How much do you charge? It is a common question for financial advisors. No one wants to overpay for advice, but underpaying can even be worse. Rather than asking, “how much do you charge” perhaps the question should be, “how much is your advice worth?”
I am often asked for referrals to other professionals such as CPA’s, Attorneys etc., and the question of how much they charge is usually included. Sometimes the cost prevents people from making a good decision. For example, I almost always encourage people to see an attorney about creating a family trust. The main purpose being to aid in the transfer of assets between generations. A full trust package generally runs close to two thousand dollars. It may seem like a lot to some but I remind them that the cost of creating a proper trust today can be far less than the cost of dying without one later.
I run into the same issue with referrals to CPAs. People sometimes like to choose a CPA by what they charge rather than what they do. Twenty years ago I referred a client to a CPA to handle some difficult tax challenges in her estate. The accountant called me two months later to report they had succeeded in saving my client an additional $120,000 in taxes that her prior accountant had missed. This was great news. A few days later my client called to complain that the CPA had billed her $3,000 saying, “My last accountant only charged me $450.” I was dumbfounded at her response and filed the experience under the “no good deed goes unpunished” category.
Financial advisors come in all types. There is no legal definition of the terms “financial advisor” or “financial planner” so just about anyone can use them, which is really kind of scary. Some advisors graduate college, get advanced degrees, obtain difficult designations such as CFA®, CPA® and CFP®, and spend considerable time attending continuing education classes. Others have little or no investment training. Some travel extensively interviewing corporate executives, doing onsite research, and building a network of trusted outside advisors. Others spend more time in sales training learning how to pitch investments than they do trying to understand them, handing over the actual investment decisions to someone else, or to a computer program.
With each type of advisor, the cost of doing business is going to be different and the value received can vary dramatically. When looking for a financial advisor I suggest asking probing questions about education, legitimate designations, licensing, personal investment experience, and other legitimate information that you would expect from any professional. I believe the biggest price most investors will pay is the price for bad advice. If you die without a proper estate plan, file taxes with a cheap but unqualified accountant, or watch your investments shrink under the control of an inexperienced advisor, you will quickly get a much clearer perspective of the cost you are really paying for advice.
I love a good football game but sometimes get really annoyed with the non-stop analysis by the supposed experts who spend two weeks before any big game trying to explain all the reasons why one team or another will win. Once the game begins the sportscasters call the game in real time, and proceed to give their expert opinion on what each team is going to do next. Every play will result in a comment about what the quarterback did right or wrong, or who missed a block, or why throwing into that part of the defense was clearly a bad idea. When the hard-fought game is over, the announcers and analysts will declare a hundred reasons why the winning team won and the losing team lost.
Some years ago, I noticed that Americas obsession with sports had drifted into investing, which today is almost another spectator sport. Imagine for a moment a typical day on Wall Street. Long before the market opens the financial news feed is filled with experts predicting how the market is going to open the day and what can be expected as it progresses. I often question why anyone would care how some supposed expert thinks the market will open. I actually worry about those who do care.
Once the market opens the initial movement is often perceived as dramatic and immediately the news feed will start to say things like “market crashes,” “market soars,” etc., as if something really important is happening. Of course, these headlines will always be accompanied by a photo of some trader on Wall Street with either a forlorn or jubilant expression on his face. I am pretty sure the lifetime professional traders on Wall Street don’t walk around cheering or crying based on the market each hour, but the photos indicate otherwise.
As the day moves on, a constant stream of news items are flashed on the screen, each matching the markets most recent movements and each determined to explain why. It’s almost like watching a back and forth football game with sportscasters second guessing and over analyzing even the slightest actions of each team.
Finally the day ends, the stock market closes, and the final number flashes on the screen as a statement of victory or failure for that day. The analysts jump in again for post-game pontificating, acting as if the whole world lives and breathes by what happened on Wall Street that day and, more importantly, their analysis of it.
In my opinion, this new never-ending sport of market watching and analyzing that has become the norm has about as much real value as watching an actual sporting event. It can definitely provide entertainment for those who enjoy it, but little if any real financial benefit. If you have become addicted to the sport of market watching may I suggest a New Years Resolution for 2019 – Watch more football! It’s more enjoyable and far less dangerous to your investment accounts.
