Do people call you for referrals?

[Roberts]

People are always talking about getting referrals from professionals but it's pretty rare that anyone asks for referrals from me (except mortgage brokers).

Client of mine inherited some money a few years ago and went to a local broker (you know the firm but I'm not bashing them). He sold all of her loaded mutual funds and put her into others. I predicted to the client that within 4 years he would flip her again.

Last week he called me up to discuss the tax ramifications of doing the flip (it only took 2 years). She had a $5,000 loss with over $4,000 of it in commissions.

Today he calls up and asks that I refer all of my clients to his business. I can't explain how impressed I am with him at this very moment. The client has about $250k in liquid assets and from the previous trades, I'd estimate he's at about $11,000 in commissions in just over 2 years.

[sea-tax]

First I will say that Churning in a clients account should be criminal.

However If the broker you are speaking of is simply re-allocating / re-balancing within the same fund family your client and his should not be paying anymore loads. In fact most financial pros that I know including myself tend to reallocate portfolios at least every two years.
Now if he is trying to convince the client to go pay another load at another fund family two years later, than I would have the client seriously think about what it is they want and who they want to work with.

As for the losses we are currently in the worst 10 year rolling period that the S&P has gone through in a really long time.

[Roberts]

He moved from a Goldman Sach fund to a Hartford fund. Load was full and complete. The only decent thing is that he didn't move into a variable annuity.

The broker has called three times trying to find out her tax situation. I've explained to the broker that it isn't my place to give out her private financial information. Basically he's fishing to find out what other income and investments she has with other brokers.

I warned the client he would do this and have told her to come to me next time and discuss this PRIOR to making moves. The broker hasn't put two and two together and figured out I'm part owner of an independent broker / dealer myself.

[Burke]

One of my "elderlies" called me last week to come over and look at a variable annuity proposal from his newest independent financial advisor (to whom I found out this week, he is moving all his money to). The guy wanted to do a 1035 exchange into his Var Ann which would have cost my client $11,000+ in surrender charges (which will disappear in 2 years on the old contract.) Old contract guaranteed rate is 3%. Ok, they will give him a 5% bump going in on $227,000 which would obviate his surrender charges, but then he can't take any principal out for 5 years, including the "bonus," and there are surrender charges for 15 years. The guaranteed rate is 2%. My TP is 85 years old. And the advantage here is? We discussed it. He decided not to do it.

[erchess]

Observations

1. I do get asked for referrals to banks, mortgage brokers and investment advisers by my clients and I occasionally get asked by professionals in those fields for referrals to interested clients. What I do is make a note of which professionals help me when I need their input into the client's tax situation and which ones give good statements.

2. As best I understand it an annuity of any sort is ultimately backed only by the private company that created it. (Ok there may also be some insurance against loss of the papers that convey ownership.) I personally would want better rates than US Treasury Paper and insured bank accounts before I considered an investment that seemed to carry more risk of loss of principal.

[Snaggletooth]

Private Money

First I will say that Churning in a clients account should be criminal. As for the losses we are currently in the worst 10 year rolling period that the S&P has gone through in a really long time.

Sea-Tax, I'm wondering if the public stock market is EVER going to bring decent returns again. Seems like every few years, when the masses catch on to how to invest, the smart money creates other, more exclusive vehicles.

I can remember when virtually no one except insurance companies invested in mutual funds. And they really did well. Then along comes the average Joe with 401(k) plans and they don't return well because the custodians are skimming off the top. The latest craze is private money, with many of the profitable companies now having their equity privatized.
We have had discussions where Sarbanes-Oxley have driven stocks off the market, and when you consider the amount of leverage involved in something like this, you just KNOW they have to be very profitable in order to do this.

Who is making money now? I have a couple oil stocks, and they're O.K. but not really doing as great as the price of gasoline. Everything else seems to be in a funk too.

Comments?

[erchess]

I'm not seatax but I have observations

Snags I think the stock market should be understood to include these other vehicles you mentioned. I also think the market has been run up before by investors who are too enthusiastic for their own good and then prices have collapsed and come back. I personally think we may see a greater collapse than we have seen since the depression of the 30s but I also know that there are measures in effect that are supposed to keep it from getting that bad again and who knows, they may work. At the same time, ownership of equities and ownership of real property have historically been the only investments that kept pace with inflation and yet both have always been among the riskiest investments.That is why there have always been investors who preferred precious metals and debt instruments, especially those issued by various levels of Government in this country.

I have a Father who has for a long time been wildly successful in the Stock Market and aside from cash all of his investments are in stocks. I personally do not put money in equities other than my own business if losing the entire investment would put me in danger of ever not having enough to get by on.

[Roberts]

There are still many quality funds that invest in equities that have performed well for over 40 years, are performing relatively well and will in the future likely perform well.

I just received marketing information for a nice mutual fund I've used for 10 years. For the last 30 years the fund had returned over 11% return annually. The average investor in the fund had returned less than 5% per year. Peter Lynch had the same reality for his fund.

[sea-tax]

Snagg,
Everything does seem to be in a funk. And there is not a lot of positive out there, but all the more reason to stay diversified and invested. I can not tell you with any certainty what will be the next asset class that will take off, I don't have the power to see into the future ,yet.
As a side note I have talked to a scientist who assures me I will gain this power in the near future but he can't tell me specifically when.

