For Clients

The Educated Investor

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Should know if their investment advisor is a fiduciary

Investment Advisors who guide individuals on their personal financial decisions fall under two categories: those who act as a fiduciary and those who do not.

Those acting as fiduciaries must carry out their duty with the highest standard of care, putting the interests of their client above their own. Federal law mandates that those advising as fiduciaries are required to adhere to the following standards:

  • Act with undivided loyalty and good faith
  • Avoid taking part in any activities that result in a possible conflict of interest
  • Provide full disclosure regarding all advice they offer

Non-fiduciary advisors are not regulated by the federal law and the above requirements. It is important that investors understand the difference between the two types of advisors.

The overwhelming majority of Financial Advisors are not fiduciaries. If you are working with an advisor make sure he is a fiduciary. Get it in writing!

Should know the Annual Return on their portfolio for the current year and cumulatively since inception

Sure, you get monthly statements that show your current balance. They may even include interesting pie charts and graphs. But what you usually won't see is your annual return. Annual Return strips away money you deposited and withdrawn and tells you what you really earned on your investments. You should compare your annual return to meaningful benchmarks and inflation to determine if you are meeting your goals.

Should know the total cost for managing their money expressed as an annual percentage of their investments

Management fees, trading commissions, market impact costs, bid/ask spreads, administrative expenses, and sales commissions directly reduce net investment returns. The combined effect of these costs can be difficult to compute and can consume a surprisingly high proportion of your gross investment returns.

Make sure you know all the fees involved in managing your investments.

Should know if their portfolio includes stock picking and market timing strategies.

Advocates of stock picking and market timing strategies argue that managers can apply their knowledge and skill to enhance returns. Using fundamental research or economic and market analysis as their tools, these managers try to outperform the market by predicting the future direction of individual stocks, sectors, or markets.

However, when performance results are put to the test, the data confirm that most active managers typically fail to add value. The longer the time period, the more likely they are to underperform their respective benchmark.

Should know if their portfolio is diversified

Do you own a bunch of stocks and mutual funds? If most of those are in similar asset classes then you are missing a big part of diversification. There are numerous asset classes both in the US and abroad, including large company stocks, small company stocks, value stocks, growth stocks, real estate and many fixed income asset classes as well. Each of these has their own historical price movements that tend to be distinct from one and other. As a result investors have the opportunity to achieve greater expected returns over time with lower volatility then they would in a less diversified portfolio.

Should know how much risk is in the Fixed Income (safe part) of their portfolio

If you have an allocation to fixed income investments, you may think your principal is safe. But, surprisingly, it is subject to its own set of risks and volatility. The risks and volatility in fixed income are largely driven by two factors: bond maturity and credit quality. Bonds that mature farther in the future are subject to the risk of unexpected changes in interest rates. Bonds with lower credit quality are subject to the risk of default. Decreasing bond maturities and increasing credit quality will lower risk and volatility in a portfolio.

Should know the tax impact from their investments

Portfolios can typically distribute large amounts of taxable income. Paying taxes can easily drain 1% to 3% a year from your rate of return. Simple solutions to lower your tax impact include: decreasing portfolio turnover, holding positions with gains longer than one year, harvesting losses, and own tax inefficient investments in an IRA or retirement account.

Should know how to exercise patience and discipline or work with a qualified professional who does

Our natural instincts can become our own worst enemy when it comes to investing. This is illustrated below in the annual study conducted by Dalbar, a leading financial services market research firm. Over a 20 year period, the S + P 500 Index outperformed the average investor by over 5% a year. The average bond investor underperformed the Barclays US Aggregate Bond Index buy almost 6%.

How is this possible? The simple answer is that we tend to buy stocks and bonds after their prices have risen. We do this simply because we feel more confident and comfortable when markets are up. Similarly, when markets sell off, fear sets in and we tend to sell. This behavior can result in our buying near market tops and selling near market lows, thus failing to capture the market rate of return. Having an investment policy statement will help keep your emotions out of the investment process.