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Sunday, April 25, 2010

SOUND INVESTING: Hire A Financial Advisor: A Sound Investment Decision

Sound Investing with Jason Lampa, MBA

Though not a philosophy shared by many of my peers in the financial services industry, it is possible to beat the market (S&P 500) on an annual basis. Money managers do so in their personal accounts more times than not. This is kept secret because if it were made public, it would make continuously beating the market more challenging. I have always been one to ruffle some feathers and this time is no different.

It is time that individual investors take control of their finances and empower themselves through education. Contrary to what the media may publicize, 99.99% of the financial advisors that I work with on a daily basis are honest professionals who treat their clients money as if it is their own account or the account of a family member. The first thing that all serious investors should do is hire a financial advisor. It isn't because it guarantees fantastic portfolio performance. The purpose of hiring an advisor is to make sure your money stays invested in the investment vehicles that can make you money. A good financial advisor is there to manage your behavior more than your money. The Dalbar study is probably the most convincing evidence of why investors should hire a financial advisor. For a period of 20 years ending in 2008, the average investor account made 1.87% per year, while the S&P 500 did 8.35%.

That is a tremendous difference. This is why discount brokerage firms make commercials telling the general public to fire their advisor and do-it-yourself. These firms push the use of index investing and that most investment managers under perform the market. It is a dangerous message. For investors who have a competent, experienced advisor, most likely they are not part of the group that had accounts generating 1.87% per year. Investors get into trouble when they begin to actively trade on their own, selling low and buying high. Please hire a financial advisor before investing.

Your relationship with a financial advisor must be a two-way street. Your input should be appreciated and the advisor should incorporate your ideas into your overall portfolio. Beware of those professionals who tell you to trust them and they will take care of everything. These people do not have your best interest in mind. The quality advisor will take the time to listen to your investment goals and that which you want to accomplish in your lifetime. They actively involve you in the selection of individual stocks and alternative investment ideas. Overtime, this benefits good advisors. A knowledgeable consumer will realize the value that advisor brings to the table and remain with that advisor through the course of many decades. A good financial advisor is worth their weight in gold.

The prevailing opinion in the marketplace is that investment professionals charge too much for their services. For some reason that I still do not understand, the general public feels that investment professionals should work for free or do not deserve to charge fees on the money they manage. Let me provide the following example to make a case for advisors and their fee.

Acme Investment Management charges 2.50% on annual basis to manage investors money. Included in this fee is access to world-class investment managers, a monthly newsletter provided by Acme and monthly financial education seminars hosted by Acme. The wealth mangers at Acme invest their clients money in publicly traded companies as well as exchange traded funds that provide access to alternative investment instruments that exhibit low to negative correlation with the overall stock market. In 2008, the average client of Acme Investment Management lost between 3-12% based on the model portfolio they invested in.

As we have seen the average investor return is under that of the market but for this example will say that those investors performed as well as the market did in 2008. The S&P 500 went down more than 35 percent in 2008. Using our hypothetical example, we note the Acme Investment Management's clients that experienced the worst performance lost -12% in 2008. Taking into consideration their 2.5% annual fee and the 23% Acme outperformed the market, investors received 9.2 years of free advice and portfolio allocation. If we take 23 and divide it by 2.5, we come up with 9.2. Based on most on the average investor performing worse than the market, our example is conservative.

When you meet with advisor, I recommend that investors tell them they want to be invested in five or more asset classes. Let them know that you believe in both traditional and alternative investments and you want no more than 150-200 companies in your entire portfolio. Overdiversification is one of the biggest culprits for investors receiving poor returns.

In summary, before investing, meet and hire a financial advisor. Make sure you play an active role in deciding what investments go into your portfolio and make sure that you invest in securities within multiple sectors which perform differently based on the economic cycle. Empowering yourself by becoming an educated financial consumer will help you find an advisor that fits your needs.

For more information, please visit Jason's TNNW Bio.


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