Become a Better Investor

It is challenging to find the right investment manager.  At a minimum, you want someone who is knowledgeable, ethical and takes the time to understand your goals and present situation.  Last week’s post on Greg Smith’s resignation from Goldman Sachs outlined some of the pitfalls you may experience with the wrong firm. 

While there is more to life than money, having enough of it when you need it most is extremely important.

The end goal of finding the right investment manager isn’t (or at least shouldn’t be) merely to amass piles of money.  It’s to form and adhere to a plan that offers you the best chance for achieving what you most want out of your life, while avoiding too many painful setbacks along the way.  If you look at investing through this lens, it clarifies how you and your advisor can view your wealth management in the same, best light:

Begin at the beginning: create a plan

Are you and your advisor guided first and foremost by a mutually formed plan that defines your unique financial goals and describes a sensible process for achieving them?  If not, what else can you rely on besides blind luck to find your way (and how reliable is that)?

Ensure that your goals drive the process

I recommend that your plan be in the form of a written Investment Policy Statement that you and your advisor have signed, and that you revisit together periodically to ensure that it continues to reflect your evolving circumstances.  By sticking with this approach, you’re investing according to your own goals, rather than the whims of an ever-fickle market.

Find a fiduciary

Financial intermediaries such as brokers expose you to potential and real conflicts of interest.  While some transactions are “perfectly legal,” by definition, they may benefit the broker and not you.  In contrast, a Registered Investment Advisor (RIA) is legally obligated to form a fiduciary relationship with you, which means that the RIA must act in your highest financial interests in managing your wealth.

If someone is determined to break the law, a written agreement isn’t going to stop them.  But, it is beyond me why anyone would open themselves up to the prospect of being legally ripped off (in the form of unnecessarily higher costs or less-appropriate investments), when it is so readily prevented by ensuring your advisor is a fiduciary.

Talk the talk

Have an investment strategy.  A plan is a great start, but, ultimately, it’s only as good as your ability to stick with it.  An advisor’s key role is not only to help you design your plan, but to serve as your constant ally in adhering to it under all market conditions.   He or she should consistently encourage sensible investment activities and remind you what you’re about if you are tempted to stray (such as panic-selling when the markets turn bearish, or chasing hot streaks when the market’s on a tear).

Walk the walk

Last but certainly not least, your advisor should establish his or her business and service offerings to complement rather than conflict with all of the above. Some of the characteristics to look for include: 

• Transparent, fee-only arrangements.  Greg Smith’s Goldman Sachs op-ed piece illustrated all too clearly the conflicts of interest that can arise when your “advisor” is operating in an environment in which portions of his income are in the form of often undisclosed commissions and similar incentives coming from outside sources.
• Arm’s length custody.  Your assets should be held by a separate custodian, who sends regular, independent reports directly to you, so you can substantiate your advisor’s activities on your behalf.  Ideally you should have online access to your account.
• Passive management.  Easily a topic for another post, but the recommended investment solutions within your portfolio should be optimized to help you achieve your personal goals. Briefly, this translates to funds that are “passively” managed to capture available, long-term market risk factor premiums as effectively and efficiently as possible.  A passive strategy helps you avoid the costs and inconsistencies found in attempting to outfox the market through “active” predictions.  The market as a collective, highly informed entity is pretty tough (and expensive) to attempt to beat.
• Go over your results at least once a year.  Find someone you can trust and also verify the results.  You can’t expect to do well every year, but you should at least know your returns.

Conclusion

There is a lot we cannot control: the business cycle, changes in tax policy, political instability and even acts of terrorism.  But we can concentrate on the things we can control.  The proper relationship with a fee-only advisor is your best chance for a positive result.

 

Can You Trust Wall Street?

For anyone who is a movie buff, this bombshell can be compared to the classic scenes in Tom Cruise’s Jerry Maguire and his career-killing “mission statement.”  Except this time, it’s not fiction, it’s for real. When executive Greg Smith quit his job on March 14th, he declared, “The environment (at Goldman Sachs) now is as toxic and destructive as I have ever seen it.” 

And this was no internal memo in which he aired his grievances.  As most are now aware, he went public (very public) in his now-viral New York Times op-ed, Why I Am Leaving Goldman Sachs.

Time will tell whether Greg Smith ends up honored as a game-changing hero, cast aside as a “whiner,” or largely forgotten, like that JetBlue steward who departed his career via the emergency exit.   But Smith’s observations are spot on. “If clients don’t trust you, they will eventually stop doing business with you. … People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.”

He may not enjoy lasting personal fame, but I fervently hope that the message he delivered ends up spurring a much-needed cultural shift within the financial industry.  Smith’s condemnation of the leadership changes he saw during his decade at Goldman Sachs struck most of us as illustrative of a global epidemic rather than a problem at only one Wall Street firm. 

It really shouldn’t be that complicated.  As Susan John of the National Association of Personal Financial Advisors (NAPFA) commented in InvestmentNews, “I think clients want to know that whoever is working with them has their interests at heart, and that there’s more loyalty to the client than to the firm.”

It seems to me that this sort of dedication to investors’ best interests should be a no-brainer — regardless of a firm’s business model, fee structure or service offerings.  It seems equally clear that, at least among Wall Street’s behemoths and likely far more widespread than that, it’s all too frequently not.  (This blog contains a series of posts on the “dark side” of Wall Street.)

How do we make meaningful progress toward eliminating financial service environments in which, as Smith alleged, his former colleagues “push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals”?

Legislation can help, up to a point. But one need only look to Bernie Madoff to know that laws will only get us so far when someone is determined to break them. What’s required is an attack on all fronts.  As individuals — financial professionals and investors alike — we must share a common passion for championing continued cultural, legal, procedural and educational improvements in all that we do with our investment activities.

My first recommendation is that you insist that your financial advisor promise in writing that your highest interests will come first.  In legal terms, this is known as a fiduciary relationship between you and your advisor.

If your advisor won’t agree to this legally enforceable relationship with you, I would suggest you respond with a quote from another movie character, Howard Beal, excellently portrayed by Peter Finch in Network: “I’m as mad as hell, and I’m not going to take this anymore.”