Question: What are the most important factors involved in choosing a financial planner, broker or money manager?
Answer: This is a very good question and one that we do not hear quite enough. Most investments are sold based on performance and unfortunately risk and total costs are typically only glossed over or ignored. Alan B. Lancz & Associates feel both risk management and low costs are two critical variables that should be emphasized when choosing someone to advise you (in any capacity) on your investments. Investors must also totally agree with the broker's, planner's, or advisor's professional investment philosophy and feel very comfortable with his/her method of research and communication, as well as investment style. If your advisor or planner places all his clients with one firm (custodian), many times you lose the checks and balances of having several custodians from which to choose. This is a critical area to cover before you invest.
Here are eight other key points to cover with your financial advisor to initiate and maintain a solid long-term relationship with any investment professional.
Know Your Investment Professional's Philosophy of Investing
Discuss the Keys to Successful Investing
Don't Be Afraid to Ask How Your Investment Professional is Compensated
Be Honest About Your Current Financial Situation, Goals and Objectives
Ask about Other Services Your Investment Professional Offers
Schedule a Regular Financial Check Up
Call When Circumstances in Your Life Change
Be Open About Your Financial Circumstances and Risk Tolerance
Question: On several occasions over the past few years, we have been asked the best way an investor can be assured their broker or advisor is worthy. What follows are some of the most toxic tactics we have seen over the past three decades that have proved the most costly.
1. Lack of a Sell Discipline - This is listed as our #1 toxic tactic because we have consistently heard from more investors over the past thirty years about their dissatisfaction with their broker/advisor simply riding a stock or mutual fund all the way up and then back down again. It has consistently been among the three reasons investors switch from their current advisor or money manager to our company's money management services.
2. One Dimensional Thinking - The markets can do three things: move up, move down or stagnate. If your advisor manages your portfolio with only one market direction accounted for, you can identify it as a sign that expertise, effort or knowledge level is lacking in your advisor. In this market climate, you cannot afford to leave your investment portfolio with an advisor whose technology and risk-management tools are out-of-date or non-existent. This year marks the sixteenth anniversary of our Long/Short Portfolio, a development we owe to the late Sir John Templeton, who convinced us to establish a more market neutral positioning prior to what would become a decade of significant volatility.
3. Reactive Investing Rather Than Proactive - Your portfolio will constantly be on the precipice of disaster if your advisor is constantly in reactive mode. Many of the new clients who have joined us since the market meltdown of 2008 were alarmed when their former advisors only began discussing risk-management ideas after their portfolios had declined 30% or more. Such reactive maneuvering is akin to the old axiom "closing the barn door after the horses are already out." Despite the numerous twists and turns the market has made over the past thirty years, such reactive decision making is still very common. Remember, it is hard to reach your proactive portfolio goals when you are constantly reacting.
4. Buying All at Once - This is another methodology we saw trust companies, brokers, money managers and banks doing thirty years ago which is still prevalent today. If your account has same day blocks of purchases, you have to wonder - was that day the best day to buy every one of those positions, or is it a matter of convenience for the trust company, broker or advisor? The odds are that not all positions, sectors and asset classes present the best buying opportunity on exactly the same day or week.
5. Mirror Investing - If your advisor has everyone in the same positions with no consideration of objectives or type of account, it is a big red flag. Similarly, advisors who create three or four different baskets to give only moderate real variations for clients are typically not doing their best to serve their clients needs.
6. Asset Location, Not Just Allocation - Lost in the shuffle is the fact that asset location can have just as much of an impact on your overall returns as asset allocation. When your advisor places a tax-inefficient investment in your taxable account, as opposed to your tax-advantaged retirement account, it demonstrates a lack of care or understanding on their part. Treasury Inflation Protected Securities (TIPS), a popular inflation fighting bond offering, is a perfect example of a commonly misplaced investment. The inversely linked U.S. Treasury C.D. mentioned in our lead article, as well as other income vehicles, are other examples of investments that are more efficient within a retirement plan.
7. Failure to Analyze Social Security Strategies and Complete Retirement Options - Similar to #5 above, the failure to take into account the tax picture and implications for one's social security and retirement options can erode the overall cash flow one can enjoy in retirement. When it comes to managing distributions, taking social security and tapping taxable accounts, it is with great regularity that the decisions are made without looking at the cash flow, tax and risk management consequences of each option. This can prove very costly over an extended period of time.
