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“ Three may keep a secret, if two of them are dead.” -Benjamin Franklin
“The more you leave out, the more you highlight what you leave in.” -Henry Green
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Some readers may remember a game show that aired from 1952-1967 called I’ve Got a Secret.
In this game show, the panel tried to determine a contestant’s secret: something unusual, amazing, embarrassing, or humorous about that person. They commonly included something that happened to the contestant, something owned by the contestant, or a notable occupation, hobby, achievement, or skill.
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In this blog, I’ll share a secret!
Since it’s a new secret, I don’t feel bad that most readers aren’t aware. But, this secret shouldn’t remain a secret.
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If I continue to withhold this information I am being dishonest with readers and not providing the most comprehensive information. I want to disclose what’s occurring because I don’t want to “ leave in” information that could be important and helpful to my readers.
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Over the approximately three years I have been doing this blog, I have stated that I am a DIY (do-it-yourself) investor with over 50 years of investing experience. This was a true statement until a couple of months ago. Two months ago I engaged an Advisory Group to manage a portion of my portfolio.
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This change conflicts with my statement that I am a DIY investor, it’s important to explain this change in my investing philosophy and outline the reasons for my about-face.
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For the last 50 years, I have worked diligently to increase my investing knowledge and ability. This increased knowledge has allowed me to remain comfortable investing and managing my investments. This is still a true statement, as I am still comfortable managing my investment portfolio.
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Does this mean I have as much knowledge as a financial professional?
I am not proposing that I have the same knowledge base as an advisor with many years of experience. Many investing fundamentals such as portfolio design, asset allocation, and asset location, remain the same whether you are a DIY investor or have professionally managed retirement funds. Because I mastered these basic principles my effective return surpassed the net return of financial advisors because the advisors couldn’t overcome the drag of their fees.
The percentage of AUM (assets under management) determines the fees of most financial advisors, and these fees create a performance drag on the return of their AUM that most advisors cannot overcome when compared to my DIY approach.
Any financial advisor would have to beat the return of my globally invested and diversified portfolio by an amount greater than their fees, plus any alpha or extra return they could provide.
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Through the years I have allowed different Advisors to manage a portion of my portfolio. In every case, the results were not sufficient to convince me to turn over control of my portfolio. I have also read of cases where unscrupulous advisors have taken advantage of investors through tactics such as portfolio “churning” to increase advisory fees. There are also cases where clients’ portfolios have been mismanaged, with funds being stolen through different “Ponzi” schemes.
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So what’s changed? Why have I now decided to trust a financial advisor with my life’s financial gains?
First and foremost, I don’t want to place my wife and children in the uncomfortable position of having to manage my portfolio in the future if I became incapable of managing it, or if I’m no longer here!
My wife and children have a good understanding of basic finance. They could capably evaluate an advisor’s performance without having to understand the intricacies of the advisor’s portfolio construction. This approach of placing them in the role of portfolio overseer, or General manager, seems much more reasonable than expecting them to assume control of investing my portfolio without adequate knowledge.
Having a financial advisor in place that my wife and I both feel comfortable with will most easily accomplish this task. If I am no longer able to oversee our investment portfolio, then it is an easier task for my wife or children to assume this responsibility. Engaging an advisor means that my heirs would not need to evaluate and hire a suitable financial advisor at an inopportune time.
Another concern is the fear of cognitive decline. The onset of cognitive decline has been well documented. The onset and severity of cognitive decline can vary greatly, but no one is spared the effects of cognitive decline with aging. Studies have indicated that changes in cognitive abilities, like slower processing speed, are normal parts of aging and can become noticeable around the 60s. The problem with cognitive decline is that in most cases, the person is not aware that they are experiencing cognitive decline. This can lead to poor decision-making, and there are many recorded cases of elderly people being involved in financial scams.
I received financial advice from financial professionals for many years. My attorney, CPA (certified public accountant), and several different CFPs (certified financial planners) have provided valuable information and advice.
Each of these professionals has been given the authority to contact my wife and children if they feel I am experiencing cognitive decline. This has been my defense against cognitive decline, but it is certainly not foolproof and not secure enough to prevent making foolish financial decisions with severe impacts. Because of this awareness of the effects of cognitive decline, I have decided to begin transitioning control of my retirement portfolio to a group of financial advisors.
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Initially, there were criteria important when looking for an advisory group. I feel fortunate that I have found a group that satisfies these concerns.
Personal criteria in an Advisor and Management Group:
- Fiduciary advisors– it is important that the advisory group that I engage with acts in my best interest. It is also important to understand that Investment advisory firms can switch between the Fiduciary Standard and the Suitability Standard when recommending different investments. Finding a fiduciary advisor doesn’t ensure that the fiduciary standard will be applied in every instance, but the fiduciary standard will be applicable for most of the investment decisions made.
