Q. My wife and I have been having a hard time selecting an investment counselor. We have interviewed counselors but have not found anyone in whom we can feel confident. We've heard and read stories about trusted advisers abusing their clients’ trust. So we are very gun-shy about making a selection.
Unfortunately, I’ve been burned in the past by people with a wonderful personality but who actually have poor character and integrity. Meanwhile, our savings are languishing in various CDs earning approximately a modest 5 percent. What can we do to feel confident about finding someone with whom to trust our savings? Are there any certain questions we can ask and responses we should be seeking?
---R.K., by email
A. Don’t be too hard on yourself. There are lots of people out there who would love to have languished in CDs for 2007.
The first thing you should ask is whether the person is an investment advisor or a salesperson. A registered investment advisor who works on a fee-only basis will have nothing to gain from commissions and is sworn to act as a fiduciary. That means putting your interests before his. That’s very different from the vague “suitability” requirement that salespeople should adhere to.
Another thing you can do with a modest investment of time is visit one of the lower-cost investment companies and simply ask for their recommendations. Fidelity Investments, for instance, probably has an office near you and would be worth a visit. The visit will probably result in suggestions for a variety of Fidelity managed funds, but the total cost is likely to be not much over 1 percent a year of your total investment. You could also do the same thing with a visit to a Schwab office. Both visits will probably still have you committed to manager risk and the associated expenses, but you will get a better deal than most of the offerings from traditional brokerage or insurance-based investments. (Those typically will cost you 2 percent to 2.5 percent a year.)
Q. I have been trying to determine my portfolio's expenses from the start without success. I have a variable annuity with 4 mutual funds. I also have 6 stock funds, a couple of bond funds, corporate bonds, a CD and a few corporate stocks. All are managed by a broker who makes recommendations, handles transactions and provides an income check each month. There are fees, management expenses, etc., associated with each entity within the portfolio and a management fee from the broker.
How can I discover all the various fees being levied on my portfolio? Should the broker be able to determine the total fees? I can see the broker’s transaction commission fee on the confirmation report, but I have no idea what his fee is for managing and handling my overall account, nor what the brokerage house takes in addition.
Please shed some light on my dilemma. Most of my portfolio is in an IRA that is being used for my retirement. Taxes are deferred until withdrawal. This is not a small account. Should the total expenses be shown somewhere in the monthly summary report I receive, and I'm just missing it?
---T. R., by email from Seattle
A. Sadly, there is no “Truth in Investing Expenses” law. Personally, I’d like to see a law that required every monthly statement to contain a total of all expenses as a percent of assets in the account, annualized over the preceding 12 months.
I suggest that you make a formal request to your broker for a tally of the average annual expense for your variable annuity and the expense ratios on your stock and bond mutual funds. This will still be incomplete since it won’t include the commissions or house spreads on your bond and CD purchases. Nor will it include his management fee if there is one.
Asking these questions isn’t rude. It’s essential. If you go to a supermarket or department store, the price of everything is marked and you can make your purchase decisions accordingly. That’s the way it ought to be in the financial “store.”
A second question you should ask is what the return on your account has been over the trailing 12 months and 36 months. This should include adding back in any withdrawals you have made, expressed as a percentage of the account value. You can then ask your account manager to compare his performance to a meaningful benchmark. If he isn’t willing to do that, your money is in the wrong place and you should move your account.