Recently I was invited to appear on a live CNNfn television
show to discuss my article “How to evaluate Load vs. No Load
Mutual Funds.” (Click
here to read that article.)
As the producer and I were working out the logistics of my
appearance, she mentioned in passing that “most people can’t
afford an investment advisor.”
While that wasn’t the time or place for me to discuss this, I
realized that many people might have a similar misconception.
Had conditions allowed, I would have pointed out the following
to her.
There are only two ways an individual can invest in mutual
funds: Selecting and investing themselves or using outside help.
If they use outside help they’ll have a couple of choices again:
A commissioned salesperson (broker, financial planner or
Registered Representative) or a fee-based investment advisor.
Most people don’t know the difference and often start with a
broker who charges about 6% commission off the top to purchase
a mutual fund. The fund is usually from a limited selection of
fund families the broker has a relationship with. He, of course,
would never recommend a no load fund or an exchange traded fund
(ETF), since it is not in his best interest -- although it might
be in yours.
Having a fee-based investment professional handling your
portfolio will get you as close as possible to receiving advice
that is based on nothing but the advisor’s best knowledge and
evaluation of the market. They advise only what they consider
top performing funds since sales commission is not a
consideration and does not create any conflict of interest for
them. But, how can you "afford" an advisor?
First off, the advisor's fee is usually in the range of 1% to 3%
per year depending on portfolio size. This amount is billed in
advance on a pro-rated quarterly basis and charged directly to
your investment account. This creates an initial savings right
off the bat.
Most fee-based advisors offer complete service as far as your
portfolio is concerned. That means that they don’t simply “sell”
you a mutual fund and disappear until you call again. Since
investors evaluate advisors based on the performance of their
portfolio, advisors are keenly interested in maximizing your
bottom line. In the long run, your gain should outweigh their
fee.
Many advisors utilize an investment discipline or methodology
that keeps you not only invested during upswings in the market,
but also in the appropriate funds for the current economic
environment. For example, at one time, tech funds were hot.
Now, generally, they're not. An advisor watching market trends
could have been able to assist you in avoiding the bursting
bubble. (In fact, my clients were advised to pull out of the
market and into the safety of money markets in October, 2000,
just before the market plummeted. What they didn't lose because
of this will more than cover my fees for the rest of their
lives!)
Most advisors don’t have lengthy agreements and you usually can
cancel by giving 2 weeks notice. The advisor never has access to
your money because he is affiliated with a custodian who handles
the money, the monthly statements and fulfills the proper legal
reporting requirements.
With this arrangement an advisor can actually save you money.
How?
1. The advisor will use only no load funds. Because of his
affiliation with a custodian (often a major brokerage firm),
he’ll have access to some 10,000 mutual funds, not just to one
or two fund families as most commissioned brokers do. This
allows him to pick the best available, which potentially means
a higher return for his clients.
2. At times there are superior load funds available, especially
in the international arena. I have used a couple of those in my
own practice because they were available to me as “load waived
funds” and my clients got the advantage without paying a sales
commission.
3. Custodians many times also offer “Advisor only” funds. These
are usually high performing mutual funds where the fund family
wishes, for whatever reason, to deal only with investment
professionals, so they set high minimum dollar requirements.
Such was the case in my practice during our most recent buy
signal (4/29/03). I purchased the NAMCX fund, which was only
available to advisors through my custodian. This fund rewarded us
with a cool 47% over the following five months. Most independent
investors would not have had access to such a fund on their own.
Keep in mind that markets fluctuate and starting with an advisor
in the middle of a downturn will not likely yield high profits
at first. However, over time, an advisor will most likely produce
results better than what you would reasonably expect yourself to
do, even with the advisor's modest fee.
Choosing the right advisor and watching how your portfolio
performs with their advice will almost always prove that it
doesn't cost you to have an investment advisor, it pays.
Copyright 2004, Ulli G. Niemann
Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit:
http://www.successful-investment.com
