Choosing the Right Advisor

Written by Rob Copeland | 14 August 2017

It's an unfortunate fact that most people do more research before buying a car than they do before hiring a financial advisor.

Choosing a financial advisor can have a huge impact on your financial success, of course. But many people don't research as thoroughly as they should, just because they don't know what to look for.

When selecting an advisor, you should consider the person's background, experience, clientele and investment style. As a starting point, it's important to understand whether the advisor is a registered investment advisor (RIA) or a broker. RIAs are paid purely to give advice; they generally charge a fee based the total amount of assets they manage for you. Brokers are paid to sell investments; they earn commissions each time you buy a stock, bond or other investment, which can create conflicts of interest.

RIAs, who are regulated by the Securities and Exchange Commission (SEC) or their home state, are fiduciaries—they're legally required to act in your best interest. Brokers, regulated by the Financial Industry Regulatory Authority (FINRA), an industry self-regulatory organization, are held to a lesser standard. They must ensure that the investments they sell you are "suitable" for you, and there can be a lot of gray area there.

While many people consider advisors more trustworthy, it can make sense to work with a broker in some cases. If you just want to make transactions, and you want to have a major say in what's bought and sold, then a broker may make sense for you.

Beware of advisors who are registered as both RIAs and brokers. These advisors can switch back and forth between charging fees and commissions, resulting in an accumulation of unexpected charges. Here's how to check credentials, employment history and disciplinary history. For brokers go to www.finra.org/Investors/ToolsCalculators/BrokerCheck.

For registered investment advisors (RIAs), you'll want to find the ADV Part 2 disclosure form. Go to the SEC's Investment Adviser Search website, at www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx .

Look up the advisor by firm name. After clicking the link for the firm, click the "SEC" link if the advisor is registered with the SEC, or if the advisor is registered with a state, click the link to that state. Click on "Part 2 Brochures." Google is another good background-check tool. Use it to see if there's negative feedback out there about a potential advisor.

When you interview an advisor, don't let him or her dominate the meeting with their standard pitch. Go in to the meeting with a list of questions, including:

What is your investment strategy? It's important that your advisor's strategy and philosophy match yours.

What is your typical client like? If the advisor hasn't worked with someone like you—a small-business owner, a widow, a very wealthy person, for example—then you probably don't want to be their first.

What is your advisor-to-client ratio? If the advisor serves more than 100 clients, he or she may be stretched too thin to properly take care of you.

How much experience do you have? Intelligent, committed advisors can be any age, but a little seasoning can be very reassuring. If an advisor has been through a few bear markets, she may do a better job of protecting your money when hard times hit.

What is your age/career stage? You don't want to be the guinea pig for a young, inexperienced advisor; better to find one who has been through a few bear markets. On the other hand, an advisor in his 60s may be focused more on retirement than on you.

Finally, understand that a long list of credentials doesn't necessarily make for a great advisor. More and more credentialing bodies are cropping up every day, peddling every conceivable sort of designation. These organizations get paid handsomely to confer their credentials, and the advisors get to put more impressive-looking acronyms on their business cards. In my view, real-word experience dealing with clients and the markets trumps any academic designation.

Why ETFs Shouldn’t Dominate Your Portfolio

Written by Rob Copeland | 13 July 2017

Exchange-traded funds, or ETFs, have become a huge part of the market, and with good reason.

The funds are a quick, inexpensive way to get exposure to an underlying index—anything from the S&P 500 to very narrow indexes in specific sectors like technology or emerging markets. They're great for achieving a diversification that can lower portfolio risk.

Because they're bought and sold like stocks, they're easy to trade. And they allow investors to manage their tax consequences better than they can with mutual funds. ETFs now account for 30% of the trading volume in stocks, twice the level of a decade ago.

I regularly use ETFs in constructing and updating client portfolios. But it's not a good idea to create a portfolio that consists only of ETFs, or index mutual funds, for that matter. Here's why.
First, ETFs work best in a rising market. We've been in a bull market since 2009, a period during which most ETFs have done well for investors. But ETFs offer little or no protection during a period of sustained market decline.

That's because ETFs' holdings don't change when market conditions change. An S&P 500 fund will reflect that index even when the S&P is plunging. It won't adjust by, say, adding bonds or foreign stocks to the mix. ETFs are like corks on the water, rising and falling with the tides. In a word, they're dumb.

That's why my clients' portfolios include individual stocks and bonds, which I buy and sell based on market conditions and on the strength of the companies behind them.Individual securities let you be much more nimble in seizing opportunities and avoiding trouble. But they also let you take advantage of mispricings that are created by ETFs and other passive index funds.

