If you're frustrated from having one financial consultant after another financial consultant offer you inadequate returns on your own stock portfolio, i quickly hope you read my first article "Three Strategies for Getting a Superior Financial Consultant." In this posting, I'll drill down some more to really hammer home those points.
Getting a superior financial consultant, isn't always about the financial consultant. It is sometimes also about you. Do you want to also make the commitments to locate a superior financial consultant? On this page, I'll discuss one more crucial behavior about financial consultants and two concerning the behavior of you, the investor.
Three more tips:
(1) Don't hold mutual funds;
(2) You shouldn't be stingy if you find a superior advisor; and
(3) Be patient and ask plenty of questions in your visit a superior financial consultant.
Don't Hold Mutual Funds
Let me tell you why I'm not just a fan of mutual funds. Mutual funds have so many hidden fees that it's often difficult to know exactly what your costs are. Besides upfront costs which might be upward of 5% for a few funds, there are 12b-1 advertising , marketing and distribution fees that range between 0.25% to 1 1.0%, administrative fees that range from 0.20% to 0.40% not to mention management fees paid to the mutual fund manager of 0.50% to more than 1.0% annually. This won't even include undisclosed "soft" costs of trade commissions that can add another 2.0% to 4.0% in costs. And yes you didn't incorrectly browse the first part of that last sentence. Many mutual funds charge you 12b-1 expenses they incur from advertisements and commercials that urge you to buy their funds, and when you're buying no load funds, chances are that your 12b-1 fees are higher than average.
Increase this, intangible costs like the performance that is sacrificed to maintain the necessary level of liquidity to fulfill share redemption, and your costs become even greater. For a fund that turns over 100% of its assets annually, Roger Edelson of the University of Pennsylvania Wharton School estimated this sacrificed performance to be 1.5% of returns annually. Lastly to add salt to the wound, sometimes fund managers sell out of these biggest winners to meet liquidity needs, generating a capital gains income tax for you, the investor, even if the mutual fund lost money that year.
But this is not even where in fact the negative traits of mutual funds end. When you have one of the numerous financial consultants that merely try to jump on the hot emerging market bandwagon by buying mutual funds in China, India, or any other country, I help you to exercise extreme caution. When pullbacks happen in these country's economies as will inevitably happen, you are at high risk of losing money quickly. Why? In a mutual fund, you're at the mercy of a herd mentality that generally, will induce panic upon the release of bad news, and cause an incredible number of investors to redeem their shares over a short period of time. If this happens, fund prices will plummet before you even knew what hit you.
But if you choose to own just the very best stocks in the best industries in these countries, most likely your stock prices will undoubtedly be much more insulated and less volatile in that scenario. While these stocks may still decline, they'll most likely decline not nearly as expensive the fund will. Strong companies' stock prices have a tendency to weather country-wide economic downturns superior to fund prices, and if they are in the proper niche, they could even continue to flourish.
Be Willing to Pay Fees for Superior Advice
Superior advice is superior because a lot of effort and time get into producing that advice. I recall talking to a potential client onetime that had a million dollars in the stock market and was adament about not paying fees. He just wished to pay commissions on stock trades. When alternative investments for accredited investors showed me his statements (by the way he was with a significant Wall Street firm that I will not name), there appeared to be no structure or investment strategy in his portfolio. He owned a variety of mutual funds and individual stocks, and several times those stocks were traded when there is a nominal 5% gain in any of these. Furthermore, the statements by his financial consultants were misleading. The consultant handwrote on his statements that he was doing great because he was up 6% that quarter (which I believe just about matched the S&P 500's performance that quarter). He told me that annualized, that the 6% translated into 24% returns.
But when I explained that his net returns will be much lower because his portfolios quarterly 100% turnover rate produced excessively high capital gains taxes that could undercut his net returns, he didn't seem to understand. I guess his financial consultant didn't bother explaining this small detail to him. Still, he insisted on paying no fees regardless of what. I could tell that he was the type of person who was blindly loyal to his financial consultant, therefore i moved on without wanting to schedule a second meeting.
Superior advice costs money. And when your financial consultant is superior, she or he will undoubtedly be transparent about his fees as well as your costs, so you won't be confused about what your true gains are really. Avoid being stingy. After everything you just learned about mutual funds, why can you not be willing to pay even upwards of 2% annually for superior individual advice and management when you're almost certain to be paying a lot more than that a year merely to own a mutual fund?
Be Patient and have Lots of Questions
In the event that you persistently ask the three questions I mentioned in part one of this article, you may get frustrated after talking to ten financial consultants, none of whom can answer those questions. My advice would be to you need to be patient. Don't quit and don't settle for a salesperson that is trained to answer those questions to lead you to believe that she or he has answered your questions when that's not the case at all. What do I mean?
For example, when you begin drilling down about specific stock picks, a common sales technique to avoid your question is an answer like the following: "I'm not just a stock picker. But don't worry. I know how to find the best money managers in the country to manage your cash for you personally, so you're in great hands." You shouldn't be misled by smokescreens like this. Understand that if your financial consultant truly understands how to locate you the very best money managers, he then or she must necessarily have discussions about geographical preferences, industry preferences, and specific stocks with those money managers. How can a financial consultant claim to choose the very best money managers for you personally but have no knowledge of what stocks you own and why is those stocks special?
In summary, buy individual stocks over mutual funds, be willing to pay fees for an exceptional advisory when you are so lucky as to find one, and remember, the luckiness of finding an exceptional advisor is not actually luckiness at all. It originates from your hard work, tough questions, as well as your unwillingness to be led astray by the professional smoke screens of financial consultants.
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