Financial Advisor Advice

I received a letter from a reader about personal investing:

“Dear Chris, My husband got me a fake Gucci bag for Mother’s Day, and I really appreciated the sentiment, but had a revelation. I’m tired of the knock-offs…I want to be able to afford the real thing sometimes. Do you have any advice for me about how to invest my money? (I earn $60K annually). How do I find an investment advisor? Is online stock trading advisable? Thanks for any advice you can send my way!”

I used the “Answer” feature at LinkedIn to access advice from people who know about investing. The following is a selection of the responses I received.

Les DeGroff:

The first question, is not what you make, but how much you are going to save and invest.

One starting place, perhaps is to read a bunch of online columnists, perhaps starting with those accessible (for free) on MSN… for the described situation, perhaps start with Liz Pulliam Weston who focuses on women in a variety of situations getting educated and taking control of finances.

I would strongly suggest, doing reading, multiple sources, books, online, magazine before attempting to work with an investment or financial advisor. I will go out on a limb here, three quarters of those giving advise will not have your interests in mind, it may be an expected conflict, like insurance sales folk, Ameriprise advisors or full service brokers or it could be worse, crooks, fraud, leeches. Your really need to know a good bit before you work with advise.

My top 7 bits of lore, all borrowed from multiple sources.

First do a simple savings, in a bank or credit union. Primary objective is to have a liquid fund for emergencies, secondary objective to build up enough to be a good customer for initial investing, even though you can start with small amounts, several thousand is a better start.

Two, considering entire life, security investing. Learn about, take opportunities to save for retirement with 401 K and/or IRA. Generally you should think of these a locked away until your 60 years old.

If your firm has a match on 401k, make sure you collect it. Two great advantages of the 401K is that it starts out before taxes so your pay doesn’t go down for as much as you are saving and that taxes are defferred until you start taking money out.

Three, be very careful, if something sounds too good to be true, it probably is a scam. Conservative investments, like CD’s and good bonds are getting up around 5.5 percent per year, Stock trading if well done, tends to AVERAGE 8% but that is with good years of 10+% and bad years when you lose money. 30% per year, 300%, run to the bank and lock up your money, these are frauds and lies.

Four, Consider your objectives and time frames, is the objective to save for certain purchases or to develop investments that give you a flow of money. There are a couple of good works, the only title that comes to mind is “The millionaire next door” about saving, investing but not attempting to live an upward spending life style. Ms. Weston has some good columns about working on life style. A key concept, one of the best ways to become financially rich, a millionaire is to live below your means.

Five, a book worth reading and thinking about (but IMO only this one book, ignore rest of the authors works) is “Rich Dad, Poor Dad” . The two ideas I think are worth taking from it are that working for your self, having a business or several is a more likely way to get rich than working for others, and that careful real estate investments also can work for you.

Six, Consider the indirect investment in your self, are you educated enough to do well in the future in what you want to work at. This might not take any money if you can get knowledge from the library and net. It might be paid for by your employer or it might be a big expense of going to more formal education.

Seven Consider in all of this your life and its values… the Gucci at 75 years old probably will not be as exciting as living a good (but frugal) life today. This can also come into the “live below your means” concept, many of the good things in life are not necessarily expensive. Creative endeavors, perhaps including creation of your own fashions can be good.

🙂 I suspect that if you dislike the knock-off, you are not really in the mood for home made, but consider how much you can save and invest.

Robert Geurden:

I’m not an investment advisor, but I run across them every day in my practice. Some are excellent, and some are dogs. However, my initial reaction to your reader’s letter is that she is barking up the wrong tree (to continue the canine metaphor). Unless a person is really lucky, such as getting into a start-up company that makes it big (Google being the most recent example), investments will not make a person rich over-night, or even within 2-5 years, and any “investment advisor” who promises otherwise is a fraud. A good investment strategy is one that bears fruit over the long term (20-30 years). There are two very simple components to a good investment strategy: 1) Live within your means; and 2) set money aside into well diversified investments on a regular and continuous basis. We can all control step no. 1 (although it is harder to do so for people who are focused on high-status goods). A good investment advisor should be able to help select and monitor step no. 2.

