Money Magazine Ask the Mole

Hop off the 'beat the market' bandwagon

The big time money managers will make some pretty lofty promises and charge some pretty high fees. But that doesn't mean they can always deliver.

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By the Mole, Money Magazine's undercover financial planner

Have future topics for the Mole to address? E-mail him at

NEW YORK (Money) -- Question: I have had several money managers over the years from Merrill Lynch, to UBS to currently Wachovia. I am paying a fee of about 1% on average but am sure there are other fees that I don't know about. I'm not sure this is working. What should I do?

The Mole's Answer: It's really easy to be seduced into going with a big firm. And those big firms will really want you if you have big bucks. Take, for example, this alluring statement:

We believe that our clients - whether institutions, individuals, or families - require more than the right advice, investments, and services. Our clients also require a profound and fundamental commitment to their long-term success.

I'm certainly not going to argue with the need for the right advice, investments and a commitment for long-term success. What I am going to argue with is how readily big firms throw these pleasing statements around, especially since they are easy to say but much harder to deliver on.

The ever-so-pleasing statement about long-term success happens to have come from the Lehman Brother's web site on the day it filed for Chapter 11 Bankruptcy. They were still preaching these sexy sounding messages as the ship was going down, much like the orchestra on the Titanic.

I don't mean to kick former titans like Lehman, Bear Stearns, AIG or Merrill Lynch when they are flat on the mat, but it does illustrate an important point. All the claimed sophistication and risk management failed to stop them from billions of dollars of exposure to the subprime market. Simply put, they bought and held notes from millions of borrowers who had absolutely no chance of ever paying it back.

Time to choose

At this juncture, you have two choices.

Choice one is to slug down some more of that Kool-Aid and pick a new firm that claims to have a crystal ball on what the next hot investments are going to be. You can stick with one of the remaining big players in the investment world or find a small independent adviser who uses award-winning research to pick and choose. Though in my view, this is a better choice for your financial adviser than it is for you.

Choice two is to hop off of the "beat the market" bandwagon and take a completely different approach. Find a financial planner that will build a diversified portfolio that meets your level of risk with the lowest costs and highest tax efficiency. Make sure your planner will assist you in achieving the discipline to help you stick to the plan.

Other things a planner may be able to help you with include risk management, taxes and even developing a plan with your estate planning attorney. They can NOT, however, help you pick the assets that will do the best over the next year, no matter how badly they want you to believe they can.

How to choose?

First, fees are important. Though you can have a really bad portfolio with low costs, I strongly believe you can't have a good portfolio with high costs. A "good expensive portfolio" is an oxymoron!

You noted you were paying 1% annually but were sure there were some hidden fees. I agree. It's important to find your total fees which include your advisor fees, mutual fund fees, hidden fees such as turnover costs, and even insurance fees. They will rob you blind without you having a clue.

Ask your prospective advisor to write down her estimate of your total fees. I recommend keeping them well under 0.5% annually, unless they are doing some major work on other areas outside your portfolio.

The best single question I recommend in choosing a planner is asking them what broad U.S. stock index fund they would recommend for you? If they give you an index fund that has more than a 0.20% annual expense ratio, then you can bet they are giving you a fund that has virtually no chance of beating the low cost equivalent. You can also bet that they are putting their interests ahead of yours.

If they pass this test, ask them some more tough questions. Always understand the strategy your adviser is using and have enough trust to listen, but not enough to ever blindly trust her or anybody who has your nest egg in their hands.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail him at  To top of page

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