Seeking the help of financial professionals has become more important to investors according to a recent survey conducted by Harris Interactive on behalf of TD Ameritrade Holding Corporation, as nearly one quarter (22 percent) of investors report relying more on a professional investment advisor following the recession (1).

Even if you have a good handle on your investments, you may find that hiring a financial advisor — who can put the time and energy into making sure you and your family plan for a secure financial future — may be a worthwhile investment. By hiring an independent registered investment advisor — commonly referred to as an RIA — you can make sure your investments are managed on a full-time basis by a professional advisor, while still having control.

Of course deciding to put someone in charge of your hard-earned money is not a process to be taken lightly. TD Ameritrade offers these tips to consider as you choose an independent financial advisor or RIA:

• Just as it is wise to do research on the background of anyone who would take care of your children, you should investigate the person or company you enlist to handle your money. The Securities and Exchange Commission, Inc. (www.adviserinfo.sec.gov), Financial Industry Regulatory Authority (www.finra.org), Certified Financial Planner Board of Standards (www.cfp.net), National Association of Personal Financial Advisors (findanadvisor.napfa.org/Home.aspx), and Financial Planning Association (www.fpanet.org), as well as your own state securities agency all collect background information on financial professionals that can be accessed through their websites. Use these sites to make sure the advisors you are considering haven’t faced disciplinary action for dishonest practices and are in good standing with regulators.
• Know the difference between working with an independent RIA and a stock broker, or other financial services provider. Independent RIAs, for example, are bound by law to act in their clients’ best interest. Brokers, on the other hand, are held to a “suitability” standard, meaning the advice they give must be suitable to that client’s situation. If you are looking for objective, comprehensive money management, you might want to consider an RIA.
• While RIAs are required by law to act in your best interest, there are other ways that you can ensure they will do what is best for you. One is to ask how they are compensated. Fee-only compensation generally minimizes conflicts of interest and means that your advisor is paid only for the management services and advice he or she offers, and only by you, not by investment product providers. When an advisor is paid on commission, there’s a greater chance he or she will make choices with your money that serve not only your interests, but their own as well. That’s not to say that advisors do not work fairly under this model, but potential conflicts of interest are something to consider as you choose an advisor.
• When looking for referrals from friends or relatives, the most valuable referrals may come from those in similar situations. It’s also a good idea to ask potential advisors if they specialize in working with certain types of clients and choose one that fits your unique profile.
• Check to make sure your advisor’s firm is audited on a regular basis. A third party custodian should also handle all your deposits, to ensure checks and balances. An independent custodian can help ensure the safety and security of your assets, and will provide you with a clear, concise statement every month. A duplicate monthly statement is also sent to your advisor. Make sure this is also a legitimate and upstanding business.

Working with a trusted independent RIA can help you realize your financial goals, while allowing you to spend less time worrying about and managing your investments. If you need help finding a financial advisor through the TD Ameritrade AdvisorDirect program (2), visit www.tdameritrade.com.

An article in the December 31 issue of the Wall Street Journal makes a point that many of us in the financial planning world have long suspected.  It says that the CGM Focus fund was the top performing mutual fund, by far, over the past ten years, generating an annualized return of more than 18% a year since January 1, 2000.

Now here’s the punchline: the average investor in this top-performing fund lost an average of 11% a year over the same ten year period.

How is it possible for investors to lose their shirts in a fund that posted outsized returns?

Most planning professionals know the fund’s manager, Ken Heebner, as a swing-for-the-fences investor, somebody prone to huge runups and equally scary drops.  A Chicago-based investment research firm called Morningstar–whose data is used by most financial advisors–calculated what is called the “dollar-weighted” return of the CGM Focus fund, which gives a picture of what investors in the fund actually experienced.  If you had bought and held Ken Heebner’s portfolio throughout the 2000s, you would indeed have received returns of 18% a year.  But the fund was so up and down that investors were alternately panicked and selling out or optimistic and crowding back in.

The article says the most dramatic example came after the fund was up 80% in 2007.  Investors flocked in, putting $2.6 billion into the CGM portfolio–just in time to catch its equally-dramatic 48% drop through the end of 2008.

There have been credible studies showing that the average investor underperforms the market, and this illustrates exactly how it happens.  Right after an investment generates strong returns, people tend to jump on the bandwagon–and then they experience the subsequent return to reality.  When an investment is struggling, people tend to abandon it, and miss out on its recovery.  Missing the upside and catching the downside, consistently, is human nature, perfectly understandable behavior.  But it inevitably leads to dismal investment results–as it did for the battered, unhappy, money-losing investors in the best-performing mutual fund of the 2000s.

Ken French

A common theme among new investors is “Dollar Cost Averaging”. Is this a good idea? Well, if it is the only way for you to get invested, than I t hink I would say, “Yes.” But what if you have a sum of money, say $10,000, that is available for investment and your goal for the money is to be 100% in equities (stocks)? Should you invest all $10,00 at once or should you spread it out over a few months?

Ken French, The Carl E. and Catherine M. Heidt Professor of Finance at the Tuck School of Business at Dartmouth College has some thoughts that will shed some light on this question. You can view his video at the Fama/French Forum.

There is one underlying reason for anyone to own life insurance: If you die before you have been able to meet your desired financial goals for your family, the insurance proceeds will create an instantaneous estate for the use of those whom you love and care about after you are gone. This doesn’t say anything about what kind of life insurance you should buy, but it says why you want to buy it. The goals for life insurance proceeds may include paying off the mortgage so your family can live in the current home, providing sufficient income so the surviving spouse can stay at home or work part time while raising the children to adulthood, paying for the dreamed of college education and generally bringing peace of mind in regard to financial needs and maintaining an adequate life style.

If you have no one who depends on you for financial support (spouse, kids, parents, etc.), then you have little reason to own life insurance. You might want to have just enough so whoever is going to have to take care of your final details will have adequate funds. There may be significant final medical expenses, not to speak of funerl arrangements, that could be problematic if you don’t have a fair estate outside of insurance.

The second major reason for owning life insurance is for business purposes. If you own a business or are a partner in a business, one contingency that should be considered is what would happen to the business of you were to die “prematurely”? What is prematurely? Sooner than you have planned for. This really works in essentially the same way as for family insurance but the direct beneficiary is the business.

• Partnerships: When one partner dies prematurely, it usually means the surviving partner either has a new partner (the surviving spouse) or he is in a position to buy out the half that belonged to his now dead partner. If the partnership is flush with cash, that may not be a problem. But if the business is like most, paying off a deceased partner’s spouse would be a real set back and could mean the end of the business.
• Corporations: This is very similar only here either the other shareholders or the corporation is buying back the shares of the deceased shareholder.
• Estates: A third reason for life insurance is to provide liquidity to pay Estate Taxes without having to liquidate the “familly farm” or whatever assets the family won’t want to have to sell in order to pay the Estate Taxes.

Each of these “reasons” for owning life insurance have different technicalities about how to properly set up beneficiary designations and ownership and a good life insurance agent should be well trained in those technicalities. In the case of business and estate planning, you should also consult with an appropriate attorney and/or accountant.

Bottom Line: The bottom line of the WHY of life insurance is it is a risk management tool to mitigate the risk of negative consequences resulting from death. The real WHY of life insurance has nothing to do with the build up of cash value inside a policy. It all has to do with the death benefit. Keep this in mind whenever talking to an insurance salesman.

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“Investor Education for Main Street America”