Most non-professional investors are caught on the Horns of a Dilemma. The dilemma is represented by this question: How do you devise and achieve a successful long-term investment strategy when you lack the knowledge to ask the right questions to get the right answers?
I have been aware of this problem almost since the beginning of my more than 20 years' career as a finance and investment professional. I learned early in my career that to effectively advise my clients, I would usually have to help them formulate the questions they needed to ask in order to arrive at answers suitable to their present and probable long-term financial situation.
To some of you this process might seem obvious as the expected and normal course of the advisory relationship between a registered investment advisor such as myself, or with others in the financial services industry, such as stock brokers and certified financial planners. I hope you will not be too shocked when I tell you that often investment professionals fail to give their clients the proper advice and guidance.
This failure is sometimes inadvertent, but all too often it is deliberate. After reading the rest of this article, I hope you will be more able to recognize the questions you need to ask in order to increase the probability of getting appropriate advice from those who should be able to give it to you. But you must accept responsibility for getting the advice you need.
I will give you some guidelines. Before you even call an investment advisor, stock broker or certified financial planner, think through and write down exactly what you think you want to accomplish. Ask yourself what financial goals or needs you want to satisfy. Make a list. First on the list would be the minimum amount of money you want to have in a checking or pass book savings account. This is money you can get your hands on in a moment's notice - for whatever purpose. Have you saved money for the down payment to buy a home? What insurance needs do you have other than auto, home and basic medical? What if you are self-employed and unable to work for an extended period of time? Are you a highly paid professional unscrupulous people target for lawsuits? Are you saving for a child's education? How long do you expect to work full time before you retire? Do you even expect to retire? How much of your expected financial needs after retirement will be covered by social security, current savings and work related retirement investments?
Regarding investment products and service, ask what are the costs, both visible and implied? What is in the small print of agreements? Ask about the risk of losing your initial investment. What are the fees and commissions you will be expected to pay? Are there cheaper competitive products and services? Your advisor may try to avoid answering these questions.
You probably have noticed that most of the items on this checklist overlap from a timing and accomplishment perspective. Yet, depending on your individual situation, the order of priority for accomplishment will vary. Ideally, you will seek the advice of a financial or investment advisor only after you have put this list together.
The first function of a financial or investment advisor should be to provide expert evaluation of your own thoughts regarding your financial plan. They should recommend amendments to your self-created plan after you have organized your own thoughts on the subject of your finance and investment needs and goals.
Then after they have helped revise your plan, you must decide whether they should help you implement your plan. This is an extremely important consideration. It is at this point in the advisor/client relationship that a conflict of interest may occur. What you need may not be what the advisor has to sell. All too often, our need as financial advisors to make a living conflicts with the appropriateness of our products and services to the needs of our clients. This is where you as the client need to remember the legal dictum: Caveat Emptor - "let the buyer beware."
Our civil courts may find that a financial or investment advisor or broker has civil liability and is possibly criminally liable if he sells a product or service to a nonfinancial professional client that results in a financial loss, and that product or service is found to have been inappropriate to that client's "reasonable needs" and "reasonable risk tolerance" at the time it was sold to them.
But I want to emphasize the words "may find liability." The dictum "Caveat Emptor" recognizes that reasonably intelligent adults must be held responsible for their decisions regarding their personal finances. So even if you must seek out an advisor to help you get the right answers to your investment questions, it is your responsibility to ask the "right" questions - to know what you want and need. The fact that you lack the education or experience to properly formulate the "right questions" may not protect you from an unscrupulous advisor or broker whose actions are unethical but legal.
Clifton Maclin is an SEC-registered financial services representative in Carson City.