I was in a store on Christmas Eve when a long time reader asked if I was having a heart attack over the record market loss for that day. I responded that if stock market movements gave me a “heart attack” then I am definitely in the wrong business. We talked about the difference between the stock market and the economy and I pointed out that both have been heading in opposite directions the past few months, but only one of them mattered to me. Ironically, the very next trading day on December 26th the stock market had its biggest point gain ever. So the question to ask is, who was right about the economic future, the sellers who drove the market down on Christmas Eve or the buyers who drove it up on the 26th? These two consecutive record days, each going a different direction, will be a topic of discussion in future college textbooks as the next generation is taught what matters and what does not when it comes to investing.
The computerization of the stock trading has essentially created two different markets. The first is focused on assembling a portfolio of great companies whose value is expected to go up over the next few years. The second is comprised of short term traders who don’t care what a company is worth, but merely seek to profit from daily market movements. The first group is focused on corporate earnings and economic growth. The latter seems more interested in what they read on Twitter® and how they think it might move markets.
The vast majority of investors I know are, or should be, in the first group. They want to own companies and profit from their growth. The challenge for this group, and what leads to “heart attack” comments, is that they often mistake the short term market movements for an indication of long term value. In a sense, they play into the hands of short term traders who make money off rapid stock movements and the fear and greed they cause.
I have studied the great investors of the last century and have been unable to find a single one that was a short term trader. As the great investor Peter Lynch once said, “I can’t recall ever once having seen the name of a “market timer” on Forbes‘ annual list of the richest people in the world.” And then Mr. Lynch gave the key that made him one of the greatest investors of all time. He said, “The time to invest is when you have money and the time to sell is when you need money.”
The national and world economies continue to grow and with technology opening up huge untapped markets, I can’t think of a better time to be an investor. But if you are going to invest, make a new years’ resolution to stay in group one and don’t allow those in group two to pull you into their short term trading trap.
As investors have been hoping for a little something from Santa Claus this year, a 1983 Anne Murray song, “A Little Good News” might seem appropriate. In her song she complains about the daily barrage of media negativity and suggests how nice it would be if just one day the headlines read, "Not much to print today, can't find nothin' bad to say.” I chuckled as I reread her lyrics and realized not much has changed in 35 years.
The barrage of negativity continued after the meeting of the Federal Reserve this week, which was accompanied by another drop in stocks. I read the speech by Chairman Powell after the meeting hoping to find what all the fuss was about and here are some highlights.
He mentioned that the U.S. economy remained “healthy and solid.” Hmm, that didn’t sound like bad news to me so I kept reading. Powell then predicted the GDP growth rate for the economy in 2019 would be 2.3%. Once again I was scratching my head. Economists say an ideal growth rate is anywhere between 2 and 3%. So with the Fed predicating an “ideal” rate, why the complaining? Have we so quickly forgotten how thrilled we were in 2017 when GDP hit 2.2%?
This year growth will surpass 3% so maybe that is the real problem. Maybe investors have become like the spoiled kid who gets a pony for Christmas and then the following year complains when he only gets a new bike.
Powell went on to say the Fed expected unemployment to continue going down, wages to go up, and inflation to stay in check. This was all great news, but investors remained unimpressed.
Finally, Powell announced that due to the continued strength in the economy, and in order to keep a lid on any potential inflationary pressures, the Fed would likely raise interest rates two more times next year bringing the Fed rate by year end 2019 somewhere near 2.75%. The markets seemed unhappy with that announcement.
So let’s turn back now to Anne Murray’s song, and 1983, for a little perspective from an investor point of view. Despite Miss Murray’s gloomy lyrics, the Dow Jones average that year ended up 20%. Apparently Anne was not an investor or she would have been singing a different tune. What is remarkable is that the Fed rate that year ended over 9%. Such a rate would likely cause widespread panic today. Maybe 2.75% only looks bad because last Christmas Santa gave us 1.5%. Could this be another case of investors acting like spoiled children?
