Go to the FINRA website, by clicking on the link.
Broker Check
Follow directions. If the person you are talking to is a registered representative, they will be listed here. So are many financial planners and other investment professionals.
A suggestion that there is a former complaint is not necessarily a strike out. FINRA has rigid rules regarding the reporting of complaints and they are nigh on to impossible to have removed, even if the complaint was dropped, or the matter settled. Frequently firms make a financial settlement to avoid the costs of arbitration. That does NOT imply the broker or the manager did anything wrong. It was a cost decision. An arbitration panel can rule in the broker's favor, but there are still costs associated with a formal arbitration, legal, fees, document searches, travel costs to go to the arbitration site. If an arbitration might cost a firm $30,000 or more, and the complaint can be settled for $15,000, then they may a financial decision to settle and everyone moves on.
If the broker has several complaints, got an adverse arbitration decision, or has any disciplinary actions, that's a different question. You will want to either investigate more thoroughly, or find a different prospective advisor. There are tons of advisors with no complaints at all, or some nebulous settlement that has no meaning. Find one of those.
Experience level. This is always a trade off. A broker with hundreds of clients almost guarantees you drop into anonymity fairly quickly. You are not going to be an active trader, you are not willing to pay more than 1% of the value of the transaction. If you don't mind paying an annual fee (usually charged quarterly) then pay no more than 1% total annually. This should include ALL costs.
Side note**Do NOT pay any fee for money market funds, especially now. Most money market funds aren't paying a 1% yield. If you have an additional fee of 1%, you are losing money just by being in the fund.
Again, if you agree to an annual fee, it is only on long term assets, not cash or cash equivalents.
A less experienced advisor has other issues. He or she is building their business, and trying to please the firm they represent. They are more subject to the demands of the firm to produce in certain favored product areas. A broker with a small client base may seem like a good choice, the logic being he or she has more time to focus on you. Problem is, they are focused on getting more and more clients. You choice is, big and possibly indifferent, or small and likely distracted.
Fortunately, you know by reading this blog, how to require an appropriate amount of attention without making yourself a pest. Trust me, 1% isn't enough to have a client that calls three times a week on every market gyration, or who wants an opinion of some stock Uncle Bob, who made a lot of money in the market, recommends.
(My reply was to ask the client to decide if he wanted me or Uncle Bob as his advisor. I was happy either way, but it was going to be one or the other of us, not both.)
For your fee, you should get a quarterly update of performance, compared to some related index or indexes. We'll go into what information this should include in future posts
Okay, now you have a bit more information on selecting an advisor. Good hunting.
Wednesday, July 20, 2011
Friday, July 15, 2011
Finding an Advisor
Before we get into a few wake-up questions for you, and for any advisor you may be thinking about hiring, let me remind you of your own behavior.
Most people lack the discipline to put together a sensible portfolio. Not the intelligence, the discipline. And they lack the discipline to stick with it. In a prior post, I went through where we go off course. Suffice it to say here, most of you will divert from the selected path, fail to rebalance your portfolio, and get mightily distracted with daily life.
All of the above are reasons you need a keeper, an advisor, a minder. A good one will prevent stupidity. A good one. The number of good ones is maybe ten percent of the available population, the next ten percent are okay, 80% are in it for fees and commissions, good luck to you.
Test questions:
Don't bother to ask for his/her track record. Different clients have different portfolios, yours may resemble someone else's but so what? Past performance is no guarantee of future results. Read the prior sentence frequently, and every time someone pulls out a track record, repeat it until they either put the track record back in the drawer, or you see they don't get it. That means you should leave and keep searching.
If they recommend any 'house' mutual fund or manager, leave.
Ask if they plan to buy individual stocks for you.
If they say 'yes,' leave.
Ask if they plan to buy mutual funds with any form of sales charge, front-end, back-end, never end, and they say 'yes'....leave. (Warning, they will likely say 'yes, but,' if so, you should definitely leave.)
Ask how they are compensated, and keep asking until you are clear.
