Mark Brandon is the Managing Partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Tuesday, November 22, 2005

Ok, folks. This is my first attempt at blogging. Thanks to Donovan for suggesting the service.

The first thing I am going to do is start with a blatant commercial. I wrote the article below for First Sustainable.

10 Reasons to Fire Your Financial Advisor (And Hire First Sustainable)

As the managing member of First Sustainable, LLC, God knows I am not against financial advisers or the advisory firms. Web discount brokers have done the investing public a disservice trying to convince us that we should be do-it-yourselfers when it comes to our financial lives. This reminds me of the time I tried to be a do-it-yourself plumber. Was I able to get the water to go through the pipes under my bathroom sink? Sure. Should I have farmed out the job to a professional? Considering that my do-it-yourself hack job hastened corrosion in other parts of the water line, causing greater damage than otherwise would have been caused, I should have called Roto Rooter. This is similar to the current state of financial services. Just because you can press the buttons that send the orders to be executed does not mean it's the right thing for your financial life. So, let it be known that financial advisers and their firms have a place.

But, for decades -- centuries even -- the financial services business has operated with inherent conflicts of interest. Those conflicts are so widespread and so well accepted that investors have forgotten that they are being taken to the cleaners. The fact is that the financial services business is built around selling products and not servicing clients' financial needs, especially when it comes to socially responsible investing. Of course, commissions have come down over the past decade, but like the proverbial balloon that gets squeezed in the middle, the conflicts have just been moved elsewhere, refined to be ever more invisible. The only time you notice them is after several years of sub-par returns. Below are the ten reasons you should consider firing your financial advisor. If you suspect that you are a victim of one of these practices, do not accept that this is the way of the world. Better yet, call a First Sustainable adviser at (800) SRI-3319 or contact us by chat or email. We will tell you if, in fact, you have been run through the ringer, and recommend to you how to fix it. Please remember our pledge to you: We will never accept financial considerations from financial product sponsors. We have the model that mostly closely eliminates these conflicts (see Our Services), and we invite you to discover how it can be applied to your portfolio.

10. Double Dipping. Many financial advisers charge a fee based on assets under management. We don’t condemn this practice. We do it as well, as it is a fair way to compensate advisers for hours of work on your behalf. But, when the adviser gets additional compensation for placing you in proprietary products, buyer beware. Many of the vehicles he is likely to recommend such as in-house mutual funds or annuity products come with their own management fees and sales charges, making you pay twice. At First Sustainable, we pledge to not accept any money or other considerations from sponsors of financial products. Our fee for assets under management of 1.25 percent is enough.

9. Proprietary Products. For the largest names in the financial advisory business, in house products have badly underperformed their benchmarks. I will refrain from naming names here, but you know who they are. There is little wonder why they are laggards. Their expense ratios are much higher than industry average, sometimes double the 1.38 percent average for all mutual funds.

8. Social Screening. Go ahead. Call your Amex or Raymond James adviser and ask them if your portfolio has a stake in unethical corporations. While you are at it, be sure to ask him if the overpriced, in-house mutual funds he sold you have unethical stakes, as well. Then, see if he even knows what you consider to be unethical. Prepare to be amused.

7. Mutual Fund Underperformance. Multiple academic studies have shown time and again that actively managed funds fail to beat their benchmarks over the long term. What’s worse, the leading funds today are likely to be the laggards tomorrow when the hordes of amateurs chasing performance force the managers to do the same. So, why do financial advisers keep recommending actively managed funds? Because they offer the fattest commissions. See reason #10. At First Sustainable, we are not blinded by the ease of selling the mutual fund story. We actually prefer to put our clients in baskets (or folios) of equities, based on your diversification needs and social criteria.

6. Over-reliance on Mutual Funds. For this, we refer you to Top 10 Reasons to Fire Your Mutual Fund Company. We have to admit. Mutual funds have a great story. Professional management, clearly understood mission, instant diversification, low costs. The fact is that the mutual fund industry gets away with more than you know, and it all comes straight out of your pocket. First Sustainable’s folio method of investing offers lower cost, tax advantages, and conformity with your social values.

5. Ongoing Selling Pressure. At a minimum, you should be talking to your adviser once a quarter, and then the conversations should be about you. If your financial adviser’s idea of a quarterly follow-up is to tell you about what’s new at his firm, it’s time to fire him. This tactic is a ploy to get you to trade out of what he sold you last time and buy something new, all to get another commission.

4. Sales Contests. If your financial adviser calls you out of the blue to tell you about a “special situation” or a “new item that just came across my desk”, he is likely trying to win a sales contest. In our opinion, the quickest way to success is to NOT deviate from your plan with every new “special situation”, which are usually nothing more than an exhortation from his upper management to sell you more of their overpriced, underperforming in-house products. Once a plan is in place, your adviser should contact you once a quarter to make certain nothing has changed with your goals and needs. Everything else is probably a sales ploy. At First Sustainable, you will already be aware of the special situations that warrant a change to your financial plan. These include changes in income, changes in employment, family events such as births and deaths, medical needs, business needs, etc.

3. Condescension. Another favorite sales ploy of the typical financial adviser is to talk down to you, “wow” you with credentials, and speak in indecipherable gobbledy-gook that means nothing anyway. He does this to take control of the relationship so that you’ll follow his lead any time he has one of those aforementioned “special situations”. At First Sustainable, we want educated customers. If you need help with a topic, we want to explain it to you, so that you continue to be happy with our services. We want you to feel free to ask questions, and we want you to take control of your own finances. Most of all, we want our customers to think about and then invest with their values, so that a better world can be created for all.

2. Commission Scales Determine Financial Advice. The firm that bills itself as having the most financial planners on staff (really, glorified salesmen) recently threatened their sales force with reduced commissions if they sold any funds other than in-house funds. Why would they need to do this? The in-house funds had been such universally awful performers for years that the funds were hemorrhaging money. Customers started to question why they were stuck holding such dogs in their portfolios. Before the change to their commission scale, the sales force had an extra incentive to flog the in-house funds, but at least they were not penalized for steering their clients to better performing options. The table below will tell you how poorly in-house products perform versus independent options. They lag because brokerage firms use their funds to vacuum more money from their customers, via fund expenses, trading expenses, and sales loads.

1. First Sustainable is Just Plain Better. Now for the shameless self-promotion. Seriously, we are better because:
a. Indexing provides superior performance.
b. Folio indexing is more tax advantageous than mutual funds
c. Folio indexing allows you to create your own mutual fund
d. First Sustainable will help you reward the good players and weed out the bad players from your portfolio, based not on someone else’s definition of socially responsible, but on yours.

First Sustainable invites you to take advantage of our free consultation, wherein a qualified adviser will talk to you about the concepts of folio indexing and financial planning. If you like what you hear, you can engage our services on a no obligation, hourly basis, or have us implement your financial plan for you.

6 Comments:

Blogger Dino said...

Nice! Well done sir. I will take some time tomorrow to dive into you space. Look forward to leanring more.

Cheers!

Donovan

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