Thursday, June 11, 2009

Part I - How to Find an Adviser - Investing (cont'd)

In the previous discussion, we discussed the issues involved in selecting an investment adviser if you require that person to do virtually all of your work for you.

This is for those of you who take more of a "hands on" approach, and are likely to do your business through a discount, or deep discount broker.

1. Research

By far the most important aspect of your investing issues is where you get your information. Any company which benefits from you taking their advice is, in my opinion, automatically suspect. You may recall the recent stories about Standard & Poor's providing the highest available safety rating for so-called "Auction Rate Securities" consisting of mortgage securities, which became unsaleable soon after the mortgage crisis. The issuers of the mortgage securities were paying S&P for the rating. Whether there was actually a conflict of interest or not, there was certainly the appearance of potential impropriety.

Moral? The more independent the research, the more reliable it is.

So, who is the author of the "research reports" provided by your broker? The best sources would be those who earn their revenue from their subscribers, like Value Line and Morningstar.

2. Fees

a. Mutual Funds

If you are a mutual fund investor, keep an eye on your fees. No-load does NOT mean no fees.

Mutual funds that do not pay a "load," or commission to a broker or planner to sell the fund, instead pay advertising and marketing fees to sell the fund directly to you. These are called 12(b)1 fees, and vary widely from company to company. Your fund will also charge you "management fees" to compensate the person(s) who manage the fund.

You will pay these fees every year, and these fees will be deducted from the return on your investment.

If you are a mutual fund investor, know your fees.

b. Brokerage

Before opening your account, get a complete fee schedule. Will there be a charge:
  • To close your account?
  • If you fail to keep a minimum amount?
  • Annually to maintain your retirement plan?
  • To talk to a representative?
  • If you don't make a minimum number of trades per year?

3. A Second Pair of Eyes

In previous discussions, we talked about financial planners. They may practice similarly to a broker, i.e., charging commissions only when selling a product or "fee only," which is similar to the way an attorney or accountant charges.

Periodically, even if you are a very experienced investor, it is a good idea to have a review of your portfolio. This can be accomplished very cost-effectively by finding a financial planner who specializes in investments review and comment on your portfolio. Generally, unless you have an extraordinarily complex situation, this should be about a two hour project, and will be well worth the time and expense if you have overlooked anything critical in your portfolio.

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