Investing and Ameriprise: Are the rats deserting the ship?

I was driving through Hamburg when I seen this...

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I just saw an article that made me shed real tears. If I understand it correctly a klatch of Ameriprise brokers (okay, “financial advisors”—ha!) are suing their employer for mismanaging their 401(k)s by forcing them to invest in Ameriprise funds.  The claim is that these funds charged excessive fees. Omigosh, what a surprise. Aren’t these the same funds that Ameripriseniks foist on their hapless clients? If Ameriprise’s own employees know they’re junk, how on earth in good conscience can they peddle this to hapless consumers?

I don’t know how members of the brokerage industry can live with themselves.   After endless press about the shenanigans and abusive sales practices of the brokerage industry, people are still convinced that that doesn’t apply to their broker. “But he’s such a nice guy” is what I hear all the time. Of course he’s a nice guy—he’d never sell anything if he were a troll. And that is exactly what he is—a salesman. They’re not allowed to recommend anything not being pushed by the company, they have to meet sales quotas or they’re out, and 90% of their customers don’t have a clue what they’re invested in. If the customer did have a clue, they’d be investing with a low cost brokerage instead and not accumulating a fistful of mutual funds with horrendous loads and management expenses and a crazy basket of goofball stocks and rip off insurance products. (BTW, Ameriprise was, once upon a time, American Express financial advisors until they came under so much bad press and regulatory scrutiny they changed the name. Catchy, huh?)

 In fact, a lot of them lately have been populating the CFP® classes. Do you think this is because of their tender concern and desire to be more competent for their clients? Do you believe in the Easter bunny? No, because it’s another way to hoodwink clients into thinking they’re getting something extra for those commissions and fees.  Or as one of them told me at my CFP® exam prep class—“It’s all about gathering assets. I’ll never use this stuff in my job.”

Whenever I get together with fee-only planners, I hear nothing but tales of the horrendous investments foisted on clients by their nice-guy brokers. In fact, I’m still waiting to hear a tale about a good, well managed and appropriate (low fee) portfolio designed by a Merrill-Edward-James kinda guy. But why is this? Are we as consumers all dumbbells?

No, this post is about outrage, not shame. I really don’t have any problem with commission sales, as long as the buyer can understand the product and knows what the actual cost is. I was totally okay with commissions when I sold real estate 20 years ago—people can evaluate the house or condominium, everyone knows what the agent is being paid, and the product and service are pretty easy to understand. Mortgages, maybe that’s another story. Did people make poor decisions and go against advice? Sure. Did some people go way beyond what they could afford? Not if they listened to me.

But the current mess in the housing industry really has its roots in the same kind of sharp practices as what the brokerage industry has always lived by.  There’s always someone trying to figure out clever and complicated ways to separate you from your money. And let’s not ignore the factor of greed—without that, none of Bernie Madoff’s victims would have been cheated.

We live in a complicated world, and most of us are already more than busy just trying to keep up with our own field. Keeping up with the financial and investing world is, believe me, a full time job. And as anyone knows who’s ever tried to hire a carpenter, or a plumber, or a nanny, finding reliable help is no easy matter.

Three simple rules would save a lot of people:

  • know how much you’re paying and think about whether that’s a fair price for what you’re getting;
  • be able to explain the investment, how you’ll make money from it, and why you’re choosing it;
  • if it seems too good to be true, IT IS.

A financial advisor should be very clear with you on how and what you’re paying for, and you owe it to yourself to understand any recommendations and keep asking questions until you do. That’s real smarts.

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Diversification—eggs in many baskets

Put all your eggs in one basket, and watch that basket, a quote variously attributed to Mark Twain and Andrew Carnegie, is really bad advice. While Andrew Carnegie knew what he was doing financially, Mark Twain most certainly did not. So listen to me, not him (I know better than to invest in crazy printing press inventions the way Twain did).

Pinning all your hopes on the success of one thing–one investment, one college admission, one friend—is quite simply playing roulette and you’re probably going to lose. Here’s my rationale for diversification:

• If one basket goes kaput you don’t lose everything

• You can control your choices, but you can’t control external factors. Worry only about what you can control

• Sentiment on various investments can vary greatly. Some part of the time you’ll be in-sync, sometimes not. You have a better chance of success if things are not correlated or all the same.