Then ask what additional charges apply in your case. Everything. Let me repeat, everything. You are looking for transaction fees, mailing costs, yes, they charge you to send you trade confirmations. If they offer a mutual fund, what does the fund manager make, what are the administrative costs, and ask them to point to the page that outlines every possible charge. Bear in mind, the mutual fund has trading costs.
So ask about portfolio turnover in the fund. If it's twice a year, that means the advisor is talking a long term plan, but the manager of the mutual fund, which has you money, is swapping out the entire portfolio every six months. So the 'long term' talk is just that, talk.
There are various measures of turnover, I'll get into those shortly.
There's more, but this is enough to digest for now.
Most people lack the discipline to put together a sensible portfolio. Not the intelligence, the discipline. And they lack the discipline to stick with it. In a prior post, I went through where we go off course. Suffice it to say here, most of you will divert from the selected path, fail to rebalance your portfolio, and get mightily distracted with daily life.
All of the above are reasons you need a keeper, an advisor, a minder. A good one will prevent stupidity. A good one. The number of good ones is maybe ten percent of the available population, the next ten percent are okay, 80% are in it for fees and commissions, good luck to you.
Test questions:
Don't bother to ask for his/her track record. Different clients have different portfolios, yours may resemble someone else's but so what? Past performance is no guarantee of future results. Read the prior sentence frequently, and every time someone pulls out a track record, repeat it until they either put the track record back in the drawer, or you see they don't get it. That means you should leave and keep searching.
If they recommend any 'house' mutual fund or manager, leave.
Ask if they plan to buy individual stocks for you.
If they say 'yes,' leave.
Ask if they plan to buy mutual funds with any form of sales charge, front-end, back-end, never end, and they say 'yes'....leave. (Warning, they will likely say 'yes, but,' if so, you should definitely leave.)
Ask how they are compensated, and keep asking until you are clear.
Then ask what additional charges apply in your case. Everything. Let me repeat, everything. You are looking for transaction fees, mailing costs, yes, they charge you to send you trade confirmations. If they offer a mutual fund, what does the fund manager make, what are the administrative costs, and ask them to point to the page that outlines every possible charge. Bear in mind, the mutual fund has trading costs.
So ask about portfolio turnover in the fund. If it's twice a year, that means the advisor is talking a long term plan, but the manager of the mutual fund, which has you money, is swapping out the entire portfolio every six months. So the 'long term' talk is just that, talk.
There are various measures of turnover, I'll get into those shortly.
There's more, but this is enough to digest for now.
Wednesday, July 13, 2011
Do You Need a Financial Advisor?
Revisiting a prior post, let’s discuss whether you want or need a financial advisor (the spellings adviser and advisor are interchangeable, although it’s best to stick with one or the other to avoid confusion.)
First, need.
If you can read and write, you don’t ‘need’ an advisor. That is, of course, a gross oversimplification. Temperamentally, you may not have the diligence to learn a new vocabulary, then research the options, and come up with a plan for yourself.
Realistically, the tax laws, the snarled jungle of insurance, estate planning, retirement savings options and investment jargon may be too overwhelming, or too boring, for you to hack through.
So while you may not need one, you may certainly want one.
Depending on your level of wealth, you may also want tax advisors, which brokers and financial planners are mostly not. There are exceptions, but if you have that much money, then the oversight by a tax advisor coupled with a financial advisor is worth it. Good ones will not object to you having both. If you’re at the wealth level of estate planning, then someone with that expertise, an attorney specializing in estate planning, is another person you will add to the mix.
The reasons are simple, because it's complicated. Each of the three, financial, tax, legal, has a vested interest in making things increasingly complicated. They want complication because they become necessary, insuring their ability to charge fees because the average business owner, working stiff, doctor, whatever, doesn't have time to dig into a maze of rules and regulations.
Your state of residence further complicates your life by having different regulations regarding, taxes, estates and insurance.
If you don’t have an estate at the three million dollar level, then an estate plan is pointless, so you can skip the attorney. That said, you may want to have a will which, depending on your state, is something you need to get from an attorney, not a form from Office Depot.
A starting point is the financial advisor, or financial planner. They don’t have all the specifics, but have access to or have a decent general knowledge of possible pitfalls to help you decide what other professionals you may want to add.
