SIG Investment Meeting April 20,2010 Financial Advisors SIG Investment Meeting April 20,2010 Financial Advisors Who are they? They go by various titles if they are not certified: Financial advisor (adviser) Financial Analyst Financial Consultant Financial Planner Investment Consultants Wealth Managers How many of these do you think are in the US?

About 190,000 Non Certified financial type advisors in the US

Financial Advisors Financial Advisors Who are they? There are various certifications: CPA-Personal Financial Specialist (CPA-PFS) CPAs only with 3,000 hours of financial planning experience and a rigorous exam Certified Financial Planner (CFP) 3 years experience, bachelor’s degree, Series 7 exam, 30 hours of coursework every 2 years Chartered Financial Consultant (ChFP) 75 hours of course work and comprehensive exam Certified Investment Management Analyst (CIMA) 2 exams plus on site study, no criminal history etc Registered Financial Planner (RFP) No exam, but 120 hours of course work + ethics code How many of these do you think there are?

About 56,500 certified planners in the US

Financial Advisors Who are they? Individual advisors who are self employed May be commission paid May be commission paid May charge a flat fee: May charge a flat fee: Hourly Rate Hourly Rate Percentage of Account or Assets Managed Percentage of Account or Assets Managed May have a combination of both May have a combination of both May have an offset arrangement May have an offset arrangement Individual advisors who work for brokerage firms, sometimes as employees, sometimes as contract agents and generally paid by commission Actively Managed Mutual Fund Managers are a form of advisors too. They typically are employees of the Fund and are paid salary and incentives based on the performance of the fund. While the client ultimately pays, it is an indirect payment They typically are employees of the Fund and are paid salary and incentives based on the performance of the fund. While the client ultimately pays, it is an indirect payment

Financial Advisors Who are they? There are two very important major classifications: 1. Fiduciary Advisors These are CFPs certified by the NAFP who take a Fiduciary Oath to protect the interest of the client and certify that they do not have a conflict of interest. This is legally enforceable. These are CFPs certified by the NAFP who take a Fiduciary Oath to protect the interest of the client and certify that they do not have a conflict of interest. This is legally enforceable Non Fiduciary Advisors These are generally planners who work on commissions for brokerages

Financial Advisors Why would I want to use one? 1.Lack of knowledge of the broad scope of financial planning and how to manage investments 2.Don’t have access to timely information to make decisions 3.Priority—want to spend your time on other things 4.Can afford to hire the service, so why not use your time on more enjoyable things

Financial Advisors What does it cost to use one? (Cost vary greatly by locations, size of portfolio, and reputation of the advisor) Flat Fees Asset management: 0.5 to 5% of money managed Hourly Rate- $100 to $300 Commissions Front end load- mutual funds: up to 6% Back end load (surrender charge) up to 5% Other Fees Transaction fees: $7 to $50 per trade Annual account or custodian fee: $10 to $50 per year

Financial Advisors What do the do, i.e. what is the scope of their services? While the common impression is that the advisors tell you how to invest your money, those with certifications take a much more comprehensive approach.

Financial Advisors What do the do, i.e. what is the scope of their services? The professionals will want to thoroughly understand you entire personal situation as it reflects on your finances: age, income, assets/investments, debts, goals, time frames, estate planning, possible inheritances, temperament, fears, prejudices. He / she will want to coordinate with your other professional consultants such as attorneys, insurance agents and CPAs. He / she will want to match up your back ground with an investment plan that will satisfy you and give you a comfortable feeling about your financial security.

Financial Advisors What do the do, i.e. what is the scope of their services? The financial plan will probably include a detailed allocation of your investments as matched up with your personal situation, but also will Include a complete accumulation / arrangement of your key records: Pension and retirement, insurance, property, marriage and divorce, Social Security,tax, property insurance, military, cemetery lots and instructions, safe-deposit and bank accounts, life insurance, loan agreements, credit cards etc Normally the Advisors will want to meet at least annually to take in to account any changes in your situation as it affects your plan and investments.

