This is a column about how to choose a financial adviser, but first a little history:
Back in the late 1980s, Marin General Hospital had a plan that allowed people to run their own brokerage accounts anywhere or choose just a pooled money market fund. While all the doctors parked their money at a variety of brokerage houses, everyone else just went with the money market fund that was paying about 8 percent at the time.
Much to the amusement of their chief financial officer, all the doctors lost money during a 10-year historic rise in stock market values. The non-physician employees made 8 percent per year. I recall a statistic then bandied about. It stated that 80 percent of all small investors using major national brokerage firms lost money over a five-year period. The average broker-client relationship lasted three years.
This is all ancient history of course, but a wrongful termination lawsuit was just filed against JPMorgan Chase by one of its former brokers. He claimed that he was fired for not selling the company's own proprietary investment products rather than what he thought were better investments for his clients.
While the merits of the suit will be worked out in the legal system, consider this: JPMorgan Chase has more than 225,000 employees around the world. Imagine the layers and layers of management overhead (bosses managing bosses) supporting that operation.
All of that overhead cost has to be included in the cost of the face-to-face meetings between a single adviser and a client.
The business model at JPMorgan is one that dominates the financial services industry, and it just doesn't compute. There are no economies of scale when it comes to providing investment advice. Merrill Lynch, for example, was insolvent when it was driven into a forced marriage with Bank of America, and we taxpayers then saved the entire kit and caboodle.
It costs about 6 hundredths of 1 percent per year to operate a mutual fund. Anything over that is supporting the world's most profitable industry. How else could Vanguard offer its 500 Index Fund today at a cost of 5 hundredths of a percent per year?
By comparison, the legacy money management industry feels compelled to charge something between 1 and 3 percent per year. Stanford professors throwing darts at the Wall Street Journal 30 years ago proved that there was no value added by active money management efforts. So why put up with having all that money coming right out of what could otherwise have been the investors' annual income or compound earnings?
For some, asset allocation between stocks, bonds and different asset classes of stock can, in fact, add value and help the average investor avoid their biggest enemy -- themselves. Paying something for this help can make sense for many, but this begs the question of who to pay and how much. Combined costs of trading, mutual fund expense ratios and advice itself should be well below 1 percent per year.
The financial services industry is moving toward a business model that should lead to creative destruction of the legacy brokerage industry. Individual fee-for-service advisers who receive no commission income from products and who are entirely independent of any major financial institution are probably the best bet for achieving long-term results. Finding such people is an inexact science. It's a process of asking friends who have had good results with their advisers over long periods, including several market cycles.
Ideally, an adviser who has been around for 20 years or more will reflect more experience and generate better results. Short of talking to friends, you might ask your CPA if they know of such people.
Be careful not to have heightened expectations. Some aggressive advisers trying to hype their services will point out how bad your previous results have been and try to make a case for how much more successful you might have been with them. At any given moment, there is no right answer as to what mix of assets will do the best going forward. Only hindsight offers 20-20 vision.
Not losing money is important. Andre Meyer, a key partner at Lazard Freres, managed money for people like Jacqueline Kennedy. He said, "When you lose money for a client, you lose them as a client and also as a friend. Even if conservative advice misses what might have been substantial gains, clients are not inclined to leave under those circumstances."
That's the kind of adviser you want to find if you're paying for the advice -- someone for whom your friendship is as important as the professional relationship.
But, the best value, in the end, is the "do-it-yourself" model. Read some books and invest in some cost-effective index funds that charge next to nothing. Always manage some of your own money yourself even if you hire a professional so you have a standard of comparison. But saving 1 or 2 percent in annual fees gives you a leg up on a broken industry with 100 percent certainty.
Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0506 or firstname.lastname@example.org.