We will follow up with what a financial advisor can help with, and what they cannot help with.
I’ll give you some litmus tests to guide you in figuring out whether the advice offered is something they can do, or something they imply they can do but can’t. You need not be mystified or dazzled by charts, graphs or statistics. They don’t tell you anything you need to know. They are props in the play. Designed to make you think the advisor knows more than he/she does.
First, need.
If you can read and write, you don’t ‘need’ an advisor. That is, of course, a gross oversimplification. Temperamentally, you may not have the diligence to learn a new vocabulary, then research the options, and come up with a plan for yourself.
Realistically, the tax laws, the snarled jungle of insurance, estate planning, retirement savings options and investment jargon may be too overwhelming, or too boring, for you to hack through.
So while you may not need one, you may certainly want one.
Depending on your level of wealth, you may also want tax advisors, which brokers and financial planners are mostly not. There are exceptions, but if you have that much money, then the oversight by a tax advisor coupled with a financial advisor is worth it. Good ones will not object to you having both. If you’re at the wealth level of estate planning, then someone with that expertise, an attorney specializing in estate planning, is another person you will add to the mix.
The reasons are simple, because it's complicated. Each of the three, financial, tax, legal, has a vested interest in making things increasingly complicated. They want complication because they become necessary, insuring their ability to charge fees because the average business owner, working stiff, doctor, whatever, doesn't have time to dig into a maze of rules and regulations.
Your state of residence further complicates your life by having different regulations regarding, taxes, estates and insurance.
If you don’t have an estate at the three million dollar level, then an estate plan is pointless, so you can skip the attorney. That said, you may want to have a will which, depending on your state, is something you need to get from an attorney, not a form from Office Depot.
A starting point is the financial advisor, or financial planner. They don’t have all the specifics, but have access to or have a decent general knowledge of possible pitfalls to help you decide what other professionals you may want to add.
We will follow up with what a financial advisor can help with, and what they cannot help with.
I’ll give you some litmus tests to guide you in figuring out whether the advice offered is something they can do, or something they imply they can do but can’t. You need not be mystified or dazzled by charts, graphs or statistics. They don’t tell you anything you need to know. They are props in the play. Designed to make you think the advisor knows more than he/she does.
Tuesday, July 12, 2011
Transcending Gravity: The Myth of Alpha
Since the blog is called know alpha, might be good to actually talk about Alpha.
Alpha, in the investment sense, means did you, or the mutual find, or the money manager, outperform the index. The index frequently used is the S&P 500, but it could be any index covering a broad swath of stocks, or in the case of bonds, a bond index.
The popular measuring formula is called Jensen's Alpha, not-coincidentally named after Mr. Jensen.
The difficulty with Alpha, is twofold.
First, let's say I'm measuring my portfolio of 20 stocks against the S&P 500. Right off, there's more risk with 20 stocks versus 500. Based on the law of risk and reward, I should do better than the S&P during good markets, or worse during bad ones. (This presumes they are diversified to a reasonable degree, not 20 gold stocks, or 20 real estate stocks. If the 20 stocks are all one industry, then there is even more risk, which is fine if that's what you're shooting for.)
Second, our friend Beta pops up in the formula for Alpha. You can read about the difficulty with Beta in a prior post.
In sum, there is no such thing as Alpha based on any repeatable evidence. A one shot measurement may demonstrate what is called Alpha, but change the length of time, the Beta changes, so the Alpha changes. If you doubt me, look it up. Google Jensen's Alpha and discover that even when money managers allegedly demonstrated Alpha, out performance, the Alpha disappeared when accounting for fees and expenses.
The postscript is this:
All performance measures tell you about the past. They use fixed numbers of past performance, or relative correlations of fixed numbers. That's fine if you are doing Newtonian physics. You can even get a man on the moon, repeatedly. (With the unfortunate surprise of occasionally blowing up the vehicle.)
The market future is variable, every minute, every day. The idea that a complex series of behavioral interactions among millions of investors will be repeated closely enough to use as a predictor is just that, an idea, a wish, a dream, and just as insubstantial.
