| Far too many high net worth individuals suffer the | | | | you’ll see in your pocket. Risk reward studies |
| consequences of pathetic advice and live toregret | | | | indicate that investors are paying too much for |
| it. A combination of time constraints, financial | | | | what they’re getting. On average, investors in |
| ignorance, and quite possibly egos often impede a | | | | funds with lower fees earn better returns than |
| wealthy individual’s ability to make rational | | | | investors in fund with higher fees, due to the fact |
| economic decisions. And let’s face it, not all of | | | | that lower fees are being deducted from gross |
| Wall Street’s ‘finest’ have your best | | | | returns |
| interest at heart. | | | | Exaggerated risk |
| Having extensive experience working with | | | | Investors get paid for accepting market risks, |
| wealthy families, I have seen the financial carnage | | | | that’s true. But taking calculated risks is a far |
| thatoccurs first hand. The symptoms are always | | | | more effective way to achieve your desired |
| the same: inappropriate strategies, excessive | | | | returns. |
| costs,exaggerated risk, portfolio churning, liability | | | | Investors that hold concentrated portfolios are |
| exposures, lack of integrated planning and failure | | | | bearing far more risk than justified by the |
| to meet reasonable goals. | | | | expected return. Concentrated issues include |
| If you are tired of fattening up other people’s | | | | individual stocks, industry, sector and geographic |
| wallets at the expense of your financial | | | | concentrations. There is no separately priced risk |
| growth,empower yourself to make better financial | | | | element for any of these oncentration issues, and |
| decisions. | | | | no additional return to be anticipated by bearing |
| Wealthy professionals, because of their high | | | | these risks.Investors should attempt to spread |
| incomes and high visibility, are often easy targets | | | | the risk across various asset classes that include: |
| for bad advice. When hiring an advisor, a | | | | Large, Large |
| considerable amount of thought and research | | | | Value, Small, Small Value, International Large, |
| should be dedicated to the process. After all, | | | | International Large Value, International Small, |
| it’s only your money. Here are some things | | | | International Small Value, Emerging Markets and |
| you should ask when engaging a financial | | | | Short Term Bonds. Employing these assetclasses |
| professional: | | | | in your account will result in true global |
| • How are you paid? | | | | diversification and tilting toward small and value |
| • Are your recommendations in any way | | | | should enhance returns over time. |
| influenced by compensation? | | | | Portfolio churning |
| • Do you have a clean regulatory record? | | | | Whether you or your broker creates the |
| • What are your credentials? | | | | churning, stop it! Technology has made it |
| • How much experience do you have? | | | | awfullytempting and so easy to shoot ourselves in |
| • How much authority will you exert over my | | | | the foot, hasn’t it? Hey, at the click of a |
| accounts? | | | | button we can move thousands, even millions |
| The Certified Financial Planner Board of Standards | | | | from one account, fund, or stock to another. |
| offers some great (free) online guides on how to | | | | But, excessive trading has a consequence: |
| choose a planner. Check out their site at | | | | transactions fees, taxes (in some cases) and |
| In your quest for an advisor, the more informed | | | | missed opportunities. Do yourselves a favor; get |
| you become, the better your outcome should be. | | | | your finger off the trigger. Trading for the sake |
| Here are the underlying factors that often | | | | of trading is expensive. Develop a long-term |
| jeopardize a sound financial plan. | | | | strategy and stick to it. Portfolio turnover should |
| Inappropriate strategies | | | | really be limited to rebalancing, distribution |
| Wealthy individuals are often successful business | | | | requirements and tax planning. Remember, if you |
| owners or professionals exercising a highdegree | | | | want to be a long-term investor, act like one! |
| of rationalization. The same practice should be | | | | Liability exposures |
| executed with your money. | | | | Asset protection planning is an integral part of a |
| Successful portfolios are based on research and | | | | comprehensive financial plan. While the level of |
| reasonable expectations, not intuition. Illogical | | | | exposure varies by profession all high net worth |
| investors attempt to guess which manager, stock | | | | individuals risk being sued. Malpractice, and errors |
| or asset class will have tomorrow’s best | | | | omissions may be the most obvious threats for |
| performance. That’s why so many have | | | | certain professions (ie. Doctors, attorneys, |
| consistently failed. Successful, rational investors | | | | securities professionals). But, if you think it’s |
| excel because of a clear methodology and, of | | | | your only exposure, think again. |
| course, discipline. What type of investor are you? | | | | If you are self-employed and your business |
| What type of investor do you want to be? | | | | sponsors a retirement plan you are exposed |
| For the past fifty years, modern finance has been | | | | tofiduciary liability as well. Plan sponsors (that |
| exploring the most efficient methods of | | | | would be you) retain a fiduciary responsibility to |
| achievingglobal market returns. The findings have | | | | act with loyalty and prudence, to diversify plan |
| been a boon for individual investors who have put | | | | assets, and act in accordance with plan |