I definitely do not recommend online stock trading – except for those few people who have the skills and knowledge to understand the companies whose stock they are purchasing, online stock trading (as it is usually practiced) is merely another form of gambling. Also, there are a number of tax risks associated with it. A few years ago, a client who had done his own online stock trading came to me because his tax return had been audited by the IRS. He had inadvertently violated the “wash sale rules” (a tax rule which denies capital losses if the same stock is bought, sold and re-purchased within a 60-day period) and his accountant had failed to realize that he had done so and not reported the sales correctly. He did have to pay tax penalties, and it took about 3 years and several thousand dollars in legal and accounting fees, to get his returns cleaned up.

If your reader wants to improve her financial situation (though I note that $60,000 per year is well above the national average income) she should either improve her skills and get a promotion or new job or start a business, which, as a previous person wrote, could include rental real estate (although rental real estate has its own set of risks too).

I.R.S. Cir. 230 requires that I inform you that none of the tax information contained in this message constitutes a “covered opinion” and may not be relied upon by any taxpayer in avoiding any U.S. tax penalties.

Mitch Muroff:

Get the book “What Wall St Doesn’t Want You To Know” – it’s the best book on investing I’ve ever read and advocates constructing a portfolio of low cost index funds. It explains how to do that. I can also offer an advisor who I would recommend based on that book. First, though, it is good to determine what approach one wishes to take then find an advisor who matches the desired approach. This book helps with the first step.

Ann Glenn:

Check out for excellent investment information! Also, buy the book “Wall Street Words” an essential reference guide.

Loren Cheng:

I’d highly recommend “The Wall Street Journal Guide to Understanding Money and Investing” (Kenneth and Virginia Morris). It’s an excellent book for people just getting into investing; it takes the time to explain in very clear terms and diagrams the fundamentals of personal investing. I found the thought of investing arduous until I read this, realized it could be very straightforward, and began investing in stocks and mutual funds.

Rafael Vilagut:

Best things in life are free! Get “How Money Works” or enter web page of Primerica Financial Services, and read and learn how to: 1.- Pay yourself first, 2.- Adjust your priorities, 3.- Avoid credit trap, 4.- Take control, 5.- Realign your assets, 6.- Buy Term and Invest the Difference philosophy, etc. Primerica | Primerica: How we help

John Reinke:

With all due respect, this is a train wreck. And, you’re in the middle. This person is going to be disappointed, unless she’s wildly lucky to pick the next Microsoft / Google / Berkshire Hathaway, and subsequently be mad at you for bum advice. The market is a rigged game and online trading is a fast path to the poor house.

Earning 60k per year, the person probably can’t (shouldn’t) even get a trading account because of “suitability rules”. There’s a reason why traders in big firms get paid lots of money and for an amateur to think they can compete is absurd. I’d suggest that they shelve this idea as a path to wealth.

If the writer wants to be truly wealthy, they need to give value to others in a way that is unique to them. It could be buying real estate and renting it. She will have to have a laser like focus on value and positive cash flow. Perhaps she can own her own side business. Maybe she can provide a service.

At 60k per year, I’d urge her to put her discretionary income into a tax deferred savings plan like a RothIRA in Vanguard Mutual Funds, and seek to increase her earning power. In thirty years, she may not be buying Gucci bags, but she won’t be eating dog food either.

I believe that the model for success NOW is: (1) ruthless financial discipline to capture part of your earnings while making every dollar work hard; (2) seek a white collar job; (3) have a blue collar skill; and (4) create one, or hopefully more, profitable web based businesses.

Then, she might become truly wealthy. If she has a husband who tried to make her happy, then she’s already blessed. Part of being wealthy is not having more “stuff”. It’s valuing what the Universe has given you. It’s not about having what you want; it’s about wanting what you have.