So the economy is strong and indications are that the strength will continue, yet investors continue to complain and sell their stocks at increasingly lower prices. It appears that any hopes for a gift from Santa is unlikely. But wait! Did I just say stocks are getting cheaper? Maybe Santa really has brought a gift for investors this year after all.
When I was quite young I read a great book by Robert Ringer, “Winning through Intimidation.” The book contained some amazing information about negotiations, and how to win them. As I have watched President Trump over the past two years I wonder if perhaps he may have read Mr. Ringers book as well.
One principle Ringer taught was that the winner in almost every negotiation is going to the person with the least commitment to the outcome, or the person with the least to lose. He points out that wealthy individuals usually come out on top in negotiations because they don’t need the deal as much the person they are negotiating with. In short, Ringer teaches to always be the person who can walk away.
The stock markets have been pretty volatile lately due to several issues, but one of the most concerning to investors seems to be the so-called trade war with China. President Trump and Mr. Xi are involved in negotiations over trade practices, with each side claiming the other is being unfair, and threatening to impose additional tariffs if they don’t get their way.
There is legitimate concern on Wall Street over this issue since trade with China is important to our economy. Many companies, largely technology, have big plans for Chinese expansion and the current battle has significantly damaged their share prices. As I have analyzed the risks to both sides in this “war,” I have felt to look past the political posturing and focus on the hard numbers. So here they are.
According to the US Census bureau, the last time we had a trade balance with China was in 1985. Since then there has been a significant imbalance. So far in 2018 the U.S. has exported $103 billion in goods to China while importing a whopping $445 billion. The Chinese market accounts for only 9% of total U.S. exports so it seems clear that China has far more to lose if this trade war is not resolved. They need this trade deal more than the U.S. needs it.
I am confident President Trump has done the math on this and realizes he is in a powerful negotiating position. We don’t want a trade war with China, and they don’t want one with us, but with much more to lose I am confident China’s leaders will do what needs to be done to resolve this issue. I am also confident president Trump does not want to drag this out longer than necessary and will be open to a negotiated solution that “improves” the U.S. position.
If the stock market gets its Santa Claus rally this year, I believe it will be driven by hope for a resolution of the trade war with China. If that happens I would look for tech stocks to lead the way as they have been the hardest hit over this issue.
Up until 2013, the two leading causes of small airplane accidents were LOC (Loss of Control) and CFIT (Controlled Flight Into Terrain). CFIT is when a pilot is flying along normally and suddenly he finds the earth at his same altitude. These “under control” accidents happen largely in poor weather or when there is diminished visibility.
I was thinking about CFIT a few weeks back as I approached my home airport on a night flight from Phoenix. I had just crossed the Grand Canyon and was passing the hills and peaks that were below me but that I could not see because of the darkness.
The night posed no unusual risk to this flight because in my cockpit are four fully independent Garmin GPS screens that clearly identified the terrain as if it had been noonday. As I descended into the darkness I thought of past pilots who had lost their lives in CFIT accidents, and how those accidents could have been easily avoided with the technology in my plane. In a recent article in Flying magazine it said that this killer of the past has largely been eliminated from accident reports in just the past few years.
This new technology has been such a blessing to pilots – well – except for one thing. With the advanced technology in the new airplane cockpit, pilots can become so overwhelmed by all the information that they forget to look out the window and fly the plane. This has led to a new class of LOC accidents. Think of a distracted driver texting on a cell phone. And so in some ways the cure has become the cause of the next problem.
If you would have asked me 20 years ago what was the number one cause of bad investment decisions, my anecdotal response would have been, “Lack of information.” Investors got their information from monthly magazines, newspapers and investment newsletters, and it was often too old to act upon it by the time it arrived. Corporate news back then was often filtered and sanitized, making it difficult to find the truth.
If you ask me today what I think the number one cause of bad investment decisions are, I would probably respond, “Too much information.” The age of Twitter® has made it more difficult for corporate execs to hide their misdeeds behind carefully worded press releases. Unfiltered and raw corporate and economic information is available on a cell phone, in real time. Where once investors may not have known what they should be worried about, today they make mistakes because they worry about too much. And so, as in flying, the cure has become the cause of the next problem.
