What is wealth management?
Over the next few blogs, we’ll discuss various aspects of wealth management. First, let’s answer that question. In the words of Harold Evensky who wrote the book on wealth management, “the practice of the wealth manager is holistic and individually customized.”
To me, the practice of wealth management means being the quarterback for a client’s financial team. It means understanding a client’s goals, financial position, and liquidity needs. It also means understanding the complexities of risk management, tax issues, estate planning issues and business issues. Of course managing a portfolio that seeks to achieve those goals is important, but it is only part of the focus.
For example, I have a client who hired us about 10 years ago due to a referral from their accountant. The client had just been through a horrible experience with a stock broker. In addition, the client had been sold insurance out the wazoo by several agents. Wealth management for this family included not only evaluation of their portfolio and pro-active work with an estate attorney, but also involved helping an adult granddaughter buy a car on her own for the first time.
Next week, we’ll start to discuss the various components of wealth management.
*The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.
Quarterly Update
What a busy first quarter! Most importantly, I want to congratulate my partner Lee and his wife Courtney on the birth of their firstborn son, Holdon. How exciting! Next, I want to thank all of you for your patience as we moved and transitioned to our new building. We are finally getting used to our new space and like it a lot. Hopefully, you will too.
Read more on the Armstrong Report Quarterly Newsletter.
Most investors use a basic measurement to gauge how our portfolios have done—how much am I up or down? But then, we compare. We compare our results with “the market.” And that’s when we can get into trouble.
You should, of course, want to compare your results to check how you are doing. The challenge is in using the appropriate benchmark. If we use the wrong benchmark, the comparison has little meaning. First and foremost, the most appropriate benchmark should be: are you on track to reach your goals? There is little point in “beating the market” if you are not on track to reach your goals or are adding unknown risks to your portfolio in an attempt to outperform.
Many investors like to compare their performance with the Dow Jones Industrial Average (DJIA or simply “the Dow”.) Many, however, don’t reflect on the fact that the DJIA is made up of only 30 stocks and that this index is price-weighted. This means that a $100 stock has five times the impact of a $20 stock. Hardly an appropriate benchmark, even if your portfolio is all stock. The Standard & Poor’s (S&P) 500 index is a more diversified benchmark having 500 stocks that are market capitalization weighted (the bigger the company the greater the impact on the average.) This is better, but still all stocks.
And that is the next issue: most investors don’t have only stocks in their portfolio. They have a mix of investments and any single index is unlikely to provide accurate comparison. Here’s a question: how can a portfolio that is made up of 10% large company stocks, 10% foreign stocks, 10% real estate stocks, 10% commodities, 20% US Treasury bonds, 20% US corporate bonds, and 20% cash be accurately compared to a single benchmark like the S&P 500 index or a bond index?
So what is the solution? In my opinion, investors are best served by keeping their eye on how they are tracking with their goals. Worrying about whether you are “beating the market” often leads to poor investment decisions, such as selling a good investment when it is simply having a temporary rough patch. For example, in the late 1990s investors abandoned bonds, foreign stocks and small company stocks as they chased the outperformance of large company stocks. For many, this led to poor results when large stocks then underperformed over the next five years, especially during the 2000-2002 bear market.
So go hire a trusted wealth manager, create a customized portfolio, and don’t compare the results too much.
*The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Past performance is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Most financial advisors are not Madoffs. Some may care more about their fees/commissions than what is best for the investor, but most are fine, ethical individuals who truly care about their clients. They may differ in compensation methods, strategies, abilities, competence, but by and large they try to do what is right.
The question is: how can you tell whether the advisor you are interviewing is a “crook?” And how can you protect yourself from the next Madoff?
Unfortunately, there is no sure-fire, fail-proof way to do so. Unethical people will try to find a way to steal from others, regardless of regulations. There is, however, one key step that can dramatically minimize the potential damage to your assets: separation of advisor and custodian.
Bernie Madoff, like most major financial frauds, had custody of the investment funds. There was no separation between him and the firm holding the money. This made his Ponzi scheme much easier to accomplish.
Therefore, the key first step an investor should take when hiring a financial advisor is to ensure that his monies will be held in custody by a major investment firm. While there is no guarantee that separation of advisor and custodian will prevent all forms of fraud, this separation makes fraud much more difficult.
Furthermore, every major investment firm is required to have Securities Investor Protection Corporation (SIPC) coverage on their accounts which further protects investors.
SIPC Membership provides account protection up to a maximum of $500,000 per customer, of which $250,000 may be claims for cash. An explanatory brochure is available at www.sipc.org.
Some firms may also offer supplemental coverage through a third party insurer to provide additional securities protection for customer accounts.
The account protection applies when an SIPC member firm fails financially and is unable to meet obligations to securities clients, but it does not protect against losses from the rise and fall in the market value of investments.
Here is the bottom line: when you hire an advisor, ensure there is separation between the advisor and the custodian of your assets. It is the first line of defense.
*The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.