Yes, when we met with new local clients in the midst of the global financial crisis in 2008. Many stated that they wish they had met a firm like us early in life and many said they never heard of us. We said we purposely granted more interviews with CNBC, Bloomberg and Fox Business as well as print like The Wall Street Journal and Barron’s to discuss excess valuations starting in the summer of 2007, their response surprised us. Several new clients said we don’t watch national business channels nor read WSJ or Barron’s and would rather watch channel 11 and 13 and read The Blade; hence we initiated regular interviews with the top rated shows in our local area.

This is a very good question and one that we do not hear quite enough. Most investments are sold based on performance and unfortunately risk and total costs are typically only glossed over or ignored. Alan B. Lancz & Associates feel both risk management and low costs are two critical variables that should be emphasized when choosing someone to advise you (in any capacity) on your investments. Investors must also totally agree with the broker’s, planner’s, or advisor’s professional investment philosophy and feel very comfortable with his/her method of research and communication, as well as investment style. If your advisor or planner places all his clients with one firm (custodian), many times you lose the checks and balances of having several custodians from which to choose. This is a critical area to cover before you invest.

Here are nine other key points to cover with your financial advisor to initiate and maintain a solid long-term relationship with any investment professional.

  1. Know your investment professional’s philosophy of investing.
  2. Discuss the Keys to Successful Investing.
  3. Get all fees and expenses itemized in writing.
  4. Be honest about your current financial situation, goals and objectives.
  5. Ask about other services your investment professional offers.
  6. Make sure he/she is a fiduciary looking out for your best interests.
  7. Schedule a regular financial check up.
  8. Call when circumstances in your life change.
  9. Be open about your financial circumstances and risk tolerance.

1. Lack of a Sell Discipline – This is listed as our #1 toxic tactic because we have consistently heard from more investors over the past thirty years about their dissatisfaction with their broker/advisor simply riding a stock or mutual fund all the way up and then back down again. It has consistently been among the three reasons investors switch from their current advisor or money manager to our company’s money management services.

2. One Dimensional Thinking – The markets can do three things: move up, move down or stagnate. If your advisor manages your portfolio with only one market direction accounted for, you can identify it as a sign that expertise, effort or knowledge level is lacking in your advisor. In this market climate, you cannot afford to leave your investment portfolio with an advisor whose technology and risk-management tools are out-of-date or non-existent. 

This year marks the sixteenth anniversary of our Long/Short Portfolio, a development we owe to the late Sir John Templeton, who convinced us to establish a more market neutral positioning prior to what would become a decade of significant volatility.

3. Reactive Investing Rather Than Proactive – Your portfolio will constantly be on the precipice of disaster if your advisor is constantly in reactive mode. Many of the new clients who have joined us since the market meltdown of 2008 were alarmed when their former advisors only began discussing risk-management ideas after their portfolios had declined 30% or more. Such reactive maneuvering is akin to the old axiom “closing the barn door after the horses are already out.” Despite the numerous twists and turns the market has made over the past thirty years, such reactive decision making is still very common. Remember, it is hard to reach your proactive portfolio goals when you are constantly reacting.

4. Buying All at Once – This is another methodology we saw trust companies, brokers, money managers and banks doing thirty years ago which is still prevalent today. If your account has same day blocks of purchases, you have to wonder – was that day the best day to buy every one of those positions, or is it a matter of convenience for the trust company, broker or advisor? The odds are that not all positions, sectors and asset classes present the best buying opportunity on exactly the same day or week.

5. Mirror Investing – If your advisor has everyone in the same positions with no consideration of objectives or type of account, it is a big red flag. Similarly, advisors who create three or four different baskets to give only moderate real variations for clients are typically not doing their best to serve their clients needs.

6. Asset Location, Not Just Allocation – Lost in the shuffle is the fact that asset location can have just as much of an impact on your overall returns as asset allocation. When your advisor places a tax-inefficient investment in your taxable account, as opposed to your tax-advantaged retirement account, it demonstrates a lack of care or understanding on their part. Treasury Inflation Protected Securities (TIPS), a popular inflation fighting bond offering, is a perfect example of a commonly misplaced investment. The inversely linked U.S. Treasury C.D. mentioned in our lead article, as well as other income vehicles, are other examples of investments that are more efficient within a retirement plan.

7. Failure to Analyze Social Security Strategies and Complete Retirement Options – Similar to #5 above, the failure to take into account the tax picture and implications for one’s social security and retirement options can erode the overall cash flow one can enjoy in retirement. When it comes to managing distributions, taking social security and tapping taxable accounts, it is with great regularity that the decisions are made without looking at the cash flow, tax and risk management consequences of each option. This can prove very costly over an extended period of time.

8. Lack of Comprehensive Investment Strategy – It is easy to get off track without a defined, yet flexible, strategy. Many wealthy investors are looking at multiple sources for investments, and thus, suffer from the lack of a coordinated effort that complements specific assets and liabilities. All too often, these investors’ failure to coordinate exposes them to a much greater likelihood of disappointment.

9. Process Over Results – Investors have repeatedly succumbed to emotional investing, “following the herd” mentalities and other techniques without regard to any consistency or strategy. Some advisors dress up their expertise with captivating and elegant phrases that many times reassures investors without any bottom line substance.

10. Failure to Gain Transparency into Costs, Risk and Performance – There are three major components to every investment: performance, risk and cost. Investors should have full disclosure and transparency for all three in regards to all of their investible assets and savings. Keep in mind, you want total costs (fees, commissions, spreads, etc.), risk adjusted performance and net after-tax results, while always looking at the worst case scenario before making any investment.

