Should Investor Stick With Advisor When Portfolio Is Taking a Beating?
Q A little over a year ago I had some money to invest (about $100,000) and hired a Certified Financial Planner to handle my investments. I am married, 35 years old, somewhat aggressive and investing for retirement. We agreed on a one-time setup fee and a 2.5% annual fee based on the total account. The planner’s philosophy has been to invest in technology, and he has invested a large portion of my money in Internet and telecommunication stocks. Recently my account has taken a beating--it’s down more than 30% from my original investment. I am getting depressed and not sure if I should stay with this person. I know the market has been down, but should it be this bad? I am in for the long haul and hope everything will rebound. Do you have any suggestions? What questions should I ask?
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A Last year’s market taught a lot of people that they’re not nearly as risk-tolerant as they thought they were. And many of them are looking for someone to blame.
That’s not to say this planner was necessarily right to weight you so heavily in risky stocks that you’ve lost almost a third of your investment in one year. But if you pushed him to get you high returns, you bear at least some responsibility for what’s happened to your money.
The best planners resist client demands for whopping returns. These planners insist that investors be properly diversified with bonds, cash and “old-economy” stocks, even when all the customer wants is dot-coms and Lucent.
In years when speculative bubbles are building, the planners have to endure a lot of client whining because diversified portfolios aren’t doing as well as big bets on the bubble du jour. In the years when the bubble bursts, however, these clients see how valuable smart asset allocation can be.
The best planners usually don’t shave 2.5% off the top of a client’s investments, either. Asset management fees of 1% or less are more common--although most planners who charge asset management fees generally won’t manage portfolios of less than $250,000.
Your first move should be expressing your concerns to your planner. He should suggest a more balanced portfolio, and you might be able to negotiate a better rate in the bargain. If he tries to shut you up by insisting everything will be fine, that’s a good sign it’s time to take your money elsewhere.
You can find more information about choosing and evaluating a financial planner at https://www.latimes.com/finplan and from the excellent book by Charles Jaffe, “The Right Way to Hire Financial Help” (MIT Press, 1998).
Homemaker Seeks Insurance
Q I’ve been a stay-at-home mom since my twins were born in January 1999. I am now the primary caregiver for four children under age 3. My husband and I have tried without success to find some type of disability insurance that would cover me in the event I am unable to perform my duties as a stay-at-home mom. I would hate to become disabled and my husband be forced to dip into our retirement accounts or the equity in our home to cover the cost of caring for the children. It seems unfair that, because I’ve decided to stay home with my children, I should be punished by no longer being eligible for disability protection. What do you advise?
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A Disability insurance experts say such policies have existed in the past, but insurers discontinued them because of “abuse.” That’s insurance lingo for a policy that winds up costing the insurer too much, either because of fraud or because too many people used the benefits for the policy to be profitable.
Interestingly, abuse also has been a problem off and on for disability insurance covering other professions. Insurers say that doctors faced with lower salaries under managed care suddenly developed a high number of disabilities, quit work and made claims on their policies, for example. Insurers redesigned their policies for doctors and other professions but seem to have simply discontinued their policies for homemakers.
This is probably not the first time you’ve noticed that society does not put the same dollar value on your services at home as it did while you were working for a paycheck. It may be annoying and unfair, but that shouldn’t prevent you from doing what you can to ameliorate the situation.
Almost everyone needs an emergency fund, but families with just one income need a bigger fund than most. Setting aside at least six months’ expenses would be smart. You also should be sure not to borrow too heavily against your home equity, making sure that there’s plenty there if you need to tap it.
Retirement accounts also can be rethought, although borrowing or withdrawing from them should be a last resort. You can shift slightly more of your retirement funds to bonds and cash than you otherwise might, since these lower-returning investments tend to hold up better in bad markets. This would help ensure that the money will be there for you if you need it.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. 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, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For previous columns , visit The Times’ Web site at https://www.latimes.com/moneytalk.
