Money Clinic: Pass/Fail

The stock market is bouncing back nicely after a slight correction a few weeks ago. I pounded the table and told you that you could test the quality of your “financial advisor” during this last downdraft in the markets because he was supposed to put some money to work for you.

Did he pass? Or, fail?

Unfortunately, the financial services industry is wrought with financial service professionals who just gather assets, collect fees and do nothing to earn their keep. It is a sham that the industry has taught its salespeople and it not only costs you money in fees, but also in performance.

For example, if you have a $500,000 managed money account or an account filled with mutual funds, your advisor should have moved about $50k that you should have had available from taking profits at the end of 2017 and put that money to work when the market fell 10%. With a market rebound, you could then take profits and pocket around $5,000.

Oh, did he call and just tell you that everything will be ok and to just hang on while markets plummeted?

Of course!

Unfortunately for you, he left $5 grand on the table that could have went toward paying his fees!!!

A financial advisor’s number ONE job is to MAKE YOU MONEY! It isn’t to hoard your assets, charge a fee and just let your money ripple in the markets without taking actions that can make you money.

I can’t believe the disinterest that “financial advisors” have in helping you to reach your financial objectives. They really have you fooled into thinking that they are paying attention to your money while they sit around and collect your fees and plan the next “client appreciation” function.

How about doing your job Mr. Advisor and act on my account! That would show me that you REALLY appreciate all the fees I’m paying you!!!!

The buy-and-hold investor has only averaged around 3% since 2000. This is a far cry from the 6-8% annualized return assumptions promised to “buy and hold” investors. Back out your fees and you’re barely keeping up with inflation!

In addition, annualized rates of return and real rates of return are VASTLY different things. The destruction of capital during market downturns destroys years of previous capital appreciation. Therefore, the SECOND job of a financial advisor is to PROTECT YOUR MONEY!

One way to help protect your money is by generating extra returns for you during corrections through hedging. Another way is to always have some powder dry so that you can take advantage of buying opportunities when they arise. You can’t buy low when you don’t have money available to purchase good investments when they go on sale.

Most financial advisors invest your money in the markets with no real personal consideration. There just isn’t enough time in the day to give everyone equal attention. They have hundreds of clients and have to split their time between servicing their best clients and attending posh sales award trips. I’m not saying that you shouldn’t pay someone to help you. However, the best way to win is when everybody wins, and your money is his top top priority. Work out a fair fee structure that makes both you and your advisor money when you do well, and he protects your downside.

Furthermore, most of the stock mutual funds advisors use are just sheep because they are almost fully invested all the time. They run money until they face distributions and then it is first-come-first served on who gets their money. It’s always the buy-and-hold gang that ends up holding the bag and taking losses when they sell their investments because they can no longer take the pain.

Remember, the goal is to stay in the game. People who get wiped out by serious downfalls tend to be those who never take anything off the table, sell in a panic and buy again when they feel better (which is usually at much higher levels). Then it becomes “catch-up” time and desperation sets in. They find themselves in the slaughterhouse hoping to get out. Most just get slaughtered.

Think about it, what are you going to do when the next prolonged correction wipes out most of the gains accrued from the current market cycle? Can you really say that your advisor took swift actions when necessary to make you extra profits? Does he have a plan in place to protect you from getting slammed when the market tilts the other way? Or, is he just going to chant “buy and hold, everything will be ok”?

It isn’t enough anymore to know, like and trust someone to be your financial advisor. They must help you put every dollar towards its greatest use and optimize the performance of each financial asset that you own. They must ensure that all of your assets are working together to meet your financial objectives. If you are fortunate enough to get invited to investment house functions like dinners, golf outings and other events but you weren’t important enough to put money to work during a fire-sale in the markets, then you are being cheated. You are the one paying for those lush dinners with the management fees you pay. However, you are paying for incompetence. You’re paying for lackluster interest in your valuable assets.

Your “financial advisor” must also be graded on how well they manage your account – not by having it rise an average 3% over the last eighteen years but by comparing YOUR results against some benchmark that measures an unmanaged index. For example, have YOUR returns matched the returns of the S&P 500 index since 2009? If you are paying a money manager to invest part of your money, it is vitally important to understand that any financial decision you make must be considered thoroughly because of the impact that it has on your whole financial picture and how it may affect other assets you own. Don’t deal with any advisor who wants to sell you a financial product (that usually makes him fees or commissions) that doesn’t make your WHOLE financial situation better.

When it comes to money, there is ONLY ONE way to grade your financial advisor. Does he PASS, or does he FAIL? The market provides plenty of tests that help you rate your financial advisor. You are not going to meet your financial objectives if you are paying someone that fails. Find someone that PASSES all the tests to help you GROW and PROTECT your money.

Enjoyed this post? Share it!