| forththe effort to learn about them. | | | | documents. After Enron (et al) the Department of |
| The single largest driving force behind investment | | | | Labor has been hammering down on employers |
| results is the policy decision allocating between | | | | that are not in compliance, or fail to offer |
| stocks, bonds and cash. Roughly 94% of the | | | | appropriate choices and participant education. |
| variations in returns are explained by asset | | | | Solution: find a competent, objective advisor to |
| allocation. The factors that most investors | | | | oversee the management, education |
| assume contribute the most to investment | | | | andadministration of the plan. The plan must be |
| returns, like individual stock selection and market | | | | comprised of funds with low expenses, a |
| timing, contribute less than 6% to the result. | | | | broadselection of asset classes, and benchmark |
| Also, by mixing risky asset classes with low | | | | performance standards. It’s important that |
| correlations together, the resulting portfolio will | | | | the advisor assume partial fiduciary liability with |
| have higher rates of return, but with lower risk | | | | you. Otherwise, the responsibility falls squarely on |
| than the average of the individual parts. | | | | your shoulders, and you’re right back to |
| Excessive costs | | | | where you started. |
| Here’s a quiz. Besides inappropriate | | | | Lack of integrated planning |
| diversification, what is an investor’s worst | | | | Individuals often make the mistake of having a |
| enemy? Answer: excessive costs. Costs are | | | | single motive when designing their financial plan. A |
| mainly comprised of the following categories: | | | | comprehensive financial plan is a complex |
| commissions, taxes, andfees | | | | structure that should consist of multiple planning |
| Commissions | | | | challenges. Retirement planning, estate planning, |
| Many financial advisors are nothing more than | | | | marital planning, tax planning, asset protection, |
| glorified salespeople. The investments they | | | | education funding and investment management |
| sellhave a direct correlation with the compensation | | | | are among the many factors to consider. If you |
| they receive. Given those dynamics, what are | | | | want a successful result, no individual component |
| theodds that you will receive objective advice? | | | | of this plan should be mutually exclusive. |
| Commission based advice serves only the broker | | | | There is no one-size-fits-all solution. And many of |
| and the brokerage firm. Stay away | | | | these strategies can be downright |
| frominvestments that charge your front end or | | | | expensive,inappropriate, embedded with |
| back end loads or surrender charges. | | | | commissions or hidden costs, may be lousy |
| Commissionbased compensation includes | | | | investments or lackintegration with your overall |
| “fee-based” compensation which is a | | | | plan. |
| particularly evil label referring to both fees and | | | | Let’s use in example using annuities, since |
| commissions. Don’t be fooled. | | | | many states allow them as creditor exempt |
| Fee-only compensation (non commission driven) | | | | assets. |
| eliminates the exploitation of investors, | | | | Doctor A buys an annuity with a 5% upfront |
| wherequality objective financial advice is the | | | | commission, 1.30 % annual administrative fees, |
| product, and the advisor sits on the same side of | | | | and inside the product holds mutual funds with an |
| the table with the client. | | | | average annual expense ratio of 1.19%. Doctor |
| Taxes | | | | Bbuys an annuity with no load (commission), |
| I don’t know of one high net worth investor | | | | annual administrative fees of 0.60%, and holds |
| who is not burdened by hefty income taxes. Add | | | | indexfunds with an average expense ratio of |
| to that the additional drag of investment related | | | | 0.30% annually. Presumably, both doctor’s |
| taxes and your problem is further augmented. | | | | annuity assets are protected. But, assuming |
| A rational investor should not necessarily seek tax | | | | identical market performance (unlikely), which |
| avoidance, but it makes sense to pursue | | | | doctor do you think will have accumulated more |
| thehighest after tax return possible. The excess | | | | after 20 years? |
| turnover of actively managed funds, will no | | | | The asset protection tail should never wag the |
| doubtlead to higher tax bills (whether or not your | | | | dog or exist in a vacuum. Asset protection |
| have a gain in the position). One of the most | | | | planning should not come at the expense of the |
| effective ways to manage this problem is through | | | | most optimal strategy. Your planning should be |
| tax efficient investment vehicles like index funds. | | | | cohesive and integrated. The goal, after all, is to |
| Tax managed funds that harvest fund gains | | | | preserve AND maximize wealth. |
| against fund losses may also be a suitable | | | | Don’t be a sitting duck. Armed with this |
| alternative. Also, consider allocating positions with | | | | wealth of information, you can empower yourself |
| higher turnover and distributions in tax-deferred | | | | to makebetter financial decisions and avoid |
| accountswhere possible. | | | | financial predatory practices. Now that you have a |
| Fees | | | | better idea of what to look for, who to look for |
| It doesn’t take a neurosurgeon to understand | | | | and what to do, your chances of success should |
| that fees are a dead drag on performance. | | | | dramatically improve. |
| Themore it costs to run your portfolio, the less | | | | |