So When Do You Change Your Financial Advisor?

We recently spoke at a prospective client event in Santa Barbara, California and we were asked the question "how do you know when you should change financial advisors?"  Before answering that question, however, one must understand that the term "financial advisor" can take on many different definitions.  Most "retail" (individual) investors, who use a financial advisor in helping them with their planning and investments, do not deal directly with those who make actual day to day investment decisions.  By our definition, a "financial advisor" is generally NOT an "investment manager".  In todays financial services world, financial advisors usually invest primarily in mutual funds or pick a 3rd party "investment manager" (sometimes also referred to as an "asset manager"). An investment manager will make actual "investment decisions" which we define as picking individual companies to be put into the client portfolio (whether bonds, stocks or preferred stock, etc.).  By that definition, an investment manager is NOT someone who chooses third party asset managers (who DO make investment decisions) or picks mutual funds (also managed by a third party).  This distinction is important because investment managers will often also act as financial advisors to their clients (as does Taylor Frigon) by helping them with important planning decisions and so forth.

Those who have been long time readers of this blog, or are familiar with our philosophy, know that we believe it is preferable that investors get as close to those that are making actual investment decisions as possible.  This blog is full of other posts explaining why we believe that, but here are just a few examples:

Novemeber 15, 2007 "Don't hire a journalist to coach your team." :

"...would you want Vince Lombardi running your team or the guy who is up in the booth doing commentary? A reporter may know a lot about the game, but the experience of voicing opinions is vastly different than the experience of making the tough calls day-in and day-out."

January 23, 2008 : "A twenty-year perspective for the recent market turbulence":

"The lesson of the terrible long-term performance shown in the graph above is that the average investor (and the average advisor, according to our understanding of the data) is fairly capable at picking short-term performers, but does not have the consistency required to achieve long-term success."

January 28, 2008: "Can your advisor answer this question?"

"Can an advisor even tell you what the long-term rate of return experienced by his clients has been? He should be able to, but can he?

It is very easy to pull out a track record of a fund or a manager that his clients own right now, and show the twenty-year record ... of that particular fund or manager, but as we have pointed out before, the advisor's clients may very well have just entered that fund or portfolio and thus the history before that time does not reflect returns that the clients themselves experienced."

February 1, 2008  "When do you fire your investment manager?":

"We have long advocated finding a money manager who has a consistent investment process and has been using that investment process for a period of many years, and has an infrastructure around him, but who isn't too big. We believe that a manager's level of investment in his own portfolios is also an important indicator (he should "eat his own cooking")."
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Investment Climate Jan 2016 "The Sky is Falling," Again!

The year 2015 went out with a whimper as major market indices in the U.S. ended relatively flat to down. This is not surprising given that the Federal Reserve finally raised the target for the interest rate on Federal Funds at the December 2015 meeting of the Federal Open Market Committee (FOMC), and that the market averages had been dancing around ‘break even” for most of the year. As we have discussed in previous Investment Climate pieces, investors (or more specifically “traders”) have become far too focused on the actions of the Fed and a “hissy fit” driving the value of stocks down was to be expected.

The “hissy fit” has continued into the first part of the new year. As of this writing, the major market indices in the U.S., and the world, have gotten off to the worst start ever. This is giving fodder to all those pundits of perpetual pessimism in the media who are clamoring to pronounce that the “sky is falling”. We would emphasize that this is not the first time we have witnessed reactions like this from both the mainstream financial media and the “experts” they traipse onto their stage 24/7 offering suggestions for the “trade of the day.”

While market drops are never comforting, these periods serve to reinforce the mantra we have preached for years that one must be an investor, in the truest sense of the word — not a trader, speculator or gambler, with respect to the way money management is viewed– if one is to maintain their sanity when facing the inevitable gyrations that the market and, for that matter, the economy will bring. Unfortunately, today the markets are more and more driven by phenomena that have little or nothing to do with the conducting of business and more to do with schemes that attempt to “game” the market. Contrived mechanisms that attempt to steer one away from the natural ups and downs that occur in something as dynamic as business activity and ensure long term success at the same time are nonsense! Thinking in terms of “macro trends”, arbitrage, liquid alternatives, synthetic instruments, hedging risk, high frequency trading, and on and on… just misses the point of real investment.

