Don't Assume Your Broker Knows

Don’t Assume Your Broker Knows

                                                                                By: Brendan Magee

A financial advisor located in Princeton, N.J. e-mailed me that she would like to be a guest on my Investor Coach’s Show. She e-mailed me that she had been named to the Top 100 Wealth Managers in New Jersey. She felt as though hers and my philosophies were very compatible and that she would make a nice fit for my show.  

We had a really nice introductory conversation, but I was pretty sure going in to the conversation she really didn’t fully understand what I was committed to for the Investor Coach’s Show. I pointed out to her that my show was about helping people avoid the problems created by traditional financial planners. I told her I believed that stock picking, market timing, and track record were akin to gambling and speculation. I told her I felt that the investment industry was putting their interests ahead of the investor’s in promoting these strategies. To which she said she agreed.

  During our phone conversation I asked her a few more questions about her background, and then asked her, when she gets done working with a client what was an investment she felt good in recommending. She told me that she likes the Templeton Growth Fund, and for me a big red flag popped up. This was not a fund that adhered to no gambling or speculation. Let me explain.

Stock picking is when a fund manager tries to pick out the best stocks from an asset category and stay away from the bad stocks. The Templeton Growth Fund is a world stock fund. With the bulk of the funds money, the fund manager has invested 43 percent of the fund’s assets in U.S. companies, and 52percent in International companies. The fund has a total of 109 companies in its portfolio. If the fund manager was going to eliminate the practice of stock picking and still invest in U.S. companies, he would own the thousands of companies located in the United States, large, small, micro, etc. If he was going to invest in International companies, again,  he would own thousands of companies that make up that asset category. They wouldn’t pick out a paltry 109, and when you pick out only 109 companies from a pool of thousands that is stock picking.

Stock picking in countless academic studies has proven to be a strategy that is detrimental to investors, and yet the financial advisor who was proposing herself as a possible guest on my show was comfortable recommending this to her clients. Again, this was a very nice person. She took the time out of her busy day to speak with me and was very engaging. Why then encourage investors to invest in this kind of actively managed fund? The only thing I could conclude was that she just didn’t fully comprehend the dangers of stock picking or she didn’t really understand how the Templeton Growth Fund was being managed.

In either case, if I had assumed based on her being placed in the Top 100 Wealth Managers For New Jersey or relied on the boards she was sitting on that this was someone who really understood how to put the investor’s agenda ahead of the investment industry’s, then I would have been sorely mistaken. Now a lot of investors are in the same boat. They make the assumption that because their advisor has an impressive title, has fancy professional designations on their business card, etc. that they know what they are talking about, but in actuality they do don’t. Unfortunately, this assumption takes a terrible toll on the hopes and dreams an investor has riding on the outcome of their investments.

So how do you avoid this dilemma? The answer is, you have to know what questions to ask. Knowing the right questions and the appropriate answers to those questions will put you in a position to see if your advisor really knows what they’re talking about or is just a pretender.

Brendan Magee is the president and founder of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or e-mail Brendan@coachgee.com.