Interview: Ray from Financial Highway

by Manshu on June 30, 2009

in Opinion

Today, we interview Ray from Financial Highway. Ray has been involved in the investment industry for a number of years now and this interview is focused on financial advisers and what you should know about them. Please consider subscribing to his feed.

Here is the interview.

Q1. Who should think about getting a financial adviser? Is it just for the wealthy or can anyone use the services of a financial adviser?

That is one of the most common questions I have been asked, and there really is not a right or wrong answer. There are many different “types of financial advisers”, so pretty much anyone can benefit from one.

It comes down to many things; how much experience does the investor have? Are they looking just for investment advice or a comprehensive financial plan? Do they have a large sum to invest or small amounts? Prefer passive investing or more active trading?

Also remember; there is always a cost associated with financial advisers either through fees or commissions, so there must be enough reward for the added cost. For example if you have a decent size portfolio and decide to go with a discretionary portfolio manager (you give the manager the authority to trade on your behalf without your consent within your risk profile) you should get a better result, than if you had just purchased some index funds and ETFs to justify the extra cost.

Anyone can benefit from a financial adviser, not just the wealthy. But benefit doesn’t always mean the best option or result. One could benefit from a financial adviser, but the added cost can negate those benefits. If the investor is a novice investor and does not understand the financial markets, then an adviser can be of great help, but if the investor has a decade of experience in the financial markets and has a good understanding of investing, the adviser might not be beneficial enough to justify the costs.

I think Financial Advisers can be of great value but finding a good adviser is not always easy. To make it a little easier I have a list of questions to ask a financial adviser before hiring.

Q2. How does a financial adviser make his living and is there any conflict of interest between him and his customers?

Ah conflict of interest of a financial adviser, how often do we hear this? Well, first of all there are generally 3 ways advisers get paid.
1. Sales commission: That’s when an adviser sells you a security (stock, mutual fund, bond) and gets a sales commission.
2. Fees: There are fee-based advisers who charge a fee, either hourly or per task, and you will have to do your own investment purchases.
3. Asset based. They charge a certain percentage of your assets under management per year, generally the larger your portfolio the lower the percentage annual fees charged.

As you can guess there can be a substantial amount of conflict between commissioned advisers and clients. They could trade more frequently than needed to increase their revenue. In fact, this is so common it has a name: churning. They could recommend investments mainly because of higher commission payout, even though there may be cheaper options. These are just two conflicts out of many potential. It’s not that all commissioned advisers are bad; you just have to be more careful with your options and monitor things a little better. I have a more detailed post on Investment Advisor’s Conflict of Interest.

Q3. When someone approaches a financial adviser for the first time, what are the questions that they should ask?

First of all, if you are looking for a financial adviser; do not settle for the first one you find. Shop around; find a few, do a little research on the firm and then interview them.

Top 3 questions to ask would be:

1. How often have you changed firms and how long between each firm change?
This is especially important if you are speaking with a commissioned based adviser, commission based advisers tend to change firms frequently because of higher payouts offered at other firms. If you notice they have changed too frequently (depending on the experience, but I would say more than 3 times) can be a sign of danger. Also if their stay with each firm has been too short I would look elsewhere.

2. What other services do you and your firm provide?
You’d want to know if the adviser/firm tries to go out of their way for their clients, do they offer insurance? tax and estate planning? mortgages? The more services they provide the more client-centric they will be.

3. Can you provide me with 3 references?
The best way to find good advisers is through referrals; ask friends and family if they have a good adviser. If you are interviewing an adviser whom you have not been referred to, then ask for references and then call and speak with them and ask about their experiences with the adviser.

Asking for referrals is much more powerful than any number of questions you ask the potential adviser.

Again I point you to my list of questions 14 questions you should ask an adviser before hiring.

Q4. What kind of things should cause you to worry about whether you have the right financial advisor or not?

That is an excellent question and with this financial crisis many people are wondering if they had the wrong adviser.
The first thing that should always cause you to reconsider your current adviser is CONTACT! If you do not hear from your financial adviser at least every six months and do not sit down at least annually, then you have a major concern. A good adviser checks in with clients on a regular basis, not only to make new sales, but to ensure things have not changed dramatically or if the clients have any questions. I personally would contact my clients once every quarter by phone and meet face to face every six months and none of those contacts would be solicitations.

Other things would be if you notice regular errors on your statements, mistakes happen, but if you notice regular errors there maybe something going on which is worth an investigation.
Frequent trading, if the adviser constantly trades, I recommend you take a closer look at the reasons for the trades.
These are just a few things (out of many) to keep in mind.

Q5. Finally, a lot of blame has been put on the financial advisors for losing a lot of their customer’s wealth in this current meltdown. What are your thoughts on this?