Investors (those who provide capital to an enterprise in expectation of a future return) are best served to be thinking solely about the enterprise in which they are investing, and its prospects for success. At its core, this is not complicated. However, in recent years (and maybe decades), we believe too many investors have been focused on almost everything except the enterprise to which they have entrusted their capital. They have become further and further removed from the enterprise that is actually benefitting from the use of their capital and in many cases are not even invested directly in a business enterprise. This has transpired through the use of intermediaries, at best, and downright instruments of financial engineering that don’t even ultimately result in the financing of a business entity but are truly schemes “betting” on the outcome of a particular event, at worst. If you are an investor reading this piece, ask yourself, “what enterprise has ultimately received my capital investment and how are they using that capital to ensure I receive a future financial gain?”

Some would argue investing in public companies does not provide capital to the enterprise itself as it is a “secondary” market for shares in that enterprise. That is not accurate because the capital that was originally invested in the enterprise is simply now yours, as transferred to you by the original investor. It is still capital used in the function of the enterprise. When you have no idea if you have invested in an enterprise or enterprises (hopefully you are diversified), or realize you have bought into the hype that there is a way to “game the system” and come out on top, then we suggest you change your approach immediately.

As the cries of doom ring ever louder, those who have our suggested approach will be able to look past the noise and know that what China, Greece, The Fed, Dubai (remember that one?), emerging markets, the Yen, the Dollar, the Euro, the Eurozone, the price of oil, Ireland, Iceland, liquid alt funds, ETFs, Italy, Brazil CDOs, CMOs, CLOs, CDSs and all the rest of the buzz-terms that are used as the “debacle of the day”, will not derail their solid long term plan. Why is that? Because businesses such as Stericycle keep picking up medical waste, Ecolab keeps on cleaning the toilets in restaurants, Nvidia keeps powering the graphics on your computer screens, Amazon keeps being Amazon, Apple keeps you using your thumbs, Verizon makes sure you connect your iPhone, Echo Global Logistics makes sure your packages arrive intact, Edwards Life Sciences makes sure your heart keeps ticking, and Middleby ensures your pizza gets cooked right!
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A Rough Start to the Year - Stay Calm!

The markets have ushered in 2016 with what is the worst start EVER in a new year for the stock markets around the world.  We are told this is due to turmoil in China, which the conventional wisdom is suggesting is sure to take the U.S. economy into recession.  We don't agree.

While there is a lot to be unhappy about in regards to the way policy has shaped up in recent years here in the U.S. and globally, what we are witnessing is yet more of the "Hissy Fit" we have spoken of coming about as the Fed ends its policy of 0% interest rates.  The problems in China have now been added to the list of reasons why we should all panic.

China is a centrally planned economy.  While they have definitely made great strides in moving towards capitalism, they are still guided by their government.  As such, problems such as those they are experiencing are going to continue until they come to grips and embrace a truly free, entrepreneurial capitalist system.  By the way, this is true everywhere, including in the United States. To the extent that government is allowed to get ever bigger and more intrusive, inefficiencies step in and things don't function as well as they could in a more free enterprise-oriented system.  This is not to suggest we favor a "free for all" system.  Quite the contrary, we suggest a strong rule of law is crucial.  However, "rules of the road" are different then requiring one to take a certain route, and therein lies the problem with centrally controlled systems.  Fortunately in the United States, and much of the Western World, the degree of government control and mandate is less than in places like China.

Still, the markets will have their moments of panic and as we have said many times before, "this too shall pass".  And even if we were to go into another 2008-type downswing, we would simply ride through it (as we did then) and look for where we could take advantage of opportunities that inevitably present themselves in such environments.  We really don't think anything as systemically troubling as 2008-9 is happening now, and today's issues are being overblown, and we suggest that trying to time when to buy and sell (trading) is an exercise in futility.

It is far better for investors to stick with their plan, assuming it is sound.  For us, that involves staying with ownership of business that are well managed and have promising outlooks for the future.  We  think this is one of the best times since 2008-9 to buy great growth companies, but also to buy positions in many income-generating investments and dividend-paying common stocks.  Of particular note are opportunities in many higher-yielding securities issued by well-run companies but suffering in this panic-ridden environment.  We plan on continuing these endeavors on behalf of our clients and recommend others do so as well.
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