How do you get paid?  It’s the most important question you can ask a prospective Durango financial adviser during an interview.  Why is this question so important?  Because aligning compensation with your goals, growing your account, is the most powerful way to ensure your goals are realized.  But so many people fail to ask this one simple question.  Why?  Because most people are intimidated by all the fancy letters after the adviser’s name: title beware!

“The titles they (financial advisers) use mean absolutely nothing,” says Barbara Roper, director of investor protection for the Consumer Federation of America.  “We have a marketplace for financial advice in which professionals use virtually identical titles. …You have to dig deeper.”

FINRA requires that professionals take the Series 65 Exam to be called an Investment Advisor Representative. The truth is that most people are intimidated because they know relatively little about investing.  They also assume that the adviser will put their best interests first.  But the problem may not be the adviser; it may be the company they work for.

Over the last several years, investment firms of all sizes have been fined millions of dollars for not placing the client’s interests first.  Nine times out of 10 the problem boils down to how the companies pay themselves and their advisers.

Recently, Edward Jones was fined over $75 million because “the company created a conflict of interest by failing to disclose a revenue-sharing deal with seven ‘preferred’ mutual fund groups.  Edward Jones acknowledged it sometimes encouraged brokers to push certain mutual funds to customers.  The company failed to adequately alert customers to its agreement with the mutual fund companies,” the SEC and the Justice Department said.Edward Jones is not alone.  Merrill Lynch, Piper Jaffray, Wells Fargo, and Morgan Stanley have all been fined in recent years.

Compensation is key.  Did you know the vast majority of investment firms and their advisers are paid via commissions and up-front sales loads on mutual funds?  This is where the trouble starts.

Kathy Chu from USA Today writes, “Advice that you get might be based around the product, rather than your long-term financial goals.  Brokers have an incentive to pitch high-commission products.”

Savvy business people know that the best way to ensure results is to align their employees’ compensation with their job performance.

For example, if you own a car dealership you want to sell cars, so you only pay your sales force when they sell a car.  But is a transactional form of compensation the best method for the financial services industry?  And more importantly for their clients?

Imagine if you paid your realtor up front to sell your house.  What incentive would the realtor have to ensure your house actually sells?  I’ll give you a hint…the answer looks like a donut!

So if you don’t pay your realtor up-front, before you see results, why should you pay a financial adviser up-front?  Shouldn’t his or her compensation be tied to how well your investments perform?

Commissions, on occasion, can be the best option.  They usually work best if investors know exactly what they want, and they don’t plan to make very many transactions over time.

Recognizing the dichotomy of “unbiased” advice and “up-front” compensation, many small and midsized financial firms are switching to a fee-only platform.  With this model, compensation is not linked to the “sale” of any product, thus a greater degree of objectivity can be expected.

Fee-only advisers typically use either a flat or asset-based fee.  Flat or hourly fees are similar to how an attorney or CPA bills his or her clients.  With hourly fees it is important to define up-front which services will be performed, and to receive an estimate of the total cost.

The second type of fee is based on assets under management.  This fee is usually between 1 and 3 percent of the account balance per year.  This compensation method works best when you hire an adviser to manage your investment portfolio, because the adviser’s pay is linked to your account balance.  If your account grows, the adviser is rewarded.  If it doesn’t, his or her pay is cut.

If Wall Street is to gain investors’ trust again they are going to have to change the way they compensate their advisers.

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For more information about Durango Financial Advisors or Sub-Advising visit www.blacklabelwelath.com.

Black Label Wealth Management is a leader in sub-advising and retirement investments.  Black Label Wealth Management is a Durango Financial Planner.
 
 
Everyone knows the three most important factors when investing in real estate: location, location, location. But what about your stock and bond investments? What are the three most important factors when choosing an investment advisor? Results, Results, Results.

In 2005 Fidelity Registered Investment Advisor Group conducted a study with HNW Inc. on wealth and investment advice. They questioned high-net-worth (above $1 million) and ultrahigh-net-worth (above $5 million) investors, about advisors and their advice. Then HNW interviewed the advisors themselves to complete the study. The results of the study illuminated a disparity between advisors and investors regarding value, advice, and performance.

