By Mark FolgmannI was listening to a local radio show about money last week when a small business owner called in to discuss a financial concern. The caller asked the host if he thought it would be advisable for her to listen to her financial advisor who was suggesting that she move her SEP (Retirement Savings Account) into an Annuity. She went onto say that she has been funding her SEP for 20 years and the account balance was currently less than she had deposited over the years. At this point the host went into a five minute review of annuities. Both seemed pleased that the current advisor had disclosed the fact that the cost could be as high as 3 or 4 percent per year in the new investment. At this point, I believe they decided that it could be a viable option to move her SEP into an Annuity but were not entirely certain on this transition.
What are you thinking and what will it take for you to get rid of your advisor? Must you lose all your money? At some point we must ask the right question and it is not, "Should I allow my advisor who has not figured out how to make any profit in 20 years invest my money for another 20 years in a product that cost 3-4 percent each and every year?"
Dr. Phil says it best when he asks “How’s that working for you”? In this case, the right question is, "When do I re-evaluate my advisor?" I would think it must be before you spend half of your investing life and show zero growth on your capital. Current surveys show that as high as 75 percent of investors are questioning their advisors and are seriously considering a second opinion. I believe this is an excellent time for a second opinion due to the strong rebound we experienced last year. Even if you had lost half of your portfolio in 2008, you should have had a strong recovery in 2009. This puts most people in an excellent position to re-evaluate the advice they have been receiving. A partial list of questions I might ask myself in this re-evaluation may include: Did my advisor provide me with an asset allocation that was appropriate for my age and risk tolerance? Was my advisor meeting with me throughout these troubled times? If we had losses in our holdings, did we harvest losses in order to reduce current and future taxes? How often did we rebalance our portfolio in order to take advantage of the market fluctuations? Or maybe the best question is, "Did my advisor have a prudent and reasonable game plan prior to the turmoil that allowed me to sleep at night with the feeling that he was as concerned with my financial well-being as I was?" If all of these things happened over the last 2 years you should have recovered all your losses and be ahead of the game at this point. If that is the case, you have a prudent advisor and have no need to look around. Make sure you thank them in some special way. If not, start your research and educate yourself before the next storm arrives. Make no mistake, it will rain again.
By Mark Folgmann In his most recent book “Outliers” Malcolm Gladwell states that his research shows you can be an expert in just about anything if you put in 10,000 hours. This applies to playing hockey, writing software, music and yes even brain surgery. If we do the math we find out that this would take up 5 years of full time effort or 10 years at 20 hours per week each and every year. Last year my wife and I were invited to Hilton Head to spend 4 days with my favorite Uncle and Aunt. Once we arrived we were notified that my cousin Brian was driving up from Florida to grill steaks. I was happy that I would get to see Brian but thought to myself, heck I can grill steaks, why was everyone so excited to have Brian grill steaks. Brian showed up at noon after a three hour drive and spent about 15 minutes preparing the steaks. I’m not sure what he did but since it only took 15 minutes it couldn’t be all that important, right? Anyway after he was done Brian and I shot off to play golf for the rest of the afternoon with no further thought about those steaks. Brian had them marinating back at the condo after he trimmed the fat and prepared for cooking. About 5 hours later we returned from golf and Brian started on the rest of the meal. Preparing the salad and cutting and washing vegetables. After taking everyone’s order on how they wanted their steaks prepared he left and returned with the best steaks I have ever tasted. I have to say the meal Brian prepared was the highlight of my trip. Sure it was great seeing everyone but to watch someone that is truly great at what they do was a pure pleasure. Most would not realize what went into that meal but I truly did. I knew Brian had spent his 10,000 hours becoming an expert and I appreciated someone who is great at what they do. Not only was it interesting to watch but I benefited from his effort. Even though the end process looked effortless I was fully aware that Brian had paid the price and pulled off an experience that was unforgettable. After all I am still thinking about that meal a year later.
The question is what does this have to do with your retirement? Everything. We can’t be expected to create a successful outcome with only one opportunity to practice. Sure retirement is far more important than grilling steaks so don’t you think the prudent thing to do would be find someone that has 10,000 hours of experience. Someone that understands how to prepare, monitor and evaluate the process. Wouldn’t you want someone that has burned a few steaks and has learned from that experience? When I grill my wife knows to have a glass of water handy at all times. Anyone that has ever grilled knows what the water is for. There are clearly two problems to this retirement dilemma, first is the accumulation stage which is by far the easier issue. The more difficult problem is once you retire and attempt to make your money last as long as you do. Brian knows exactly what temperature to grill steaks so they don’t burn and in my world I have to know what distribution rate and expense ratio’s are acceptable over a 30 year retirement so your money doesn’t disappear before you do. There is always a very fine line between a great meal and burning steaks. Oh, did I forget to tell you what Brian's profession is? He's a Chef.