8. Lack of Comprehensive Investment Strategy - It is easy to get off track without a defined, yet flexible, strategy. Many wealthy investors are looking at multiple sources for investments, and thus, suffer from the lack of a coordinated effort that complements specific assets and liabilities. All too often, these investors' failure to coordinate exposes them to a much greater likelihood of disappointment.
9. Process Over Results - Investors have repeatedly succumbed to emotional investing, "following the herd" mentalities and other techniques without regard to any consistency or strategy. Some advisors dress up their expertise with captivating and elegant phrases that many times reassures investors without any bottom line substance.
10. Failure to Gain Transparency into Costs, Risk and Performance - There are three major components to every investment: performance, risk and cost. Investors should have full disclosure and transparency for all three in regards to all of their investible assets and savings. Keep in mind, you want total costs (fees, commissions, spreads, etc.), risk adjusted performance and net after-tax results, while always looking at the worst case scenario before making any investment.
Question: Your analysis that subprime would lead to ripple effects that permeate through many areas of the global economies saved me from much financial pain in 2008...thank you. I could have only done better with Peter Schiff.
Answer: We received various versions of the above paraphrased comments over the past few months and thought it was interesting that Peter Schiff's firm has many unsatisfied clients despite his words of warning. It seems his money management side was highly exposed to international equities and this combined with losses from the strong U.S. Dollar resulted in losses of 50% or more in accounts managed by Euro Pacific Capital - Schiff's firm. According to the Wall Street Journal (1/30/09), this article only confirms some of our thoughts at the time we received several of the above referenced well wishes.
Question: Could you elaborate on your doubleheader comment on CNBC last October in reply to investors being so positive with the passage of the initial bailout package?
Answer: After our warnings about global equity markets back in the summer of 2007, we were constantly getting inquiries as to how long these dire times would last. Many times we were asked what inning were we in and our response was that subprime's ripple effects would be much more pervasive than anyone expects. We saw many new portfolios taking too much risk (emerging markets, financials, etc.) and heard so many stories of investors being talked out of selling in August and September last year that we were trying to come up with a memorable way to let investors know that those advisors saying just ride out the storm or that thought the bailout was a "cure all" were well off target. Subsequent to these various positive comments with the bailout, we felt compelled to respond to the what inning are we in question regarding the stock market sell-off with the statement "...we are in the 9th inning", which after our words of warning for the previous 16 months brought on a sigh of relief only to follow it with - "the only problem is no one told investors that we are in a doubleheader." That is what we were seeing in 2008, the second game of the doubleheader with unemployment rising and earnings reports disappointing. In other words, we felt in early October that expectations were still too high and investors still did not understand the extent of our problems and how they would negatively affect the global economies.
Question: What do you mean by investing in the "right" areas?
Answer: It is just as important to invest in the right companies as it is to avoid the "bubble" areas of high risk. There is a trend in investing to buy a little of everything with Exchange Traded Funds (ETF) & asset allocation programs blanketing investors in every asset style known to man. What makes this worse is that many times there is no differentiation among these investment programs between well managed and poorly managed companies. Assets are simply spread out to the largest or highest yielding (or in some cases every) companies in a particular category dependent on the ETF's specific composite. It is important to be diversified and take a long term approach when it comes to investing, but in many ways these programs remind us of the statement "Diversity is a hedge against ignorance" - in other words, you can be over-diversified to the point of deworstification. The best current example we can give you of this is in regards to the financial sector and response to the previous question. Goldman Sachs and J.P. Morgan are up 74% and 8% since we highlighted them on November 21st, 2008. This is the same time the Vanguard Financial ETF was down 4% (it was down 25.7% for the month of January alone). That is what we mean by being in the right areas, so if you venture to higher risk sectors with lesser transparency, it is particularly important to be selective in this challenging environment. Alan B. Lancz & Associates will definitely not always be right, but when we recommend the higher risk areas into panic selling, we want the potential of high reward by a solid management team, rather than owning a composite of nearly all companies in a sector without any differentiation to balance sheet strength or quality of management.