When asked which was most important, portfolio performance or the client relationship, the vast majority of advisors, 80 percent, said the quality of the relationship was the most important factor.

When the high-net-worth investors were asked this same question, 79 percent deemed that the portfolio performance is most important factor. According to high-net-worth investors, results really do matter.

It's important to have a quality relationship with an advisor, but isn't that just the bare minimum? After all if you are not comfortable with an advisor why would you let them manage your money?

They have it all wrong. Most investment firms stress the importance of "educating" their clients on the different investment options. Once again, education is important, but as is that what you are paying for?

What would you rather have a deep knowledge of modern portfolio theory or a positive return in a down stock market? (If you chose the former you can dazzle all your friends at your next cocktail party!)

The results of the survey suggest that advisors seem to be too focused on the features of the client relationship while the investors are looking for the benefits. It appears that investment results really do matter. After all, isn't that what you are paying for?

Killing poor performance. If you want to receive good performance, you need to eliminate poor performance. And the root-cause of poor performance is losses. No kidding you say; and the root-cause of dying is death! But I'm serious. If you control your losses you will control your portfolio's performance.

So how do you control losses? You control losses by having an exit strategy. That's right...an exit strategy. Highlight it, cut it out and tape it to your mirror. Without an exit strategy how will you know when to cut the losers in your portfolio or lock-in a winner's profit? Nothing goes up forever. Therefore, it is imperative to know when to take your chips off the table.

Warren Buffett once said that there are only two rules to investing. Rule #1: Don't lose money. Rule #2: Never forget Rule #1.

POP QUIZ: If your portfolio loses 25% of its value this year, what return would you need next year to break even?

Investment Year #1

* Starting Value = $100,000

* Investment Return = -25%

* Ending Year Value =?

$100,000 x (1-25%) = $75,000

Investment Year #2

* Starting Value = $75,000

* Investment Return =?

* Ending Year Value = $100,000

($100,000 -$75,000) / $75,000 = +33.33%

Did you get the correct answer? If you lose 25% of your portfolio, it takes a 33.3% return, to break even. If you lose 50% of your money you need a 100% return, just to break even! That is why it is critical not to lose money.

The main reason so many investors lost money in the last down market is that they, or their advisor, did not have an exit strategy. Remember, there is no reason to be emotionally attached to any investment. Investments are designed for one thing and one thing only: to make you money.

Run it like a business. It all boils down to this: you need to run your portfolio like a business. And just like a real business, you need to have a disciplined strategy for success.

You have a choice to make, manage your portfolio yourself or hire a competent manager. If you do not have the tools, or the desire, to manage the day-to-day operations of your portfolio, then you better hire a skilled manager.

But just like a real business, you need to measure the performance of that manager regularly. If that manager is costing you more money then they are making, then you need to fire that manager. I know that sounds harsh but the reason you hire someone is to get the job done. If they can't do it someone else can.

The choice is yours. You can choose to ignore performance and accept what the market gives you or you can take control of your investments. The sooner you run your portfolio like a business the sooner you will stop paying for losses. After all the only thing worth paying for are results.

Daniel Wiggins is the Founder and Chief Investment Officer for Black Label Wealth Management, LLC, a Colorado based Financial Advisor in Durango. A graduate of the University of Colorado (BS / Mechanical Engineering) and Arizona State University (Master of Business Administration), he has succeeded as a Hedge Fund Manager, Durango Financial Adviser, and Wealth Manager for numerous years.

Mr. Wiggins is widely recognized as a leading Wealth Management expert and authority on Absolute Returns. He specializes in delivering positive financial results, in both up and down markets, to executives, entrepreneurs and their families.

Mr. Wiggins has been featured on National Public Radio (NPR), the Idaho Statesman, The Idaho Business Review, Everyday Wealth Radio, GEM Radio, and MarketViews TV.

Black Label Wealth Management, LLC is Durango Investment Advisor.