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Follow-up
on Choosing a Financial Advisor
by Robert B. Gordon,
Sc. D.
August 11, 2003
In January of this year, FSO published our essay on Questions to Ask Your Financial Advisor. At the time, our stock market had been in a bear market rally since October of 2002. It has continued to this day, causing a majority of investors and advisors to adopt a bullish stance towards the stock market. This nine month bear market rally has given the minority of bearish advisors a severe test of their convictions. I view this as favorable for investors seeking help since it is good for both advisors and their clients to be alert to any major market changes.
Our personal views have been bearish for several years before the 2000 market top so it was quite natural for my article to select 3 advisors with a known bearish stance. We selected 3 advisors on the basis of their published and private views on the market. Six months after selecting these 3 advisors who, vary in geographic location, age and experience, they remain our recommendation today. We have continued to follow their work and have no basis for changing our positive views.
As promised in our earlier essay, we furnished the names and addresses of the 3 advisors to more than150 men and women readers. A few scattered requests are still coming in. .Most of the requests were short and did not provide any information about their specific needs. Some readers gave background information on their needs. We were very careful to remain impartial in all our replies as each investor must decide what is best for their situation
The requests from women were much fewer than those from men and typically gave more information about their circumstances and needs. In only a few cases, did I have further correspondence with the requester so I have no information on the results of their contacts with the advisors. However, in the case of a number of men and women who mentioned the size of their assets, I did suggest they consider spreading their investments between two or three of the advisors. The reason for this suggestion is that I am considering doing the same thing with my own assets. No single advisor has all the answers all the time. Investing money in a vicious bear market environment is always difficult for both investor and advisor.
OPTIMISM STILL PREVAILS AMONG INVESTMENT ADVISORS
It is amazing to me that, more than 3 years into this great bear market, a considerable number of nationally known advisors have publicly joined the camp of the bulls. In each of these publicized cases, my conclusion is that these bullish converts have (1) somewhat limited bear market experience or (2) they do not know or use the Elliott Wave Theory in their work.
Optimism among investors has recently been at the same high level as at the 2000 stock market top. But recent Elliott Wave reports describe this phenomenon as both normal and necessary for the continuation of the bear market. Bear markets do not end until most investors have been completely discouraged and left the market. We are a long way off from that point in both time and price level.
THE NEED FOR COMPETENT ADVICE IS STILL VERY GREAT
The long, sizable bear rally, starting in October 2002, rebuilt confidence among many investors and advisors that money could still be made in their old favorites like semiconductors and small cap stocks. In the next bear leg, their views will change as all sectors join the rout in a general market decline.
Our first requirement for an expert advisor is that they fully recognize we are in the declining phase of the worlds greatest stock mania. They must understand that there will be times in bear market rallies when some long profits can be taken but they must hold firm to their long term bearish view. Only when all the early bulls have deserted the market can it be safely assumed that a real bottom is being formed.
IMPORTANT QUESTIONS STILL NEED TO BE ASKED
My reader e-mails have confirmed the very real need for expert advice. With the possibility that bonds are about to start their own bear market, the problems for both the investor and the advisor are magnified. So my earlier decision to give preference to advisors with a serious understanding of this bear market is still firm. I do not feel it proper for me to recommend an advisor who appears ready to adapt a bullish stance in every important bear market rally. This kind of action gives me the impression that the individual has not done an adequate job of understanding the history of all previous bull and bear market cycles.
Before approaching any advisor it is important and essential that every investor decide how much risk they wish to take in the money under advisor management. Deciding on zero risk means the account must gain at least as much as the advisory fee, typically 2% on modest accounts. Each advisor knows the risks and net returns realized over the past 3 years in other managed accounts and should help the new client to specify at least a range of risk and returns acceptable to the client.
In our view, it is not essential or necessary for an investor to have face-to-face contact with the selected investment advisor. Using telephone, e-mail and overnight mail delivery of documents, the information gathering process can be conducted quickly. The most important thing is for the investor to gain a feeling of confidence in working with the advisor.
Do not hesitate to ask these advisors any question on your mind. Get the facts on their prior experience and their current and long range market views. You must be satisfied with their answers before you send them any money. If you contact all three you will have an interesting and varied experience.
WHO SHOULD SEEK A COMPETENT ADVISOR
There are a number of good reasons for both young and old individuals to seek out a competent advisor. Whether or not they do so is another matter. There are cases where huge fortunes have been squandered by individuals and families. The first example is when an individual has acquired at least $100,000 and has neither the time or experience to manage it adequately. In an extremely difficult market environment such as the current one, it can be very easy to lose an inheritance or a nest egg.
A second example would be an individual who may have several hundred thousand of invested funds and decides to have part of them managed so as to compare the results with each other. This situation might be especially attractive for busy working men and women.
In my own situation at age 88, I am concerned about passing an estate to my heirs who may be too busy to manage it. So I am planning to set up at least two managed accounts to take advantage of two advisors with different but successful management styles.
DO NOT SEEK HELP FROM A SALESPERSON
There are many thousand of salesmen and women all over the country, and in your home town, who are seeking to gain some control over your invested assets. They earn their livelihood by selling and receiving commissions for stocks, bonds and mutual funds. They do not work for you but live on the sales commissions you pay. They are not advisors working in your interest for a fixed fee.
I have a California reader who writes about the situation in his very large national brokerage office. He claims to be the only one trying to find appropriate securities for his clients but is denied the privilege of offering them short funds that go up when the market goes down.
GOOD LUCK TO MY READERS
I wish you well in your search. I will be happy to answer your general questions but cannot express my opinions about any advisor. Ask each advisor to answer your questions to your personal satisfaction.
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© 2003 Robert B. Gordon, Sc.
D.
Dr,
Gordon's Editorial Archive
Robert
B. Gordon, Sc. D.
Sun City West, Arizona
August 11, 2003
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