Anay Srivastava:

Here is my thought different from others. Cost of learning and practicing disciplined investment in long term is significantly higher than using an adviser. Some institutions provide complementary financial analysis. A very nice document to have and follow. This document summarizes financial goals that includes asset management (investments). Once you have this document shop around for a well informed adviser – doesn’t matter which institution adviser belongs to. They all have access to most of the investment solutions. With the current income you will not qualify for the risky investments like hedge funds etc. In accumulation phase maximizing savings (tax preferred), protecting principal, and maintaining liquidity should be the goal.Once your goals are defined making investment decisions are lot easier. Typically insurance companies like Met. Mass Mutual & New York life will advise also you on other necessary cost of living expenses like disability, long term care and estate planning once you get there. Brokerage houses like Merrill don’t get into comprehensive financial advising – they are asset gatherer and most of the time they will put assets into pre-canned managed money programs. Good Luck.

Richard Krasney, CFP:

Shirley S. has two issues here:

  1. How to invest her money
  2. How to find an investment advisor

First, I believe that it would be inappropriate to make investment recommendations without determining what Shirley’s investment objectives are, her time horizon, risk tolerance, and other personal relevant factors. An investor’s goals should drive the investment strategy and be executed within the framework of a plan. All financial planning comes down to “How much, by when”. Once that question can be answered, then an investment strategy is designed around the individual’s objective.

There are a variety of ways to find an investment advisor and a number of things to consider when searching for one.

The first thing to consider is deciding what type of advice you are looking for. Essentially, there are two main groups of people who provide advice. The first is a Registered Representative (stock broker), and the second are Registered Investment Advisors. I believe that the most critical factor here is to ask about how each person you are considering working with is compensated. Many Registered Investment Advisors work on a fee-basis, rather than a commission basis. Working with a fee-based individual, the advisor’s compensation is paid by their client, not by the investments that they recommend. Registered Investment Advisors can receive commission on products as well, so it is important that you ask questions to understand how they will be compensated. I believe that this is one of the most critical questions that a prospective client can ask, and critical that they understand. Other compensation arrangements include annual retainer, and hourly fees. Before interviewing any advisor, it is a good idea to be clear on exactly what kind of assistance you are looking for so. There are many kinds of services available.

Another way that people can get recommendations are to ask your accountant or attorney for a recommendation. This is one of the best ways to find a reputable person.

There are several online resources for consumers to search. The Financial Planning Association, Certified Financial Planner Board, and National Association of Personal Financial Advisors are all excellent resources.

There has been recent legislation that is having a major impact on the investor consumer protection laws in the US. Doing a search on Google for “Broker Dealer Exemption Rule” will provide consumers with a wealth of knowledge on the impact of the consumer protection standards affecting investment advice in the US.

Feel free to email me directly if you have additional questions: rkrasney{at}krasneyfinancial{dot com}

Ed Green:

Lots of good book suggestions here (all of which will, I presume, nix the idea of online trading for a rookie). I’d recommend starting with the classic “The Wealthy Barber” before any of the nuts and bolts types. There’s a lot she can do before paying an adviser makes any sense.

Keith Elis:

The best way to find any sort of professional advisor (lawyer, accountant, broker, real estate agent, etc.), is to ask the people you most respect and trust for names. Think of the people you know personally who you would most like to emulate, or who you most admire, and find out who they work with. Then call around, set up appointments and get to know the individuals.

Some people will disagree with me, but you can also save yourself a lot of trouble by sticking with fairly well-established firms whose target market is close to your demographic. The brand name of the firm is certainly not the most important factor. But the more clients a firm has, the more people have voted for the firm with their hard-earned money. This is not an irrelevant fact.

It’s pointless to rely on regulatory or consumer protection groups to protect you from sharks. Your best bet is to stick with referrals, established firms, and trust your instincts. The person you eventually decide to work with must be *your choice* — someone you like, someone you trust, and someone who you believe can help.