- No contract period– I had no desire to contract an advisory service for a set period. Having an open-ended relationship without a contract means that I am free to move to a different advisor if I feel my best interests are not being served. It also maintains the advisor’s interest and participation because the advisor knows that his performance is important in a continuing advisory relationship.
- Control of assets– there is a strong interplay between asset management and general control of assets. For many years, I have controlled both. In the relationship I have entered with the advisory group, the advisory group controls asset management and asset selection. It was agreed that I would maintain general control of the account. I have the authority to accept or reject asset selections. As we are in the honeymoon period, I have not exercised this authority and have allowed the advisory group full control of asset management and selection. I feel it is important to give the advisory service full control to facilitate optimal portfolio performance. It also allows the advisory group to implement their vision without any interference on my part. But, it also means that they are fully responsible for portfolio performance, and can’t use my potential manager control to justify poor performance. By giving the advisory group “ room to run”, I can evaluate their performance without any outside influence or interference.
- Location of assets– A huge concern would be where assets would be located. Anyone who has been investing for a significant period is aware of numerous scams perpetuated on investors when the advisory group receives assets and also controls them. Having both access and control of assets makes it much easier to mishandle or steal retirement funds. One of the most important aspects of this collaboration is that all assets under their management remain within my brokerage account. The advisory service has the authority to place trades on my behalf, but has no authority to remove or transfer funds outside of the account. All transactions and revenue generated within the managed account remain within the managed account. All managed assets are located in one location, facilitating easier monitoring and peace of mind.
- Access to investments I can’t purchase as an individual– many Investment advisory groups have access to classes of assets unavailable to individual investors. In addition to access to these nontraditional asset groups, these advisory groups also have access to research and analytical services that provide valuable investing information to the group. One of the things that drew me to this particular advisory group was their knowledge and access to nontraditional investment opportunities.
- Less time spent with investments– although I have always enjoyed managing my portfolio as a do-it-yourself investor (DIY), portfolio management takes time. One of my basic tenets is that everyone has a certain lifetime. Do you want to spend a substantial amount of time in portfolio management, or would that time be better spent pursuing other hobbies? To this point, portfolio management has not been a burden, but something I’ve enjoyed doing. As my time horizon decreases ( see: WHAT’S YOUR HORIZON), how I want to spend my remaining time becomes more important. For me, the answer that’s beginning to materialize is that my time can be better spent doing other things that I enjoy. Allowing an advisory group to manage my assets means I have more free time with family, friends, or hobbies.
- Partial transfer of assets– one of the negotiated pieces of my initial advisory agreement was a partial transfer of my assets instead of a complete portfolio transfer. As stated above, I am giving the advisory service full control of assets under management (AUM). However, the assets they manage constitute about 15% of my total portfolio. 15% is an arbitrary percentage, but it surpasses their minimum account balance and is significant enough to facilitate a comprehensive portfolio strategy. If the performance or service of the advisory service is unacceptable, reintegrating 15% of my portfolio into my remaining portfolio is much easier than reestablishing a new portfolio. Also, allowing them to manage a portion of my portfolio permits me to vet their performance while limiting my exposure. The advisory group is aware that it manages part of my portfolio, and I feel that this incentivizes the advisory group to optimize performance to gain access to more of my portfolio assets.
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Final Thoughts
Anyone who has followed my blog or podcast knows I am a planner.
This transition to an advisory group is not a decision I made overnight.
I evaluated different advisors over a period of years, but never felt the potential advisory services were a proper fit.
My current engagement is the most comprehensive involvement I’ve had with any advisory service.
I outlined reasons for my shift in thinking, with my most important reasons being a firewall against cognitive decline and finding an advisory service that does not require assets to be transferred to a dedicated account under their control. Having assets remain in my brokerage account while giving the advisory service trading authority was an important consideration.
I have ultimate account control and authority. I control account decisions and have the ability to modify this arrangement at some point in the future.
Each investor must decide what options are important in terms of engaging an advisor. Things important to me may not be important to someone else. Each person and family’s needs are different.
I am not providing the name of my advisory group because each person, Family, and situation is different. This would not be fair to you, the Reader, or to the advisory services that I did not engage. All of the advisory services that I evaluated were top-notch and reputable. There is nothing wrong with these other services, except that they were not a good fit for my circumstances. That’s why each person or family needs to do individual research to find a person or group that will be the best fit.
This advisory group is not the first group that I evaluated. No one needs to engage with the first advisory group that they evaluate, and should feel comfortable with the person or group that will control their financial future.
THIS IS IMPORTANT STUFF!
I’ve not taken this decision lightly! It has taken me many years to reach this point, and I’m still unsure I’ve made the right decision. Time will tell!
It’s been said that an attorney who represents himself has a fool for a client! I’ll determine in the next few years if for many years I’ve had a fool for an advisor!
The good news for readers and listeners is that you can evaluate the pros and cons of an advisory Service vicariously through me, without engaging an advisor or advisory group.
I’LL KEEP EVERYONE POSTED!
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