Wednesday, June 10, 2009

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

From the previous article, you have a general idea of whether you need a lot, a little, or almost no guidance in choosing investment from your adviser.

If you are a woman who is best suited with an adviser who will walk you through the entire investing process, this discussion is for you.

Broadly, there are two type of advisers who fit your needs:
  • Full service brokers (like those employed by Goldman Sachs, JP Morgan, etc.)
  • Fee-only financial planners

Full Service Brokers

Education and Experience

Series 7 License

A full service broker will have a Series 7 (General Securities Registered Representative)licence, that shows at least 70% accuracy in answering 250 questions about

  • Stocks
  • Bonds
  • Mutual Funds
  • Options (derivative instruments)
  • Commissions

as well as a Series 63 (State specific) license.

This individual will have passed a background check by the employing firm and be fingerprinted.

Most investment bankers (Goldman Sachs, JP Morgan, Morgan Stanley, etc.) have changed their charter to commercial bankers because it allows them to raise money more cost effectively. If, for example, you bank at Chase, you will find that it is owned by JP Morgan, formerly an investment bank. In your bank branch, you may find a person who sells securities. This person is not a bank employee, but works under a separate "umbrella" company - which is different and separate from JP Morgan brokerage.

Series 6 License

These advisers may have only a Series 6 (mutual fund representative) license, and are not authorized to sell individual stocks and bonds.

These advisers will be familiar with general guidelines as to whether a particular fund or group of funds is appropriate for your level of risk.

CFP - Certified Financial Planner

This is a national designation that the adviser has passed a rigorous course of study that includes budgeting and cash flow, investments, taxation, risk management, education financing and estate planning. There are additional requirements for continued education.

CFA - Chartered Financial Analyst

This person will be skilled in analyzing both portfolios and individual securities.

Other Professional Designations

Advisers may also have licenses to sell insurance products (such as annuities), regional professional designations issued by the American Banker's Association, various universities and other financial education providers. Contacting the issuer will give you the scope of training represented by the license or designation.


  • What licences she has
  • What professional designations she has
  • The length of experience she has

and verify that information through:

or for a fee only planner.

You want a person that has significant experience and training.

2. Type of Client

The type of adviser that will likely serve you best is one who serves people like you. If your adviser's clients are primarily 70 year old retired executives from Boeing and you are a 30 year old middle management woman, your adviser may not have the background to best address your particular financial needs.


  • Age
  • Average account size
  • Occupation
  • Risk tolerance

If the description is significantly different from your situation, you may be best advised to keep looking.

3. Historic performance

Over very long periods of time

  • The stock market yields about 8 - 10% per year
  • The bond market yields about 4.5% - 6.5% per year
  • A portfolio of 60% stock and 40% bonds yields about 6.6% to 8.6% per year
  • With significant differences from year to year.

One of the red flags that should have been seen by Madoff and Standford's clients was consistently beating market averages year after year after year, with no apparent increase in risk. Not Peter Lynch, not Warren Buffett, not ANYONE has achieved this performance, and no credible investment managers would intimate that such returns are either probably or possible.

Ask your adviser what her average annual performance for clients has been with similar risk tolerance as yours over the past 5 years, and verify that information with her employer.

4. A word about risk tolerance

As it applies to you as an investor, risk tolerance is the answer to "How far can your portfolio go down before you freak out and

  • Sell
  • Wake up in the middle of the night with cold sweats
  • Call you broker and ask what the heck happened to all your money

Markets predictably and regularly correct by 20% +, and as you can see from the recent correction, sometimes 50% +. In the mid-1970's when I was but a babe in the financial industry, such a correction occurred. Another one is in process now. Answer the question about risk tolerance in terms of what percentage of your portfolio are you capable of losing before you panic.

State your risk tolerance in terms of a percentage, and obtain a commitment that your portfolio volatility will remain within an amount acceptable to you.

5. Charges

Keeping in mind the general market returns provided in 3 above, ask what percentage of your portfolio you will pay for management on an annual basis. Fees will vary (some mutual funds charge 5% to buy as a one-time charge), so ask for estimated fees over a 5 year term. Ask the adviser to subtract her fees from your expected portfolio annual return, provide this estimate in writing, and tell that adviser that you're comparing fees with other investment professionals.

6. Discretion

Never ever ever ever grant discretionary trading authority to an adviser, unless you open a "wrap" account, i.e., one where your broker assigns your money to a private money manager. Under any other circumstances, this is a highly inadvisable practice.

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