We received various versions of the above paraphrased comments over the past few months and thought it was interesting that Peter Schiff’s firm has many unsatisfied clients despite his words of warning. It seems his money management side was highly exposed to international equities and this combined with losses from the strong U.S. Dollar resulted in losses of 50% or more in accounts managed by Euro Pacific Capital – Schiff’s firm. According to the Wall Street Journal (1/30/09), this article only confirms some of our thoughts at the time we received several of the above referenced well wishes.

After our warnings about global equity markets back in the summer of 2007, we were constantly getting inquiries as to how long these dire times would last. Many times we were asked what inning were we in and our response was that subprime’s ripple effects would be much more pervasive than anyone expects. We saw many new portfolios taking too much risk (emerging markets, financials, etc.) and heard so many stories of investors being talked out of selling in August and September last year that we were trying to come up with a memorable way to let investors know that those advisors saying just ride out the storm or that thought the bailout was a “cure all” were well off target. Subsequent to these various positive comments with the bailout, we felt compelled to respond to the what inning are we in question regarding the stock market sell-off with the statement “…we are in the 9th inning”, which after our words of warning for the previous 16 months brought on a sigh of relief only to follow it with – “the only problem is no one told investors that we are in a doubleheader.” That is what we were seeing in 2008, the second game of the doubleheader with unemployment rising and earnings reports disappointing. In other words, we felt in early October that expectations were still too high and investors still did not understand the extent of our problems and how they would negatively affect the global economies.

 It is just as important to invest in the right companies as it is to avoid the “bubble” areas of high risk. There is a trend in investing to buy a little of everything with Exchange Traded Funds (ETF) & asset allocation programs blanketing investors in every asset style known to man. What makes this worse is that many times there is no cash component to mitigate risk when valuations are excessive. Typical asset allocation models may work in generally rising markets and periods of minimum volatility but fail during periods of market extremes. Assets are simply spread out to the largest or highest yielding companies (or in some cases every company) in a particular category dependent on the ETF’s specific composite. It is important to be diversified and take a long term approach when it comes to investing, but in many ways these programs remind us of the statement “Diversity is a hedge against ignorance” – in other words, you can be over-diversified to the point of deworstification. The best current example we can give you of this is in regards to the financial sector and response to the previous question. Goldman Sachs and J.P. Morgan are up 74% and 8% since we highlighted them on November 21st, 2008. This is the same time the Vanguard Financial ETF was down 4% (it was down 25.7% for the month of January alone). That is what we mean by being in the right areas, so if you venture to higher risk sectors with lesser transparency, it is particularly important to be selective in this challenging environment. Alan B. Lancz & Associates will definitely not always be right, but when we recommend the higher risk areas into panic selling, we want the potential of high reward by a solid management team, rather than owning a composite of nearly all companies in a sector without any differentiation to balance sheet strength or quality of management.

In November 1999, we did a feature article entitled “What Ever Happened to Tech Wreck”. We warned about the risk in the tech/telecom sectors and how profit taking was in order. Many investors picked up on our tech warning when the markets were hitting daily new highs, but many others did not. In fact, the most frequent comment we heard into the bear market of 2000-2002 was why we haven’t heard about you before. So in May 2007 when real estate and utilities were hitting record valuations each day, we coordinated a visit to the N.Y.S.E., while meeting with clients in the New York area, to discuss Strategic Profit Taking on CNBC. We followed up that segment with several subsequent remote interviews warning about the ripple effects of subprime and tried to make sure our warnings about the much loved financials were exposed to an even larger group of intelligent investors than our warnings on technology back in late 1999. The global media’s interest in our independent research and insights is definitely appreciated, and in a time of volatility we tend to receive many more requests.

 There are many advantages to having an individualized account that is customized to your specification as opposed to a mutual fund. One critical advantage is that individual accounts have the ability to be extremely tax efficient, a problem that many mutual fund investors discovered in after years of decline) when they lost money on their funds yet still owed taxes on these funds. We can lower tax liability much easier than a mutual fund; this is a big reason we have never set up our own mutual fund. Another reason is that we feel risk adjusted performance can be enhanced because we do not “pay up” for stocks and we are very disciplined as to our price parameters. The specifics can best be detailed after a private meeting to assess what you are specifically looking for with your retirement plan, trust, or personal assets. Many times, pooled investing is vulnerable to investment inflows and outflows which would not hinder customized accounts.

An advisor once introduced us to his client to directly work with the decision makers thus avoiding the middle man. If you go to most managers directly, you receive direct management rather than boilerplate concepts that can prove costly. Plus the managers can then trade with whom they wish, as opposed to solely through the broker who refers clients to the money manager. It is often not in the best interest of the investor to have every trade mandatorily placed with the same brokerage firm and that is why we do not accept such “brokerage directed” accounts. All the above are aspects to consider when looking towards investing your retirement or personal assets.

When placing assets under our management, your money is protected via several methods. First, we never take custody of clients’ assets, utilizing nationally recognized and financially sound brokerage firms or banks to actually hold your assets. You should never make your checks payable to the investment advisory firm. Secondly, your account is insured from fraud and theft up to $10M (with more protection available if needed). This includes $500,000 protection directly from the SIPC. Higher insurance levels are easily applied through large third party insurers through the third-party custodian utilized for your accounts.