Skip's Blog On Planning For A Moving Target

Understanding Your Bonds - I

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Visit to OLLI - Part 2

Welcome back.

Last week I re-answered a question I received at the OLLI class at UNC Asheville.  Most of the attendees were people who make their own financial decisions.  Maybe not a brilliant marketing strategy for HelmsWealth but I love talking about finance and usually learn something myself.  We can swap yarns in good fellowship because none of us risks our trust.

Before the bell, I said that investors with full-service financial advisors didn't need to know anything about portfolio mechanics.  Instead, they absolutely must answer these three questions about their advisor:

          1)  Do I like this person?

          2)  Do I trust this person? and

          3)  Will he (or she -- usually he) do what I need?

You need three confident "yes" answers whether you are interviewing a prospective advisor or have known him for 12 years.  If you get all three right, managing the money is his job from them on.

After class, I was asked to expand on that statement.  I’m glad of the opportunity because it comes down to the trust I think is the hallmark of the essential family advisor.

"Trust" and "like" are separate questions for a good reason.  When it comes to money or family, trust is the higher standard. 

President Reagan famously said, "Trust, but verify."  Verifying trust with your financial advisor can be daunting.  But you have to do it.  You are the only one who can.  I can't give you much emotional support from a blog page but I can share some ideas how to start your search.

Investors are between a rock and a hard place.  On one hand, Wall Street sells investments.  Sales incentives can include rewards or pressure depending on how much freedom advisors have to choose what you own.

On the other hand, financial advisors have an ongoing fiduciary duty to place their clients' interests above those of their firm.

How your advisor and his firm handle those competing forces determines where their loyalties lie. 

That’s also the easy (and discreet) place to look for conflicts-of-interest.  If you really want to know where you stand, test the integrity of your advisor's product supply chain.

My personal favorite fiduciary responsibility is maintaining the transparency of the investments in my clients' accounts -- both what they are and how they get there.  We shop hundreds of investment sources using a fee-based platform so none of the vendors have any economic leverage to force their way into the portfolio.

That's crucial because part of that essential duty is to intervene in the product flow when I see strategic threats or opportunities.  As things change, there is always a Plan B without duress from suppliers.

It's not so simple when firm-wide revenues depend on favoring one vendor.  Plan B means a one-sided talk with your boss about being "a team player".  If you distribute for a single-line manager, Plan B means looking for another job.

Let's do some verifying in your best interests:

Start with the low-hanging fruit.  Does your advisor's firm or parent corporation frequently pay huge fines for stealing?  That's a clue. 

Can your advisor only sell (or does he only sell) products or strategies his company manages?  That's another clue – although not a deal-killer if they're competent.

My big red flag is when advisors are paid to keep you on their company's glide-path (last week's blog).  Funds, wrap accounts, annuities – the platform doesn't matter if you are just a dot on the chart.  Managing one big account is more profitable than managing 80,000 little ones.  That doesn't mean it's better for you – or even cheaper.

Case-in-point:  Last week I said I think rigid asset models are a strategic threat for retirees when used instead of on-going vigilance.

I've been wrong before.  Maybe I'm just the only advisor who can't squeeze 6% out of a 3% bond.  Right or wrong, markets create plenty of other dangers without my help.  When I spot one, I can act without someone breathing down my neck.

If you haven't done the 5-minute exercise at the bottom of last week's blog, please do that now.  You need to know your asset allocation before you ask why you have it.

Innocently ask your advisor how he would change your investment strategy if he felt you, his portfolio process or even his firm was on the wrong track.

Then listen.  He has one chance to get this right.

A good answer is that he constantly monitors client portfolios and chooses investments from independent sources without duress.

A bad answer (stated or unavoided) is that he hasn't had any portfolio input since your account was opened.

The bad answer means there is no Plan B if his firm implodes, uses self-serving products or forces him to sell you things you wouldn't touch with rubber gloves. 

They may never happen – but you are trusting him to tell you if they do.

Sometimes I imagine investors embracing these truths and flocking to my door.