Question: As a new client, I am impressed how you are gradually buying and building a portfolio for my recently established account - taking advantage of this market volatility rather than just riding the markets up and then back down. You bought a couple energy companies in my account but I read in your June 30th, 2008 commentary that you were taking profits in energy - please explain.
Answer: We have been recommending an overweight position in energy since late 2001 and when speculation drove up prices, it was prudent to take profits. When oil went down so much the past several weeks, select energy once again began to look attractive - in addition, your account had no energy positions as we did not want to chase the sector in June, but rather waited to accumulate energy only after significant weakness. Your account is still underweight energy, but if prices continue to decline we will selectively accumulate more shares.
Question: I know you have been featured in the Wall Street Journal and other media since the mid 1980's, but it seems like the tier was doing media every week or two in 2007-2009. Is there any particular reason?
Answer: In November 1999, we did a feature article entitled "What Ever Happened to Tech Wreck". We warned about the risk in the tech/telecom sectors and how profit taking was in order. Many investors picked up on our tech warning when the markets were hitting daily new highs, but many others did not. In fact, the most frequent comment we heard into the bear market of 2000-2002 was why we haven't heard about you before. So in May 2007 when real estate and utilities were hitting record valuations each day, we coordinated a visit to the N.Y.S.E., while meeting with clients in the New York area, to discuss Strategic Profit Taking on CNBC. We followed up that segment with several subsequent remote interviews warning about the ripple effects of subprime and tried to make sure our warnings about the much loved financials were exposed to an even larger group of intelligent investors than our warnings on technology back in late 1999. The global media’s interest in our independent research and insights is definitely appreciated, and in time of volatility we tend to receive many more requests.
Question: I understand that you do not pool monies like a mutual fund and that you customize a portfolio to my specific goals and objectives. But how do your services differ from those advisors who utilize different classes of mutual funds?
Answer: There are many advantages to having an individualized account or separately managed account as opposed to a mutual fund. One critical advantage is that individual accounts have the ability to be extremely tax efficient, a problem that many mutual fund investors discovered in the past two years (2000-2001) when they lost money on their funds yet still owed taxes on these funds. We can lower tax liability much easier than a mutual fund; this is a big reason we have never set up our own mutual fund. Another reason is that we feel riskadjusted performance can be enhanced because we do not "pay up" for stocks and we are very disciplined as to our price parameters. The specifics can best be detailed after a private meeting to assess what you are specifically looking for with your retirement plan, trust, or personal assets.
Another advantage of going directly with a money manager that investors are just discovering is the significantly reduced costs. We recently obtained a new account in which the investor was using class C mutual fund shares through a broker for his retirement plan. The new client was not particularly happy with his broker's selections of late; in addition, he had no idea that our personalized separate accounts would actually save him money. (The broker charged 1% annually and we would charge .90%, so no big deal, right?) But he learned after our initial meeting that the broker's 1% was simply a "middle man" sales charge and that there were additional money management charges from the actual money manager of the fund, plus commission costs for the manager's activity. His annual costs actually totaled 2.16% (the 1% he thought he was paying was just what the broker had made each year for selling him the fund) compared to our annual .90%. In other words, the broker had him thinking the costs were comparable when in actuality he was paying 140% more per year (and when factoring in the transaction costs, the difference becomes even greater). The same holds true when a broker acts as a "middle man" with a separate account money manager. If you go to most managers directly, you can pay substantially less than if you do so through a broker. Plus the managers can then trade with whom they wish, as opposed to solely through the broker who refers clients to the money manager. It is often not in the best interest of the investor to have every trade mandatorily placed with the same brokerage firm and that is why we do not accept such "brokerage directed" accounts. All the above are aspects to consider when looking towards investing your retirement or personal assets.
Question: How is my money protected from fraud or theft with your firm?
Answer: When placing assets under our management, your money is protected via several methods. First, we never take custody of clients' assets, utilizing nationally recognized and financially sound brokerage firms or banks to actually hold your assets. You should never make your checks payable to the investment advisory firm. Secondly, your account is insured from fraud and theft up to $10M (with more protection available if needed). This includes $500,000 protection directly from the SIPC.