Quantity is not the same as diversification. If you own Dell, Hewlett-Packard, and Apple, you’re not diversified. If your child applies to Harvard, Yale and Stanford, you’re not diversified. If all your friends are from Civil War re-enacting, you’re going to be pretty lonely in the wintertime. You have to make your investment in things with true differences. In financial terms, this is why I recommend index mutual funds and/or ETFs. Put 90% of your money into funds and you can own Dell, H-P, and Apple as one basket (nicely diversified within that basket but not necessarily one I recommend), but also a fund of small value companies, international bonds, REITs, or just about any other type of investment that might be suitable for you. You develop a suitable mix based on your goals, the amount of money you have to invest, and your tolerance for stomach churning. That’s one of the things a financial advisor can help you sort through.

On the other hand, you probably don’t need 65 different investments. Research has shown that more than about 10-12 core holdings begin to lose the value of diversification. You’re spread out among so many things that you have no chance of “beating the market”—you ARE the market. Plus, keeping up with what’s going on just becomes ridiculously time consuming. 10 or 12 mutual funds you can monitor, 25 individual stocks become your full time job, with no evidence that you’ll actually do better and probably do a lot worse than an index. Ask any big-time money manager. Ask Bernie Madoff.

You know all this already? Are you doing it? Are you in love with a stock? Holding it because it will “come back some day”? You inherited it from your dad who worked for the company forever? Um, were you formerly employed at Enron? Reserve your love for your friends, family, art, music, hobbies. Investments are just money—get professional advice and make rational decisions.

 

 

Financial advisors: fee-only or fee-based?

What’s the difference? About as much as pro-life vs. pro-choice. Yes, I have to think twice before I have those two straight, too. But on the fee-whatever, it makes a big difference in the kind of advice you’re likely to get.

If you’re old enough to remember the old comedy routine whose tag-line was, “That’s what they’d like you to believe,” you’ll understand why suddenly you see all the brokerage houses touting fee-based. It sounds more consumer friendly, like your broker
is really going to care about you, and is really a financial advisor, not a big, hairy, commission-hungry salesperson. Please bear in mind that, as of now, a stockbroker (or whatever else they call themselves now) is only obligated to recommend products or investments to you that are appropriate. Funny how appropriate also seems to mean the ones with the best commissions in any given genre, or the ones designed and marketed by their firm. The brokerage industry has fought tooth and nail to avoid being held to a fiduciary duty, which means an obligation to put the client’s interests first—to
recommend investments in the best interest of the client.

Fee-based is often a way to make the client believe they are paying less commissions for the trades they make. It’s also been a way for brokerages to sell clients a ton of different investments while basically ignoring any service. And you can be pretty certain that everything recommended in the account is going to be a product of the brokerage firm. Just compare the mutual funds management fees to one from, say, Vanguard. For a more extensive discussion, here’s a good article from Investopedia.

Guess what I’m going to recommend? Fee-only, of course. That’s what Haven is, and that’s what I think is ethical. With fee-only, you know exactly what you’re paying for. Currently, Haven charges only by the hour for financial planning advice. Fee-only set-ups don’t accept commissions, or referral fees, or lavish junkets (I wish). My recommendations are only based on helping you consider your needs and coming up with suggestions that are in your best interests.

At the moment, Haven does not manage money or your investments. However, some fee-only financial advisors do, and we may add this service in the future. Generally, this works by charging a percentage of your assets—if they go up, the amount increases (not the percentage) or down, and down goes the amount. Of course, a consumer needs to be careful of how high a percentage a fee-only planner is charging, and generally these arrangements are only cost effectivem(for both advisor and client) if the “Assets Under Management” exceed $500,000. Think about it—if the advisor is charging you .05%, you’re paying $2,500 per year. For accounts that “small”, many advisors will charge 1%. Ironic that the more money you have, the lower percentage you’ll be charged.

$2,500 would buy a lot of hours of time with an hourly planner. For under a million, you probably don’t need that much time if your investments are in well-thought out baskets. Maybe the first year, but probably not every year. However, if you’re way too busy, or nervous, and you expect to have ongoing needs for re-evaluation or advice, placing assets with an advisor who uses a custodian can be appealing. Fee-only investment advisors like “AUM” because, frankly, we get frustrated when we make great recommendations and the client never implements them. If you cringe at re-balancing, the advisor won’t be as likely to fall in love with your investments as you may be.

One other reason to use fee-only advice: a comprehensive look at everything that makes up your financial security. People will often say their advisor has done well for them if their account “goes up”, which may be due far more to the vagaries of the market than any expertise on a broker’s part. But a fee-only financial planner can take a comprehensive look at your planning for retirement, estate, college & family goals, insurance, tax, and spending management, without attempting to sell you products on any of them. For example, when have you heard a broker recommend a Coverdell? Why not? Too small potatoes. 529s make a lot more money for them.

So, how to keep them straight? My advice—ONLY fee ONLY.