I agree, Financial Advisers have come under scrutiny by their clients. It is natural to want to blame someone when things go wrong, and investors have turned to blame their adviser, but its part of the job. This is where you can distinguish the good advisers from the bad ones.

A big part of an adviser’s duty is to educate the client and to keep clients emotions out of investing. It is not easy talking to clients and telling them they have lost 40% of their portfolio and that they should invest more, but that is exactly what a good adviser should tell their clients. Unless you have had an unethical adviser, there is no way an adviser could have predicted this mess (well hardly anyone did) so it’s not the adviser’s fault that the markets lost 40% last year, blaming them does not make any sense. As long as your investments reflect your risk profile you should not blame your adviser for the losses.

I really enjoyed doing this interview and would like to interview other bloggers as well. If you are interested, please get in touch with me using the contact form.  I hope readers found this good too, please leave comments to let us know.

{ 7 comments… read them below or add one }

Mark Wolfinger June 30, 2009 at 5:33 am

Good interview.

I have two complains about the replies.

1) “there is no way an adviser could have predicted this mess (well hardly anyone did) so it’s not the adviser’s fault that the markets lost 40% last year, blaming them does not make any sense.”

Tru on the first part. But it is the advisor’s fault that his clients lost 40%. Portfolio insurance is there for the taking. It’s inexpensive and most clients would want it – if they only had an advisor sophisticated enough to offer that insurance.

2) “if you have a decent size portfolio and decide to go with a discretionary portfolio manager you should get a better result, than if you had just purchased some index funds and ETFs to justify the extra cost.”

This is really objectionable to me. First, if the financial advisor were able to outperform the market averages on a consistent basis, he/she would be earning a large salary somewhere else and not be available to be your financial helper.

Next granting discretionary power gains nothing. No investment must be made ‘right now’ and it’s okay to discuss each trade with the advisor. He/she shouldn’t be making that many trades for this to be a nuisance.

Mark

Reply

Ray June 30, 2009 at 9:42 am

Thank you Manush for the interview!!

Thanks to your responses Mark. I am not exactly sure how portfolio insurance works, never sold them never bought them never really cared for them. Unless you mean Segregated funds, it would be great if you could shed some light on it.

As for point two, I think I worded it incorrectly I am actually in agreement with you. What I meant was that discretionary portfolio mangers should outperform the Index in order to justify the extra cost and most do not outperform therefore you are better off purchasing index funds.

Reply

Ray June 30, 2009 at 9:44 am

Actually looking back at the answer my point about discretionary managers does fit into the context, in the comments you have taken it out of context.

Reply

Manshu June 30, 2009 at 10:04 am

On the point of advisers losing money for their customers last year, well so far, I have not seen a single investor who has not lost money last year.

Even people who saw it coming like Peter Schiff seem to have lost money. There was a story in WSJ which spoke about how Schiff’s bets on the dollar decline cost him dearly even though he was right about most other things.

Buffet lost last year and so did the hedge funds, so I guess this is not as simple as being sophisticated enough to buy insurance. I am sure Buffet is sophisticated enough to understand that insurance, or we can get that gecko to give him a few lessons 😉

So, to me it is not just last year, but how has the adviser done in the last five or ten years. and are you happy with him over the long run.

Reply

Mark Wolfinger June 30, 2009 at 10:04 am

Ray,

I apologize for the ‘context’ error. Yes, you do state that in order to justify the cost, ‘better results’ ought to be anticipated. Thus, as you say, index funds do the job.

Regarding insurance. I’m referring to collars using options. When you own stocks or ETFs (especially those that match the performance of index funds), buy one put and sell one call for each 100 shares owned. Portfolio now insured against a disaster – but at a cost of limiting profits.

To me that’s a winning trade-off. But, for more bullish investors, not so much. That’s why options are not for everyone.

Reply

Mark Wolfinger June 30, 2009 at 10:11 am

Manshu,

I’m not saying investors (except for the bears) ought to have prospered last year, but those who owned collars, or who otherwise hedged their positions did much better. Losing 20% was significantly better than the averages.

Most investors – such as Buffett – are long. People buy things – stocks etc. They are long. Investors ought to know that it’s okay to hedge (reduce the risk of owning) that stuff. We insure our homes and cars, why not our stocks?

That’s the only point I’m trying to make. Not claiming anyone should have been profitable last year. But they should have owned some protection.

Reply

Ray June 30, 2009 at 7:29 pm

I have actually written about options as an insurance previously, options are not really understood by most investors, there are too many variable to take into account for investor’s, so I guess that’s why it is not used as widely. It would be a good way to insure your portfolio but the costs can be fairly hefty and not sure if it always is worth it.

Reply

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