Think of it this way. Anyone who can consistently beat the market just isn't going to clue you in about it. Why? Because that person is destined to own everything marketable. He/she has to, for a simple reason. His pile would keep getting bigger as other piles shrink. He can't do that if he runs around letting other people join in the fun by paying a fee.
Don't worry, it can't be done. Even by debonair, billionaire, hot air, investment bankers with BIG SWINGING...computers. Eventually, they crawl out too far on a limb, and their pile evaporates. You, me, or the man behind the tree cannot repeal the law of risk and reward. It's the gravity of investing.
Alpha, in the investment sense, means did you, or the mutual find, or the money manager, outperform the index. The index frequently used is the S&P 500, but it could be any index covering a broad swath of stocks, or in the case of bonds, a bond index.
The popular measuring formula is called Jensen's Alpha, not-coincidentally named after Mr. Jensen.
The difficulty with Alpha, is twofold.
First, let's say I'm measuring my portfolio of 20 stocks against the S&P 500. Right off, there's more risk with 20 stocks versus 500. Based on the law of risk and reward, I should do better than the S&P during good markets, or worse during bad ones. (This presumes they are diversified to a reasonable degree, not 20 gold stocks, or 20 real estate stocks. If the 20 stocks are all one industry, then there is even more risk, which is fine if that's what you're shooting for.)
Second, our friend Beta pops up in the formula for Alpha. You can read about the difficulty with Beta in a prior post.
In sum, there is no such thing as Alpha based on any repeatable evidence. A one shot measurement may demonstrate what is called Alpha, but change the length of time, the Beta changes, so the Alpha changes. If you doubt me, look it up. Google Jensen's Alpha and discover that even when money managers allegedly demonstrated Alpha, out performance, the Alpha disappeared when accounting for fees and expenses.
The postscript is this:
All performance measures tell you about the past. They use fixed numbers of past performance, or relative correlations of fixed numbers. That's fine if you are doing Newtonian physics. You can even get a man on the moon, repeatedly. (With the unfortunate surprise of occasionally blowing up the vehicle.)
The market future is variable, every minute, every day. The idea that a complex series of behavioral interactions among millions of investors will be repeated closely enough to use as a predictor is just that, an idea, a wish, a dream, and just as insubstantial.
Think of it this way. Anyone who can consistently beat the market just isn't going to clue you in about it. Why? Because that person is destined to own everything marketable. He/she has to, for a simple reason. His pile would keep getting bigger as other piles shrink. He can't do that if he runs around letting other people join in the fun by paying a fee.
Don't worry, it can't be done. Even by debonair, billionaire, hot air, investment bankers with BIG SWINGING...computers. Eventually, they crawl out too far on a limb, and their pile evaporates. You, me, or the man behind the tree cannot repeal the law of risk and reward. It's the gravity of investing.
Monday, July 11, 2011
Short Detour
If you are considering buying a home, you will want to click the title of this post and do some simple homework.
Wednesday, June 29, 2011
How'd We Miss That?
The excerpt below is from a book, cited underneath, that is a collection of research studies that were not then concerned with the current popularity of Behavioral Economics. The book is the seed research of that now well regarded topic, and Daniel Kahneman is the father of subject. It has also been further researched by Richard Thaler PhD, among others.
The excerpt addresses, not specifically, but by implication, how we missed the market crashes and how we overweight some scenarios versus other, equally probable ones.
In any plan, the cumulative probability of at least one fatal error could be overwhelmingly high even when the individual cause of failure is negligible.
Plans fail because of ‘surprises;’ occasions on which the unexpected ‘uphill’ change occurs.
The simulation heuristic, which is biased in favor of ‘downhill’ changes,
is therefore associated with a risk of large systematic errors.
In evaluating a scenario, alterations on ‘what could have been done differently’ are many times introduced.
These can be classified as either:
Uphill: a change that introduces unlikely occurrences or surprises
Downhill: a change that removes an unlikely occurrence or surprise
Horizontal: one arbitrary value replaces another in the scenario,
neither arbitrary value is more likely, or less likely
-people are much more likely to undo a scenario with downhill changes than uphill changes…
horizontal changes are almost nonexistent.
