How To Manage Personal Finances Book: Chapter 15- Political Bingo Cards and Selecting an Investment Advisor
Author’s Note:
I am posting a text version of this entire book on Substack, and video versions on YouTube. Email ken@stltest.net for details on my 5th book’s publishing date in late ’24 or early ’25.
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When the political season heats up, the media will use these phrases constantly:
“Revving up the base”
“It’s all about turnout”
“Engaged voters”
If you’re playing political bingo, your card must include these phrases.
The same is true with ads for investment advisors. All the ads use phrases like:
“Trusted advisor”
“Helping you meet your goals”
“Tailored to fit your needs”
I can make strong case that everyone should work with an investment advisor.
Why?
None of us make good decisions when we’re under stress. When we’re anxious or “under the gun”, we may not think clearly.
These are the types of situations that may lead to a bad decision. When you make an investment decision, you benefit from speaking with a financial professional.
A 2015 article in the Wall Street Journal points out research from Vanguard, the large mutual fund company. Vanguard’s research found that-
“Brokers and advisors perform a vital service by keeping clients invested for the long-term. The decision to stay invested during times of market stress swamps all other factors affecting retirement savings”.
So, here’s what you need to know to select an investment advisor.
I understand finance- do I need an advisor?
Yes- I think you do.
I have a background in finance (let’s hope so- I write about finance for clients). A person like me might say: “I’ve got this covered on my own- why work with a financial advisor?”
What if you have a medical emergency?
I had emergency surgery in 2021 and was in the hospital for a week. I was in no condition to make financial decisions for another 10 days after getting home.
I think everyone needs an advisor- even people who work in finance.
Years of experience
OK, this sounds obvious- but there’s a specific reason why experience is particularly important.
Has the advisor worked with clients during market downturns?
Consider what’s happened in the past 25 years:
To explain, this Investopedia link lists the Standard and Poor’s (S&P) 500 annual returns for the last 25 years. The S&P 500 is an “index of the 500 leading publicly traded companies in the U.S.” These returns assume that the investor reinvested any cash dividend payments:
2008 Financial Crisis: 36.55% decline
Dot Com Financial Crisis: 11.85% decline in ’01, 21.97% decline in ‘02
I want an advisor who helped clients navigate one (or both) of these market declines.
The guidance may have sounded like this:
“We’ve had market downturns like this before. You still own quality stocks and bonds issued by companies that have been profitable over the long-term. Based on 80-plus years of market history, prices will eventually go back up. There’s no reason to sell anything.”
Now, every advisor must add: “Past performance does not guarantee future performance.”
I get it.
You need an advisor who has “survived” a big market downturn by providing wise counsel to customers. If the advisor didn’t do an effective job during a downturn, he or she wouldn’t have any clients.
Responsive to customers
Can you get your advisor on the phone when you have a question?
Many large financial firms have decided to focus on clients with the highest net worth. To free up each advisor’s time to service the “big fish” customers, smaller accounts are given an 800 number to call.
Well, what if you’re not a big fish?
Life events happen. A parent passes away and a child must unravel the parent’s investment accounts. You’re closing on a home loan and need to move funds for closing (my daughter recently had this issue).
Customer service people are nice and well-meaning, but they don’t know you personally.
Can they solve your problem?
Ask the advisor if you can get them on the phone- or someone in the office that knows you. If they work for a large financial service company (I won’t name the specific firms), the answer may be no.
The best way to find an advisor
The best way- hands down- is to ask friends for a referral.
It’s an important decision similar to finding a doctor or an attorney. Rely on people you know and trust to refer you to the right advisor.