By Todd Moerman
Learn more about Todd on NerdWallet’s Ask an Advisor
Far too many people I meet get financial advice from a family friend, someone from church, an uncle or a brother-in-law — or they try to do it themselves. This strategy may be fine or it may have serious problems. There are over 400,000+ advisors in the U.S. Sadly, many of them are just selling product.
Are you confident you have an optimal strategy or will high fees and poor strategy require you to work longer or retire with less money?
A solid retirement will not happen by accident, it is a matter of conscious choice, strategy, coaching and discipline. Most investors need a coach to help them in good times and especially in difficult times.
We suggest the following:
- Fee-only – Work with a fee-only advisor. Demand transparency and full disclosure of all fees. In 2010, $10.6 billion was paid to advisors via 12b-1 fees. Upfront loads and commissions are brutally expensive, often hidden, and may not be in your best interest.
- Fiduciary – Work with an advisor who is a fiduciary for you. This means that, by law, they put your interests first – not their company’s, not their own; Get it in writing! According to a recent PBS show, only 15% of advisors are a fiduciary for their clients! Find out more about the fiduciary standard of care. The fiduciary standard of care has been around since 1940. Why would investors use a non-fiduciary advisor?… We think it’s because they don’t know the facts. A 2010 survey revealed that 76% of investors believe brokers are fiduciaries; 60% believe insurance sales people are fiduciaries. Both are not!
These first two items should be non-negotiable. You work hard for your money and your advisor should be aligned with your goals and objectives.
The SEC’s message is clear: stockbrokers are salespeople who make a living by selling investments; they are not paid to provide investment advice. Instead, providing advice is “merely incidental” to the sale – much like a car salesman’s advice is merely incidental to getting you to buy a car.
3. Academic approach – Does the advisor follow an academic approach to investing? Is it based on historical evidence and data? See the information regarding Vanguard vs. Dimensional funds (DFA).
4. Say “no” to active managers – Does the advisor build a customized investment plan and invest in low-cost passive funds or ETF’s. Most active managers fail to beat their benchmarks after fees and expenses. Also see the NerdWallet review of active management.
- Only 24% of active managers outperform their index according to NerdWallet.
- If you compare this analysis to Dimensional funds, even less than 24% outperform.
- Over the 10 year period 2002 to 2012. DFA percent is net of my .6% management fee. I subtracted from performance.
- DFA large value 7.81% vs. Active 5.97% vs. Index 6.64%
- DFA small value 10.67% vs. Active 7.5% vs. Index 9.24%
- DFA foreign large value 9.6% vs. Active Large blend 6.06% vs. Index 8.38%
- DFA foreign small value 12.89% vs. Active small blend 8.26% vs. Index 7.92%
- DFA emerging markets 16.78% vs. Active 13.31% vs. Index 15.87%
5. Investing philosophy – Do you agree with the advisors investing philosophy?
6. Written plan – Does the advisor provide a written plan that includes cash flow goals, savings goals, net worth goals, retirement goals and yearly tracking. This does not need to cost thousands. It can be a simple 2 page document.
7. Personal relationship – Is the personal relationship a good fit for you and your spouse?
8. Low fees – Are the advisor fees reasonable… under 1% on the first million dollars and decline after $1MM? Fees matter!
9. Does the advisor practice what they preach and use the same investments for their own portfolio?
Good luck. We suggest you get a free 2nd opinion about your current financial strategy and investments.
Integrity Investment Advisors, LLC is a fee-only independent Registered Investment Advisory Firm. We are headquartered in Fort Collins, Colorado and serve clients on a national basis. If you know anyone who may benefit from our services, please contact us. 2013 Press Release: Integrity Investment Advisors, LLC and Managing Partner Todd Moerman are pleased to have recently joined an exclusive group of wealth managers offering the low cost mutual funds of Dimensional Fund Advisors (DFA) to its clients. firstname.lastname@example.org
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Integrity Investment Advisors, LLC), will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.