Here's another excerpt from Wealth by Stuart Lucas. I liked the book -- giving it 6 stars. So it's my pleasure to offer this excerpt from Chapter 5:
With open architecture, the total shape of your investment program is even more important than the individual mutual funds, stocks, hedge funds, or other products in your portfolio. Remember that from 1984 to 2004, the average mutual fund generated a return of 9.9% but the average investor only earned 6.6%. With all the upheaval (mergers, deregulation, and re-regulation) that’s taking place in the private client business, there doesn’t seem to be much focus on helping individual investors acquire The Four A’s of investing.
If your private client portfolio is simple, you don’t need to build The Four A’s beyond a basic level. And you can achieve that basic level on your own. However, if you want to invest the way institutions invest, in specialized products and in things like venture capital or hedge funds, you have to be just as skilled as they are to have a chance of winning. Just how tough is this?
How Can You Distinguish Among Wealth Advisors?
There are few businesses where salespeople can make more money than in wealth management. As a result, the industry attracts many bright individuals. These are the folks that most individual investors hire in hopes of achieving The Four A’s needed to compete using complex strategies and products. Wealth management professionals are highly competitive, have a nose for new business, and possess great powers of persuasion. They exude success and smarts, wear designer suits, carry platinum credit cards and thick pitch books, and they are supported with billions in advertising dollars.
To the inexperienced person with newly liquid assets, salespeople from wealth management firms present two challenges. First, a prospective client can potentially sit through hours of PowerPoint presentations from different wealth management firms outlining their investment options without being able to truly differentiate one value proposition from another. Second, in these interactions, it can be even tougher to discern the track records of individual advisors in adding value to their clients, even when they work for firms with good reputations.
Today, some advisors have a strict fiduciary duty to put their clients’ interests first, as defined by the Securities and Exchange Commission (SEC). Investment advisory firms and their representatives have this duty. Broker dealers and their registered representatives meanwhile operate under a different set of guidelines, defined by the National Association of Securities Dealers (NASD). Hedge fund managers and bankers do not have a strict fiduciary duty. Neither do many salespeople of life insurance or annuities.
Some salespeople operate under more than one set of compliance rules. At the same time, laws and regulations designed to curb abuses by wealth management practitioners, no matter how carefully crafted, contain nuances and loopholes that leave clients open to exploitation. The strict regulatory environment governing mutual funds, for example, hasn’t prevented recent improper trading scandals.
So, how do you measure one wealth advisor’s knowledge of financial markets against that of others? How do you gauge a person’s instinct for the market, his or her knowledge of emerging market trends, or the degree to which he or she is ethical in their everyday client interactions?
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Kind of leaves us hanging, doesn't it? Don't worry, we'll have more on this tomorrow. Stop by then for a continuation of this topic.
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