That doesn't happen very often.  Trust is deeply personal.  Verifying it can be uncomfortable.  Many investors won't even risk the pain of learning (or finally admitting) their trust has been misplaced.  If they get that far, they have to find somebody new without any idea how to look.

One of the reasons I've made my practice so transparent is to save clients the embarrassment of asking if I'm honest.  I explain how I handle those conflicts-of-interest early in the conversation so they always know it's OK to hold me accountable.  If you advisor has earned your trust, he won’t mind either.

Find the courage to verify the trust your advisor must earn every day.  It makes everything better.  You may even like him more.  sh

PS-  Or just come see me!  

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Securities offered through LPL Financial, Member FINRA/SIPC. OLLI, Helms Wealth Management, and LPL Financial are separate entities.

Market Timing Follow Up

The prequel to the three-part timing blog comes from real life.  It gives me the chance to offer you a peek behind our curtain on how the advisory business works when it works well.

In early February, a prospective client came in to see me.  He was very concerned about the steep market decline in January and wanted to know my strategy for waiting to buy until the market was about to turn up again.

I told him I didn’t have one.  He said he’d get back to me.

In early April, a couple (who did become clients) came in to assess our services.  He (always he) was concerned that the market had rallied too sharply and wanted to know my strategy for timing the pullback.

I tried not to smile.  If you know me, you know it didn’t work.

I told him I didn’t have one.

I added we would be purchasing a portfolio that was probably worth between 90 and 110 cents on the dollar.  It would take a year or two before we even knew that.  The object was to own securities with a reasonable chance of being worth more than either of those two numbers when the money was needed.

If they were already retired, I’d have said the object was to buy securities with a reasonable chance of producing the income they need and keep up with inflation.

Basically the same portfolio in both cases.  Maybe the yo-yo is low that month and we catch a break.  Maybe not. 

Here’s the one thing I absolutely know about market timing:  Markets couldn’t care less when people come to our door.  Bear markets make clients in damaged financial relationships more receptive but most folks come by because they just retired or sold a condo or moved here and want face-to-face service.  I often meet them though a happy client.

Now for the insight into my business:  I’m not betraying any sworn secrets here but this doesn’t come up in most conversations.

Well-run financial practices have defining disciplines for asset management.  It limits the range of the practice but to be good, you have to concentrate on the needs of core clients.

A broker just starting out will take almost any account under almost any condition.  If a prospective client only wants companies that start with the letter “S”, that’s what he gets.  When dad told mom to never sell their bank stocks, you’ll watch them for her.

Then the market drops 20% and you find out just how many plates you had spinning on sticks.  Notice I said “had”.

That night, you realize every minute you spent researching “S” stocks or watching banks crash that you can’t sell was time you didn’t devote to the people who believe in you.  You don’t sleep much.

The next day, many of us decide to do our very best for our clients.  We take ownership of the client experience. 

You feel reborn.

So the next guy comes in and says his brother-in-law thinks XYZ Corp. is poised for big gains.  He wants you to put 50% of his account in the stock and send him daily research bulletins.  You simply say you only follow companies in your carefully monitored investment discipline.  Straying from those guidelines compromises the care you owe your existing clients.

Either he decides he needs yet another inexperienced advisor who can’t refuse his reckless strategy or he realizes your advice is more valuable than his brother-in-law’s.

If you don’t get the account, you won’t miss it long.  One of your happy clients is about to introduce you to his best friend. 

This approach doesn’t leave much room for timing entry-points. 

At shops where you sell what you’re told, compensation doesn’t start until the money hits the account.  You turn the management over to people chosen for your client’s needs and they make the calls from there.

At shops like mine where we make the buy and sell decisions, we still can’t play hunches – ours or yours.  Everyone with the same objective gets the same basic portfolio.  Every holding has a reason to be there.

Happy long-time clients may have nice gains in positions that have seen their share of ups and downs.  Newer clients may have bought the same position at a recent top and wonder why our timing isn’t better. 

So now you know a little more about how successful advisory practices keep their focus.  We reach a point professionally where we have to dedicate as much time as possible to the people who trust us most. 

Be one of them.  sh 

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. It is not possible to determine the top or the bottom of the market. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. No strategy assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC