Archive for July, 2008

Finding a Financial Advisor, Part 3

July 27, 2008

8 comments

Now that you have a shortlist of advisors, the next step is to interview them. First, I compiled a list of sample questions to ask potential advisors from various sources. The CFP website has a list of ten questions to ask your planner. The Mackenzie funds website also features a list of interview questions that you can print out. Gail Bebee lists some sample questions in a chapter on hiring a financial advisor in her book, No Hype – The Straight Goods on Investing Your Money (review). And of course, Suze Orman has five questions for grilling a financial planner.

Initially, I worked from the list but later found that it is better to mention what you are looking for and develop a conversation from there. For instance, I’d start off the conversation by mentioning that I am a DIY investor, currently managing a portfolio of broad-market index funds and am looking for a fee-only planner to get additional help with taxes, retirement planning, portfolio review and insurance needs and ask if the planner is interested in me as a prospective client.

As someone looking for a fee-only planner, the discussion on fees was pretty straightforward — both planners said they would charge $100 per hour and take 10 to 15 hours for a comprehensive financial plan. If you are hiring a fee-based planner for managing your portfolio and offering other financial planning services, fees are an important point to bring up in an interview. It is absolutely essential that the advisor be forthright about fees and discloses all other compensation schemes (such as commissions) and reveal any incentive they may have to recommend financial products.

One great tip I got from a practicing financial advisor is to ask for a representative portfolio constructed for someone who has been a client for at least five years (without any personal information) and check if the prospective planner is a performance chaser or churns the account too often.

This and That # 102

July 24, 2008

8 comments
  1. Mark Hulbert reports in The New York Times on a recent research that finds that money managers have a sorry record: “the number of funds that have beaten the market over their entire histories is so small that the False Discovery Rate test can’t eliminate the possibility that the few that did were merely false positives”. The paper referenced in the article can be found here.
  2. As E*Trade Canada get gobbled up by Scotia Bank, Rob Carrick pays homage to the independent broker for breaking the comfortable oligopoly that charged high trading commissions for years.
  3. The 16 Rules for Investment Success by Sir John Templeton courtesy of Franklin Templeton. While you are at it, check out the updated Canadian periodic table of investments.
  4. Statistics Canada reported that inflation hit 3.1% over the past year. It was hardly surprising that food, energy and transportation costs were up sharply moderated by lower automobile and computer prices.
  5. Jon Chevreau finds out what some advisors are telling their clients about the global stock market turmoil.
  6. Growth in Value doesn’t share the Industry minister’s optimism that the spectrum auction will result in lower cell phone bills.
  7. Canadian Financial Stuff has a crazy idea for splitting income with his spouse.
  8. Michael James gives a good piece of advice only to find that it didn’t work out as anticipated.
  9. The Dividend Guy on the nine rules of risk management.
  10. Frugal Trader is excited about the GM Volt.

Expected Asset Class Returns from The Intelligent Portfolio

July 24, 2008

3 comments

In The Intelligent Portfolio (Book Review), the author has published real expected returns from various asset classes calculated by Financial Engines. Financial Engines uses a technique called reverse portfolio optimization – i.e. use estimated volatilities and correlations from history and solve for expected returns from an optimal portfolio, the market portfolio.

Cash – 1.7%
Short bonds – 2.6%
Long bonds – 3.6%
Large-Value US Equities – 7.0%
Large-Growth US Equities – 7.6%
Small-cap US Equities – 7.4% to 8.0%
Europe – 7.1%
Pacific – 6.4%
Emerging Markets – 6.6%

It’s interesting to note that growth stocks have higher expected returns than value stocks, US equities have higher expected returns than foreign stocks and small caps have roughly the same expected returns as large-cap equities. These returns are also much higher than estimates from other sources that Canadian Investor posted recently.