Financial Advisors What do they do? Recently an article in Barron's gave a list of the top 100 Advisors in the US and described the investment actions that the top 10 were recommending to their clients: Their comments: They don’t buy the PIMCO concept of the “new normal” Asset allocation and diversification still applies The big thing is to avoid mistakes and protect capital The fast recovery is over, now it will be slow and steady The fast recovery is over, now it will be slow and steady Return to hedge funds and away from bonds Large cap dividend payers are better than bonds now Use fund managers going forward now instead of stock pickers

Financial Advisors How can you find an Advisor? First decide which type of advisor you want to deal with. For a Fiduciary Advisor, the NAPFA has a guide for this: They are listed about where ever you want to look: phone books, on line etc. Perhaps the best way is to get a referral by a satisfied client.

Financial Advisors How can you find an Advisor? You also need to how to avoid Bernie Madoff and Robert Stanford type Advisors. About Your Advisor.pdf About Your Advisor.pdf About Your Advisor.pdf About Your Advisor.pdf What are other ways to avoid getting scammed?

Financial Advisors How can you find an Advisor? To avoid getting scammed: If you choose to work with an advisor there are several ways to avoid this 1.You can just pay a flat fee for a financial plan which will tell you how to make your investments and then you make the investments your self through various brokerages or investment houses such as Schwab, Vanguard, Fidelity. 1.You can just pay a flat fee for a financial plan which will tell you how to make your investments and then you make the investments your self through various brokerages or investment houses such as Schwab, Vanguard, Fidelity. 2 Never use an Advisor that handles your money directly. When you write a check, the payee should be the broker (Scott Trade, Schwab etc) not the advisor. 2 Never use an Advisor that handles your money directly. When you write a check, the payee should be the broker (Scott Trade, Schwab etc) not the advisor. 3. There are two types of ways to authorize an Advisor to invest your money: a. Non Discretionary-You place the trades 3. There are two types of ways to authorize an Advisor to invest your money: a. Non Discretionary-You place the trades b. Discretionary-you delegate all decisions to b. Discretionary-you delegate all decisions to the planner the planner Choose Non Discretionary. Choose Non Discretionary. 4. If you allow an Advisor to use discretionary authority, then get regular reports from the broker that do not get routed through the Advisor. 4. If you allow an Advisor to use discretionary authority, then get regular reports from the broker that do not get routed through the Advisor.

Financial Advisors What’s Best thing to Do? 1. If you are still in your career and building your retirement portfolio, paying for a comprehensive Financial plan is a good idea. It will point out omissions, mistakes, and give good counsel on strategy pertinent for your stage of life, family obligations, and current wealth Then the implementation of the plan would depend on the factors mentioned before: Your knowledge of investments, 2. If you are retired, the opportunity to structure your financial situation does not have as many options but a plan may still be instructive if you have never had one. If you have basic knowledge of investments, and keep informed, you can probably achieve similar results with out paying the fee. According to Malkiel, et al, buying index funds will out perform the actively managed funds 75% of the time. The S & P index outperforms the average managed fund by 2%.

Financial Advisors Hmmmm—Another way? A thought: A CFP who charges based on the asset base, does so with the incentive to make your asset base bigger so that he makes more money. I wonder at the justification for associating his pay on the asset base. A CFP who charges based on the asset base, does so with the incentive to make your asset base bigger so that he makes more money. I wonder at the justification for associating his pay on the asset base. Perhaps a better way for the client would be to pay him a higher fee based on what performance he achieves for your portfolio above what an allocation between equity and fixed income would earn if invested in Index funds. Perhaps a better way for the client would be to pay him a higher fee based on what performance he achieves for your portfolio above what an allocation between equity and fixed income would earn if invested in Index funds. If he doesn’t out perform the index, he doesn’t get paid. If he doesn’t out perform the index, he doesn’t get paid. Problem is he may make long shots.

Financial Advisors The End