Much of pilot training today focuses on using the benefits of technology without becoming distracted by it. Modern investors need to likewise discipline themselves to take advantage of technology and its unlimited information, without becoming overwhelmed by it.
We visited our two daughters in Dallas last week and went out one night to find some good old fashioned southern cooking. We headed to a highly recommended restaurant but were disheartened to find the place packed. As we considered our options we noticed a similarly themed restaurant right next door with only a few people inside and no line. My first thought was “Oh good, we can get right in, the place is empty.” I then realized the foolishness of being excited about having found a restaurant that no one else wanted to eat at.
Stocks are often like restaurants and hungry customers like investors. The reality is that companies that are worth owning, the ones who make the most money, are usually the most expensive because everyone else wants them too. With a good product and a strong history of turning a profit, the better company’s stock is in much higher demand. Like a crowd and a full waiting room, if you want to own stock in these great firms, there is going to be a price to pay.
At the same time there are many companies whose stock seems to always be on sale, often selling for mere pennies. Some are tempted to buy these companies because of the low price. They rationalize that when you buy cheap the upside is so much greater. When these individuals come for advice I remind them that stocks are cheap for a reason. Thinking that you have found a great deal because a stock is cheap is like thinking you have hit the jackpot when you stumble across an empty restaurant on a Friday night.
As I have studied the great investors of the world, I have found that most look for high quality companies and are willing to pay well for them. They realize they aren’t going to make a killing overnight on a quality stock but they understand, as the famous investor Peter Lynch once said, “Time is on your side when you own shares of superior companies.” When markets are on fire Investors can often get away with making careless decisions, but when things get a little more difficult, it sure makes it easier to sleep at night when you are holding great companies.
The restaurant with no line may seem like a great find, but inevitably you will likely be disappointed in the outcome. The company whose stock is cheap because no one else wants it may seem like an opportunity with lots of potential upside, but there is likely a good reason no one is waiting in line to buy it. As the past two months have shown, the days of the stock market always going up have come to an end. The economic future still looks very good, but I suspect investors will need to be a little more selective in their investment choices, focusing more on quality, or they may wind up with some serious financial indigestion.
A university student interested in financial planning came to my office to discuss the industry. He asked, “What is the most important thing for me to do to prepare to be a financial advisor?” He listed the potential classes he might take, and internships that were available to him, trying to give me a bigger picture of his options.
I asked him to consider the other areas of his life where he might need to hire professionals, and what qualities would be important to him. He mentioned several items but ultimately it came down to his answer that he would hire someone who had shown by his own experience, expertise in the field in which he worked. I asked if he would hire a contractor who lived in a run-down home and he agreed that he definitely would not.
With this question I had set him up for part two. I asked him to tell me about his own investment account and personal financial plan. He laughed and reminded me that he was a starving student without a spare nickel to his name. His answer was fair but I told him he could not expect to advise others on financial matters in which he had no personal experience. I encouraged him, no matter how small, to get started investing and learn by his own experience so that he could teach others.
I have often been frustrated with the financial planning industry. Although regulators are working on a uniform code of conduct, there are currently very weak standards that govern who can call themselves financial planners. I think this needs to change.
People often ask how to select an advisor. Obviously, education and certification are required pre-requisites (only 15% of financial planners are Certified Financial Planners®). But I would like to recommend another step, a bold step. When a potential financial advisor is interviewing you and asking lots of financial questions, turn those questions around. I believe clients have a right to know that the advisor has his/her own house in order. Advisors need personal experience and success in the areas they will be advising you in. You would be surprised how many there are who call themselves financial advisors but have little or no personal investments. The thought is absurd and scary.
Some years ago at a seminar I surprised the audience by posting my own investment allocations on the screen. I wanted them to know that I had personal experience in the things I was teaching them. I would like to see the regulators add a requirement that all who advise others on their investments be willing to disclose, at least at some level, their own personal investing experience and allocations. If you are looking for an advisor, don’t be afraid to ask them some personal questions. This is your life’s savings and you have the right to know the person trusted to manage it has their own financial house in order.
