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Choosing Shampoos and Financial Advice By Stephen J. Butler

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Many people have the impression that financial services are like shampoos. When you get beyond the marketing hype, all are pretty much the same.

Unfortunately, buying investment services is not as simple as buying shampoo, and there is much more at stake than avoiding split ends. A recent experience illustrates the extent to which bigger isn't necessarily better. And, you often have to beat the bushes to find quality advice.

A reader emailed me to say that they had a high six-figure account balance in their retirement account and that they needed to find the right institution to help them manage the money. They had checked in with Fidelity, Merrill Lynch, and Washington Mutual (the bank; not the fund of that name.)

All had recommended a mix of investment types that reflected a certain level of conscientious and informed thinking on the subject. While Fidelity and Washington Mutual suggested mutual funds, Merrill Lynch emphasized that such a large amount of money would be better served by individual stocks that would be managed by someone from their list of managers. This would be the Merrill Lynch wrap account approach that admittedly offers the advantage of being able to control when taxes will be triggered. At 2-3% per year, however, it is expensive, but its enormous popularity across the country indicates that it is meeting what many people feel are their needs. Controlling and limiting tax hits can easily turn the higher cost into a good value.

I suggested that a fee-only financial planner might be a good alternative that seemed to be missing from the list of alternatives. A planner who charges a flat fee or even a percentage of assets might be able to steer his or her client toward a cost-effective investment format that would more than compensate for the planner's fees. With high six-figure balances, this investor qualifies for Vanguard's Admiral series which only charges 12 basis points. That's $120 per year for a $100,000 investment. Even better advice would result from a planner who assists at assembling some combination of stocks purchased through Buyandhold.com that approximate the performance of the S&P 500. Professional money managers estimate that this can be accomplished with about 20 stocks.

The disadvantage for many people is that they have to write a check for the planner's fee on a regular basis. Unlike the brokerage firm that just deducts fees and commissions automatically, this bill-paying format prompts many investors to continually revisit their relationship and sometimes end it sooner than they should have.

Sometimes planners earn their fees by encouraging someone to make no change in their investment mix. It's like Clark Clifford, the late Secretary of Defense and high-powered Washington lawyer who once told his client to not say anything. For this, he sent a bill for $10,000. The client complained and said that for $10,000 he should at least be told WHY he should keep quiet. Clifford replied, "Because I told you to," and sent him a bill for another $10,000.

Good advisors can perform the same function. An acquaintance with a large portfolio of inherited stocks she had owned for fifty years, and most had never been sold or traded. For the most part, the stocks kept pace with the market because they were the market or at least the Dow. Her advisor for most of those years charged a half percent, and earned his money during the bad years when other advisors, standing to benefit from a sale or a trade, would have taken advantage of any normal client's urge to panic. While one half percent per year sounds like a lot for doing what appears to be nothing, it was undoubtedly a good value in this case.

So, turning to a major financial institution just because they are large does not necessarily serve the needs of many investors. In the end, you may depend on a large institution to house your money, but choosing where it gets invested is a critical step that can benefit greatly by some input from an independent advisor not beholden to any single institution. Firms like Charles Schwab owe their success to the independent financial planners that have brought their clients to Schwab for stock and mutual fund investing. The advisors are copied on all transactions and use Advent or Centerpiece software to generate elaborate performance reports.

The best way to get started is to ask an older relative, friend, or your CPA if they have some referrals. CPA s are good referral sources because, by background and temperament, they are conservative. How many wild and crazy CPAs do you know? According to one study, CPAs have the highest IQs of any professional group. The last thing they ever want to experience is being tarred by the same brush as that of an advisor whose clients have had any reason to complain.

In the end, whether working with a financial planner or an employee of a major institution, the quality of the relationship you have with that person will determine the level of success you experience over the coming years. If you sense that your advisor is offering advice they would give to themselves were they in your situation, then you are dealing with a true professional. The older we get, the more we depend on our intuition to tell us who to trust.

So, take your time if you're looking for help. Do some research and talk to a number of people. In these whipsawing markets, there's certainly no hurry. Nobody has the clairvoyance to know what will be happening in the immediate future. As J.P. Morgan said when asked, "The markets will fluctuate."

In the NBA finals, Kobe Bryant and Alan Iverson got into a little spat at the end of game five. Asked about it later, Bryant said, "It's nothing. It's just basketball." The same can be said for all the factions competing loudly for your investments. "It's just business." Choosing an advisor and financial institution, in the end, is a personal decision that's a little like choosing shampoos. Find one you are comfortable with, apply some common sense, and be reasonable with your expectations.

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.