September 23, 2017 01:46 pm CDT
Ask These 3 Questions
By Brian O'Connell, Wealth Daily


For the past half-decade, the living has been easy on Wall Street.

Since 2009, the Dow Jones Industrial Average has reached double-digit gains in three different years (with an 18.82% return in 2009 and a 26.50% return in 2013).

During the other three years, the DJIA finished in positive territory, giving investors access to fairly easy gains.

But the party could well be over in 2015, and that means investors would have to be vigilant about getting the most they can from their financial advisors and their fund managers — and get the most from their investment fees at a time when those fees could mean the difference between their portfolios finishing in positive or negative territory.

This comes at a time when growing evidence shows both actively managed funds and even index funds are limiting returns through sub-standard management and high investment fees, no matter which direction the fund goes.

It also comes a time when individual investors have more resources, more clout, and — in many cases relative to actively managed and index mutual funds — better investment results.

In fact, subscribers to The Wealth Advisory newsletter, which is built on the premise that the paltry gains you get from the mutual fund giants won’t help you much in retirement, have seen this firsthand.

In recent months, Wealth Advisory investors have scored some big gains on large, stable companies, including 155% on Boeing (NYSE: BA), 112% on Starbuck's (NASDAQ: SBUX), and 176% on Realty Income Trust (NYSE: O).

The gap between what individual investors can make on their own and what they’re actually getting from fund providers comes at a critical point in time.

This is not mere hyperbole.

According to Bill Gross, the portfolio manager of the Janus Global Unconstrained Bond Fund and the original co-founder and (former) chief investment officer at Pimco, it’s plain and simple: “When the year is done, there will be minus signs in front of returns for many asset classes,” he wrote. “The good times are over.”

Timing the end of an asset bull market is nearly always an impossible task, and that is one reason why most market observers don’t do it. The other reason is that most investors are optimists by historical experience or simply human nature, and it never serves their business interests to forecast a decline in the price of the product they sell.

Nevertheless, there comes a time when common sense must recognize that the king has no clothes — or at least that he is down to his Fruit of the Loom briefs — when it comes to future expectations for asset returns.

Now is that time, and hopefully the next 12 monthly “Ides” will provide some air cover for me in terms of an inflection point. Manias can outlast any forecaster because they are driven not only by rational inputs but also by irrational human expressions of fear and greed.

Knowing when the “crowd” has had enough is an often-frustrating task, and it behooves an individual with a reputation at stake to stand clear.

As you know, however, moving out of the way has never been my style, so I will stake my claim with as much logic as possible and hope to persuade you to lower expectations for future returns over the next 12 months.

If Gross is right (and he’s not alone in calling for a weak investment climate this year), it’s time for that discussion with your investment advisor. Here are three key priorities to cover:

  • Describe your strategy to actively manage my portfolio in a potentially down-market year: Your advisor should have no problem running through his or her model for actively managing your money. Make sure you know what investments he or she will be using to maximize income and protect your wealth, and make sure to ask about the suitability of each asset class your advisor chooses. Above all else, make sure your broker or advisor can detail why each investment in your portfolio is suitable to your situation. The key, as always, is this: “What exactly am I getting for the fees I am paying you?”
  • Aside from me, who else is paying you?: You’ll want to ask your financial advisor whether he or she is getting a kickback on any stock or (especially) mutual fund that winds up in your portfolio. If so, that’s a big red flag in a tight market (or any market, for that matter). You only want investments that are suitable to your needs, no matter who gets a commission.
  • Are you managing my cash?: These days, some investment firms just have advisors raking in fees and assets but kick the portfolio management part of the equation upstairs to a separate money manager. Is that the case with your money in these markets? If so, what does this separate party know about your specific situation and long-term financial goals?

It could be a tough year on Wall Street and for regular Main Street investors, too. So make sure you’re getting the most bang for your advisory buck, and hold your financial planner accountable for the fees you’re paying to see your financial ship stays afloat in a volatile, churning 2015 investment market.

If your advisor isn't holding his or her end of the bargain, don’t wait to take the reins yourself. As the data shows, advisors and managers have banded together to produce tepid investment returns for clients, and both are charging fat fees for that performance.

There is a better way, and it starts with holding your advisor’s feet to the fire.

Until next time,

Brian O'Connell for Wealth Daily

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