My point is stay invested and stay diversified and when small caps take off great I own some, when large caps surge great I own some, so on and so on and so on. Investing and making money in the market does not have to be difficult, so long as people don't become there own worst enemies.

[DaveO]

"Investment Advisors"

Are the ones calling and looking for referrals most often. My best referrals come from several Attorney clients. In turn, I refer clients to them based upon needs and the area of practice. Having at least 1 attorney in your address book admitted to Tax Court is pretty handy. One that works with incorporation, wills trusts and estates is handy. I hope I don't have to use the criminal defense guys too much.

I'll echo what Sea-Tax said about investing. Good diversification is the key to surviving the market swings as any Enron retiree can tell you. Right now I would look towards blue chip stocks that pay a good dividend. GE, Dow Chemical, Altira and Lily to name just a few. During a sideways market dividends can make up the bulk of your gains. I've never had much luck playing hot sectors so mostly avoid trying to guess the next one. I do own some exchange traded funds to overweight sectors that I feel are poised to outperform the market in the long term. Water is one area I feel will do well over the long term. Everyone has to drink water and much of the worlds populations lacks access to safe drinking water. Long term, basic materials are going to do well. Mining, refining and manufacturing will always be in demand but buy carefully.

[erchess]

I just received marketing information for a nice mutual fund I've used for 10 years. For the last 30 years the fund had returned over 11% return annually. The average investor in the fund had returned less than 5% per year. Peter Lynch had the same reality for his fund.[/QUOTE]

What am I missing? If the fund returned 11% why did not every investor get 11%? (The answer must be fees but why is the fund allowed to state a rate of return without including fees?)

[JoshinNC]

Because retail investors are fickle

I just received marketing information for a nice mutual fund I've used for 10 years. For the last 30 years the fund had returned over 11% return annually. The average investor in the fund had returned less than 5% per year. Peter Lynch had the same reality for his fund.

What am I missing? If the fund returned 11% why did not every investor get 11%? (The answer must be fees but why is the fund allowed to state a rate of return without including fees?)[/QUOTE]

That return is most likely net of fees. What happens is the retail investor spends so much time watching CNBC (which I'm watching right now) and trades on every little blip that comes across the screen. As such they trade in and out of the fund, netting a lower return than the total return of the fund.

[Snaggletooth]

Load Advertising

Gentlemen, I'm very much satisfied that in all of the propecti (is that a word?) sent out by the funds, the returns are properly advertised net of fees.

In other words, if XYZ fund says 8.35% over the last 15 years, and its administrative fee is 0.9%, then that fee has been deducted from the advertised return. Outside of the fee, the performance of the investments within XYZ would be more like 9.25% or a tad more.

However, if you put money into a 401k at work, and Transamerica is your custodian, you will be charged an extra 3-4% because they will put only 96-97% of your available money into that fund, and carry their own pool as a "shrink-wrapped" XYZ fund. You can expect your real return to be about 5% if XYZ is performing at 8.35%. Even though this is the REAL return, Transamerica is still allowed to advertise XYZ as performing at 8.35% over the last 15 years. Truth-in-advertising does not seem to apply to them.

[sea-tax]

Snagg I am not condoning it but I will bet a dollar to a donut that some where the exact costs are written and the employee was made aware of it. Whether they understood it or not is a different story. I am not wanting to argue about disclosure and how large the print should be. But with every financial product the fees and costs are usually outlined in the prospectus or in some official document, the client may have to search for it but it is there.
From my history classes in college I remember that our systems are based on caveat emptor ( let the buyer be ware) sorry if I butchered that one,spelling was not my best subject.
My point being is that people need to take responsibility for there decisions, and not be afraid to ask questions. I am sure there are financial reps who gloss over the fees, but none the less they are written for everyone to see. I for one make each client sign a statement that spells out exactly what they are being charged and they attest to the fact that I have explained it and they understood. I am not ashamed of what I make therefore I have nothing to hide, and I make the client well aware of it.
On another note how many clients do you get from a big chain tax store who say I never paid for audit protection or refund loan. And clearly right on the bill it is spelled out that they paid an extra $100 in these services. Who's fault is that the client's or the store's? Sometimes people are duped, but sometimes people just have selective hearing.

[Roberts]

What am I missing? If the fund returned 11% why did not every investor get 11%? (The answer must be fees but why is the fund allowed to state a rate of return without including fees?)

What you are missing is that the return for the clients is asset weighted.

There was an article in the mid-90's in regards to the Money Magazine hot mutual fund list for 12 month returns. There was an explosion in assets to any fund that made the list but that's AFTER the fund earned high returns. Investors flooded the fund and invariably the fund then underperformed (because it gambled to make the list in the first place). If $30 million earns 50% return in year 1 and $250 million loses 10% in year 2, the fund had a nice return but the asset weighted return was negative.

I spend more time telling people what NOT to buy than investing money. In 2000 I lost several clients because I wouldn't put everything in tech and was instead buying commodity funds. Last year I lost a client because I wouldn't go huge into China. In 1995 nobody was putting assets in commodities. This year I was reading financial planners were suggesting 20% was reasonable.