You Can Blame Your Broker, but First Figure Out What You Really Want
Q. I invested some money with a broker a few months ago. I am retired and interested in investing for growth. But my portfolio has lost money recently. When I ask my broker about it, she tells me to be patient. She also invested a lot of my money in municipal bonds, which don’t have much potential for growth at all. I think she’s not listening to what I really want, and I am thinking about finding a new broker. What do you think?
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A I’m sorry to tell you this, but smart brokers would cringe to see you coming.
Not because you’re a bad person. But there seems to be a huge gap between what you think you want and what you really do want.
You told your broker you wanted growth, so she probably put some of your money in the stock market. Whereupon you promptly lost money--not necessarily because your broker betrayed you, but because the stock market dropped, as it is wont to do. The fact that you’re shocked by this betrays your true motivations. What you really want is growth without risk.
Oh, don’t we all? But there is no such thing.
If you invest in the stock market, you have to be prepared for the bad times as well as the good. If you can’t take a 40% to 50% drop in your investments from time to time, you probably shouldn’t be in the market at all, or you should at least hedge your bets with a healthy dose of bonds, which tend to hold their value when stocks tumble.
Which is what your broker is probably trying to do by investing some of your money in municipal bonds. Munis give you tax-free income but, as you noted, don’t have much growth potential.
It could be that you don’t need the protection. Most of your money might already be invested in bonds or certificates of deposit, and the money you’ve invested with her is money you don’t need for years. If that’s the case, then you need to tell her that.
In fact, a little more communication on both your parts would probably help. Your broker needs to walk you through the various risks and rewards of investing in stocks, and you need to be honest about your own risk tolerance and goals.
Before you bail on your current broker, have another talk with her. Ask her to show you how your portfolio is doing compared with relevant benchmarks. A benchmark is usually an index; in the case of your stock investments, it might be the Standard & Poor’s index of 500 large-company stocks. If you’re doing significantly worse than the benchmarks, you have good cause for complaint. If not, it’s time to rethink your strategy and see how much risk you really want to take.
It might also help to have a knowledgeable third party, such as a certified financial planner or a tax advisor who is familiar with investments, look at your portfolio and give you a second opinion.
All this is not to say that brokers who ignore their clients aren’t a serious problem. You should find a new broker if you really can’t communicate with or trust the one you have. A broker who won’t answer your questions or who makes you feel stupid for asking them definitely needs to get the boot. But you’ve got to do your part too.
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Q. I take issue with your recent warning to a reader about “commission-hungry insurance agents” who “shoehorn people into overpriced investments.” I think you’ve done a grave disservice to all the honest insurance agents out there.
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A. Actually, it’s the commission-hungry, shoehorning agents who are doing their honest brethren a disservice.
One of the problems with the insurance industry is its high agent turnover. At some companies, more than 70% of the agents have less than three years’ experience. That means the agents don’t have a solid customer base and have to hustle hard for commissions. The result is sales of inappropriate investments because the agent needs to pay the mortgage.
Consumers could help the situation by having higher standards and doing more research before they buy any insurance product. At a minimum, I would want an insurance agent to have at least five years’ experience, and preferably more. Agents who have some decent credentials--a CLU (chartered life underwriter) or ChFC (chartered financial consultant) for starters--show that they’re willing to put in some time and effort to learn about their field. A visit to the California Department of Insurance’s Web site at https://www.insurance.ca.gov would show if the agent is licensed and if state regulators have taken any disciplinary action against the agent.
Most of us need insurance, and experienced, competent agents are worth their weight in gold. But you want to make sure you’ve got the real thing--not the fool’s gold version.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