Years ago I had a client for whom I created a financial plan designed to get them comfortably to the end of their lives. A few months after the husband passed away, we received a call that was out of the ordinary. This nice lady needed $25,000 to pay for some remodeling in her home. I discussed with her that the amount requested would impact the financial plan and potentially put her at risk, but she was insistent.
Over time, requests for funds continued to come and my yellow flags were turning red. A financial advisor has a legal obligation to be alert for signs of fraud so I sat down for a serious conversation with this lady. She admitted that after her husband’s death she was very lonely but a kind man, (30 years younger,) had suddenly appeared to help her and they had become romantically involved.
We talked about other potential motives her boyfriend might have, and I cautioned her that her account was drawing down dangerously fast, but she was in love and could not be convinced. We require all clients to authorize us to contact a third party in such situations so I decided to call the lady’s daughter. Her daughter got involved but was also unable to persuade her love-struck mother. Shortly thereafter the account was mysteriously transferred from my office. It is a sign of potential fraud when criminals act to separate the victim from the people who care about them.
As you can imagine, once the money was gone, the boyfriend disappeared. The mother was devastated not only financially but emotionally. She had lost the love of her life, or so she thought. This is one reason we advise against major decisions following the death of a spouse. Death notices are public and unfortunately criminals can use them as a list of potential victims who are in a vulnerable state.
We learned at our recent company national conference that romance scams are becoming increasingly common in our digital world. Criminals today don’t need to move in with their victims, they simply use the internet, and dating sites, to create loveable but fictitious people and lure the lonely into phony relationships. They are very convincing and usually search out their victims first to learn their hobbies and likes to help create an emotional connection.
A major protection against being scammed is to remember that no financial fraud can occur unless money moves. As soon as money in any form is involved – stop immediately and re-evaluate the situation. A criminal cannot defraud you unless he can convince you to move money or assets. And you can be sure that before the request for money, there will be a strong play on your emotions. Help protect yourself right now by agreeing in advance with a trusted friend to consult with each other in any situation where someone makes an unusual request for you to move money.
An extensive exit poll this week demonstrated the vast divide in American politics. On each issue the respondents came down heavily along party lines. One question that stood out to me was, “How do you feel about the state of the economy?” Over 85% of Republican respondents said it was “Great” while over 85% of Democrats selected “Terrible” as their answer.
I can understand ideological differences over healthcare, immigration and other social issues but as a numbers guy I have a difficult time with varying opinions about the economy. Unemployment is near record low levels, GDP is high, growth is strong and earnings continue to outperform expectations. In just about every measurable field the numbers say that the economy has rarely, if ever, been better. So how can almost half of America consider it to be “Terrible?”
I suppose there are isolated situations but it’s hard to imagine any significant demographic that has not benefitted economically from the current growth cycle. Which leaves me to assume that unfortunately, politics has just become part of the human reality and we tend to see things through the blue or red lenses we wear.
Investors, however, don’t have the luxury of having their investment decisions clouded by colored glasses, at least if they want to survive and thrive. They must look at the numbers as they are, and attempt to predict where they are likely to go. Since I’ve already stated that the numbers continue to be positive, let me address how I feel the recent election might affect those numbers going forward. Let’s take off our colored glasses for a moment.
The 2018 tax cut greatly benefitted businesses and consumers and should continue to do so. Deregulation has been a strong positive factor for continued growth. A business-friendly attitude at the executive branch has spurred growth and development in many industries. Historically low inflation and interest rates have helped the economy and innovation continues to improve productivity. The big question is, will any of the above conditions change as a result of this election? The day-after market rally was Wall Street’s answer to that question. They were not cheering the democratic takeover of the house, nor the Republican gains in the Senate, but rather the financial peace that comes from assuming a divided congress will get very little done. From an investor point of view, a congress that can’t act, can’t hurt anyone.
I suspect that the next two years should see a continued pattern of growth as the mechanisms are already in place to allow that to happen. However, the areas of growth will shift slightly as the new political landscape makes some slight adjustments, so investors need to stay informed. Both sides won in this election and both sides lost. No one ever gets everything they want but I believe, as a financial advisor and a numbers guy, that investors just got two more years of economic growth, although perhaps just a little bit less than the past two.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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