Think of a cross country skier. It is easier to ski down than up, the psychological distance from peak to valley is shorter than from valley to peak.
Thus, mental simulations invariably have a preference for downhill variations.
Kahneman and Tversky, Judgment Under Uncertainty
I will explore the topic further in future posts.
The excerpt addresses, not specifically, but by implication, how we missed the market crashes and how we overweight some scenarios versus other, equally probable ones.
In any plan, the cumulative probability of at least one fatal error could be overwhelmingly high even when the individual cause of failure is negligible.
Plans fail because of ‘surprises;’ occasions on which the unexpected ‘uphill’ change occurs.
The simulation heuristic, which is biased in favor of ‘downhill’ changes,
is therefore associated with a risk of large systematic errors.
In evaluating a scenario, alterations on ‘what could have been done differently’ are many times introduced.
These can be classified as either:
Uphill: a change that introduces unlikely occurrences or surprises
Downhill: a change that removes an unlikely occurrence or surprise
Horizontal: one arbitrary value replaces another in the scenario,
neither arbitrary value is more likely, or less likely
-people are much more likely to undo a scenario with downhill changes than uphill changes…
horizontal changes are almost nonexistent.
Think of a cross country skier. It is easier to ski down than up, the psychological distance from peak to valley is shorter than from valley to peak.
Thus, mental simulations invariably have a preference for downhill variations.
Kahneman and Tversky, Judgment Under Uncertainty
I will explore the topic further in future posts.
Moron Beta
To revisit the current discussion, after my digression, Beta tells you what the relationship WAS between a security and the market. It tells you nothing about what the relationship will be.
As suggested earlier, Beta can be any number you want as it is dependent on the time frame chosen. A one year Beta is one number, and a one week Beta is another for the same security.
Phormula Phreaks argue that if you use the same time frame for both the security and the market, the problem is solved. It isn't. And to make matters worse, frequently the number for Beta is tossed out like it's a constant, and with no reference to the time frame used to calculate the Beta. Beta is a variable, that means it changes. Variability is the mortal enemy of predictability.
In sum, knowing what happened, which is all Beta tells you for a given time frame in the past, is NOT the same as knowing why it happened. Historians and statisticians frequently equate the two. They do this by attributing one off events with causality.
For instance, as pointed out in Everything is Obvious (once you know the answer.) by Duncan Watts, if you notice that each time the wind blows, the leaves of a tree move, that's once kind of cause effect. It happens a lot, it has validity.
What historians frequently do is take a one time event, and attribute causality to subsequent events. That is, if a cat meows, and the leaves shake, the meow caused the subsequent movement in the leaves. It ain't so. His example is a skirmish between English and French ships in the 14th century leading to the hundred years war, as if the skirmish 'caused' the war. Nobody can know that, and certainly can't know it at the time of the sea battle. As it has been put, there is no, "Dear Diary, the hundred years war began today."
As suggested earlier, Beta can be any number you want as it is dependent on the time frame chosen. A one year Beta is one number, and a one week Beta is another for the same security.
Phormula Phreaks argue that if you use the same time frame for both the security and the market, the problem is solved. It isn't. And to make matters worse, frequently the number for Beta is tossed out like it's a constant, and with no reference to the time frame used to calculate the Beta. Beta is a variable, that means it changes. Variability is the mortal enemy of predictability.
In sum, knowing what happened, which is all Beta tells you for a given time frame in the past, is NOT the same as knowing why it happened. Historians and statisticians frequently equate the two. They do this by attributing one off events with causality.
For instance, as pointed out in Everything is Obvious (once you know the answer.) by Duncan Watts, if you notice that each time the wind blows, the leaves of a tree move, that's once kind of cause effect. It happens a lot, it has validity.
What historians frequently do is take a one time event, and attribute causality to subsequent events. That is, if a cat meows, and the leaves shake, the meow caused the subsequent movement in the leaves. It ain't so. His example is a skirmish between English and French ships in the 14th century leading to the hundred years war, as if the skirmish 'caused' the war. Nobody can know that, and certainly can't know it at the time of the sea battle. As it has been put, there is no, "Dear Diary, the hundred years war began today."
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