FULL DISCLOSURE

What does the magic of Penn and Teller have to do with investing?

I’ve enjoyed live theater ever since I saw my first play on Broadway.  One of my favorite shows is the magic act of Penn and Teller who are not only fantastic performers, but are confident enough in their talent and generous enough with their skills to share a few “tricks of the trade” with their audience during the show.  This hasn’t earned them the greatest affection from their fellow magicians, but it is always interesting to get a “peek behind the curtain” of any trade.

I am writing this month to share a few insights on the financial advice industry to give the individual investor a “peek behind the curtain” in the hopes that you can become a better consumer of financial advice.

What is the first step to working with an advisor?

When dealing with any advisor, always insist on an answer in writing to the following question, “Are you acting as a fiduciary and is this in my best interest?”  If you ever get a “no” answer or your advisor refuses to put it in writing, immediately seek a second opinion or find a new advisor who will answer yes.

Am I paying too much for advice?

If an investor determines that she needs to earn an 8% return to achieve her objectives, but she is paying the typical 1% fee to a financial firm for advice, over a typical career she would need to continue working 3-4 years longer before achieving her financial goals versus working with a fixed fee firm like Fenway Financial Advisors to develop a portfolio that generates similar returns.  Ineffective tax management can add many more years to this number.  For a retiree, that seemingly benign 1% fee can be devastating, representing an additional 20-25% annual reduction in the retirement income generated by hard-earned savings.

Thanks to modern technology and new investment choices, a competent advisor can usually effectively manage a complex, multi-million dollar personalized portfolio with less than 10 hours of work per year, including time spent with the client for semi-annual meetings.  In a typical year gross annual fees for investment advice and transactions should usually range from $500 to $2000. 

What should I get for my money?

There are a few critical documents that your advisor should always be happy to develop for you including:

1) An investment policy statement outlining your specific goals and how you plan to achieve those goals

2) An asset allocation summary that defines the percentage of your assets targeted to be held in cash, bonds, domestic stocks, international stocks and other appropriate investments like real estate or precious metals  

3) Annual or, at most, semi-annual portfolio reviews

Is my advisor helping me or just generating high fees?

Personal finance is just that – personal.  There are no absolute right and wrongs.  However, many financial products are sold so that the advisor can generate fees, not because they are the best investments.  Be extremely wary and seek a second, unbiased opinion if your advisor recommends any of the following:

1) Cash value life insurance (whole, universal, variable), long term care insurance and variable annuities.  These are only suitable in a small minority of situations but are frequently recommended because they often generate extremely generous commissions.  Depending on your objectives, there are usually better alternatives to these expensive products.

2) Actively managed mutual funds or managed accounts that try to outperform the market.  With few exceptions, analysis repeatedly demonstrates that active management usually succeeds primarily in rewarding the advisor selling the fund, not the investor.  Even advisors that know this continue to recommend these solutions because they generate perpetual streams of income for the advisor and their favorite fund managers who often subsidize their marketing efforts in return.

3) “Wrap programs” where a fee is charged to manage a portfolio of mutual funds.   You may need to beat the relevant index by almost 4% just to stay even with a simple index fund, a virtual statistical impossibility.

4) Stock picking and trading.  You probably know people who work in finance and many of them have made substantial incomes trading other people’s money, maybe even yours.  Perhaps not so curiously, you have probably never met someone who made their fortune trading their own money. Over time active trading rarely outperforms its relevant index, especially after fees and taxes.

Finally, be careful about picking an advisor from “brand name” companies.  Admittedly, we’re a little guy, so we’re biased (after all, the title of the column is Full Disclosure).  Roughly 60-70% of fees paid to big name firms typically go toward profits, overhead and marketing.  In smaller companies 60-80% of the fees typically go to the advisor which is where your value is generated.  We believe that investors should be paying for service and advice, not overhead, executive bonuses and advertising.

If you would like to work with an advisor that is willing to act as a fiduciary and even put it in writing, please call us at 617-948-2102 and we’ll be happy to help.


Steve Wintermeier is Managing Principal of Fenway Financial Advisors in Boston.  Mr. Wintermeier received a Bachelor of Science of Foreign Service in international economics from Georgetown University and an MBA from Columbia Business School. His professional experience includes an extensive background in international business management and consulting.  He is the founder of Fenway Financial Advisors, a Massachusetts registered investment advisory firm specializing in fee-only planning and investment services.  For more information, please call 617-948-2102 or email This email address is being protected from spambots. You need JavaScript enabled to view it..