When investors buy or sell an ETF en masse, the fund must buy or sell blocks of the stocks or bonds that make up the index they follow. ETF companies buy or sell the cheap and expensive stocks alike, with no analysis of each stock's fundamental strength. They don't consider whether they should buy or sell selectively.

Essentially, they throw the babies out with the bathwater. And that creates an opportunity for investors to find bargains.

Not long ago, I noticed that the price of bonds issued by chipmaker AMD were soaring up and down without any apparent rhyme or reason. There were no major changes in the company's condition or sales outlook. Eventually I learned that the price fluctuation was due to ETFs' indiscriminate selloff of the bonds in the manner I described above.
I bought a block of the AMD bonds at a very low price, and my clients made some good money off of it.

Another drawback with ETFs is this: If an investor only owns ETFs or index mutual funds, they are guaranteed to do no better than the market. ETFs, after all, are built on indexes that encompass big swaths of the market.

Example: If my clients' bond holdings between 2009 and 2013 had been only ETFs, they would have lost money. But, by buying and selling individual bonds in that period, we earned yields north of 10%.

So an important question for those who are deciding whether to invest in ETFs alone, or ETFs plus individual stocks and bonds, is this: Do you want to match the market, or do you want to beat it?

Do You Need Longevity Insurance?

Written by Rob Copeland | 14 June 2017

As Americans' average life expectancy increases, many people are afraid of outliving their savings.

One solution that has gained popularity in recent years is what's known as "longevity insurance." Longevity insurance is designed to provide guaranteed income from the time you reach old age—usually around 85—to the time you die.

The thinking is that by age 85, your savings may be depleted. The appeal of longevity insurance is that it can allow you to remain independent as long as you desire.

Longevity insurance typically provides larger payouts the earlier you buy the policy. If you buy a $50,000 policy at age 50, you will receive significantly more annual income than you would if you bought the same policy at age 60. The insurance is available with various bells and whistles; for example, adding inflation insurance will ensure that your dollars won't have lost value decades from now.

My view on longevity insurance is that it may be right for certain people. Yes, there's a cost associated with it. But if that buys you peace of mind, it may be worth it. Still, I invite you to discuss longevity insurance with me before you pull the trigger.

It's important to understand that when you buy the insurance, you're betting that you will live past age 85. If you don't, the insurance company keeps your money—your heirs don't get any of it. What's more, the lump sum you invest in longevity insurance today won't be available until you reach old age. If you need it in an emergency, you're out of luck.

One alternative some people may be more comfortable with is setting aside a chunk of money in a separate account, investing it and then tapping it when your nest egg is running out.

Finally, it's important to be realistic about how much money you'll actually need in your old age. I believe as you get less active—less travel, less time on the golf course, and so on—you need less income. You may assume you need longevity insurance, when in fact you probably don't.

Longevity insurance is an interesting new option and may make sense for many people. Yet every person's situation is different; as with any investment or major financial decision, it's wise to look at all the variables before making a decision.

Trump Rally Loses Steam—What Now?

Written by Rob Copeland | 13 May 2017

The rally that followed Donald Trump's election in November has cooled off—but that doesn't mean good investment opportunities have disappeared.

After the election, sectors like financials and energy took off, posting big gains for several months. But they've more recently reversed course. Energy is down nearly 8% over the past three months. Financials are off nearly 1%.

Part of the reason for the pullback is that the market has become skeptical of Trump's ability to turn his campaign promises into reality. Specifically, the struggle to pass healthcare legislation has cast doubt on whether economic stimulus legislation such as tax cuts, infrastructure spending and deregulation can be passed.

Such legislation would have put a charge into the earnings of financial and energy companies, and their stock prices rose in anticipation. But with Washington appearing as divided as ever--even under Republican control—many investors have taken their gains and cashed out.

As enthusiasm has faded for "Trump-trade" stocks in some sectors, investors have redirected their money to other opportunities.

Healthcare has risen about 5% over the past three months on renewed investor interest. Investors had shied away from the sector because of uncertainty arising from looming healthcare reform.

Now that a big shakeup isn't an immediate threat, the industry is seen as more stable. And because healthcare stocks didn't participate in the Trump rally, many are attractively priced.

Another emerging sector is technology. It's up nearly 9 points in the past three months after being largely left out of the Trump rally.

It's normal for market leadership to rotate from one sector to another as conditions change. The trick for investors is to find the best opportunities—at the best prices—as new sectors gain momentum. They're always a place to make money in the market.