Selecting 'your' financial advisor

During my visit to Chennai earlier this week, I met a motley bunch of people as part of my work. One who wanted to understand how a financial plan would help him. There was a couple whose plan was made, but who were contemplating whether the fees for executing and managing their investments would be justified. Then there was a young business owner who wanted to make a quick return on his stocks. And a man who had retired early, at peace with himself and getting set for a long sojourn to the foothills of the Himalayas.

At the end of day, I realized that each one of them was interested in a relationship. They wanted someone they could talk to � who would understand their dreams and help make them a reality; who would reassure them that reaching a future goal was within reach with discipline, no matter how insurmountable the odds.

Financial Planning: An Art or A Science?

I am sometimes asked whether financial planning is an art or a science. The answer � not a diplomatic one � is that it is a bit of both: a science, as it requires the study of financial products and complex calculations; an art, as it requires the understanding of human behavior and financial psychology. The number crunching or competency test becomes the entry gates through which the relationship is started, and is like the compulsory question in your examination: there is no choice other than being upto speed with the latest knowledge in the field. However, the strength of the relationship will be determined by the way you deal with the client, hold his hand during times of uncertainty and help him achieve his goals.

Look for an advisor in the Long Run

For you to get maximum value from your advisor, you should be in a position to share with him your concerns, needs and desires. This can only happen after you develop the trust in him and his advice. But it surely takes time. The competence that the advisor needs to display will extend beyond just understanding and explaining of financial products; it will! include understanding of operational procedures especially in resolving issues.

For example, a client may have multiple demat accounts and may be delaying closing them because he has to dispose off the shares that are held in them (possibly at a loss), and he imagines that he may need to physically visit the demat offices to shut these accounts, for which he does not have the time. As an advisor, I must not only recommend whether the share should be held or sold, keeping in mind his total portfolio, but also assist him in the closure of the account.

The Past Experience of the Advisor

Everyone needs a financial advisor. But how do you select the one that fits your needs. Here, then, are a few questions that you can consider before selecting your advisor. How long has the advisor been in business?  How many market cycles has he seen? How many clients does he have? And how many of his clients of 3 or 5 years ago are still continuing with him? Can he give references of a couple of his clients, preferably at the same age and status in society as you? Does he concentrate on a particular segment of clients: only retirees, only IT professionals, etc? What is the organizational back up to ensure that the advisory business will remain a running entity? May be, there should be legislation to define advisors and an audit or rating system in place to ensure that you are not misled by your �advisor� any more.

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Ways to Protect Yourself and Your Portfolio

Often, when faced with significant losses, some investors become rattled and shaken, maybe even frightened away from investing entirely, but now Norman Rothery of Globe Investor has some possible ways to protect yourself and your portfolio.

The sharp smell of singed electronics reminds me of a conversation I had, in a physics lab, while fixing a distressed piece of equipment. My colleague and I talked about his encounters with the stock market and the fact that his portfolio was also in dire need of a tune-up.

He first got into the market in the mid-1980s after stocks had advanced smartly. But his resolve was tested in late 1987 when the S&P 500 suddenly lost just over 20%, on what became known as Black Monday. The plunge scared him out of stocks.

But the 1987 crash turned out to be a temporary blip in a much longer bull market. These days, it's easy to wonder what the big deal was all about, even though the crash was quite worrisome at the time.

Despite his losses, he returned to stocks after they recovered. Alas, once again, his timing wasn't great because he sold shortly after the recession hit in the early 1990s.

His unfortunate tale is hardly unique and many others have experienced similar bouts of poor timing in more recent times. It's a pattern that can be seen in the difference between mutual fund returns and the returns earned by mutual fund investors.

Mutual funds report performance figures based on the assumption that an investor puts all of their money into the fund at once. The money is then left there untouched and any distributions are reinvested. Technically speaking, fund returns are time-weighted returns.

However, most people put money into a fund, and take it out, in a lumpy fashion over time. Such changes must be taken into account when calculating the returns for an individual investor.

Similarly, to get a sense of how a fund's investors have done over all, it is important to take into account all of the cash flows into, and out of, the fund. Doing so results in what I'll call investor returns.

The difference between fund returns and investor returns is a measure of how well investors have timed their buying and selling.

Morningstar looked at the timing issue by studying funds offered in the United States over the decade ending Dec. 31, 2009. The results were not pleasant.

Consider the plight of technology funds, which fared particularly poorly after the Internet bubble collapsed in the early 2000s. As a group, they posted average annual losses of 6.9%.

But much like my hapless colleague, investors in those funds fared even worse with losses of 10.9% annually. Bad timing cost them an additional four percentage points a year.

The decade was hard on most stocks and the average US stock fund posted positive annual returns of only 1.6%. However, the average investor experience was even worse. They picked up gains of only 0.2% annually.

Given the large difference in results, it makes sense to look for ways to help shield investors from their own poor timing habits. It's a thorny problem that is hard to resolve completely. One potential solution comes in the form of the humble low-fee balanced fund.

Such funds hold a diversified mix of stocks and bonds. The combination tends to provide investors with a smoother ride and hopefully a little extra in the way of returns along the way.

According to Morningstar, investors seem to do well in balanced funds. On average the funds gained 2.7% annually over the difficult decade and their investors fared even better with annual gains of 3.4%.

Balanced funds offer something of a behavioral shield.

By packaging together both stocks and bonds, they help to conceal the volatility of their underlying components. It's a subtle point that reveals itself when you think about the experience of two investors who ultimately hold the same portfolio.

The first owns a low-fee balanced index fund.

The second owns a collection of individual index funds that, in total, mimic the balanced fund in all respects. While their portfolios will yield the same amount of money, they may not feel the same way about their investments.

The person holding the collection of funds will likely have a few that will lose money in any particular year. But losses tend to be quite painful, even if they're offset by gains elsewhere. They also have a nasty tendency of tempting investors to shuffle their money out of past losers and into past winners.

On the other hand, the balanced fund investor hides such disappointments from themselves. Instead they keep a firm eye on their overall performance and expose themselves to less timing temptation.

While balanced funds aren't a cure-all for the ails of market timing, they do represent a useful tool for new investors and for those who get a little jittery in downturns.

When shopping for balanced funds, it is important to keep a close eye on the fees they charge. All too many funds offered to Canadians charge outrageously high fees. Some wrap programs (close cousins to balanced funds) are notoriously expensive and tend to be sold to, shall we say, less knowledgeable investors.

To help your search, I've listed some of the best low-fee balanced funds in the accompanying table along with a few details on each fund. The table shows their annual fees (or management expense ratio) and roughly how much they invest in stocks and bonds. I've also indicated whether the fund actively picks stocks or passively follows market indexes.

Balanced funds are simple, and a little boring, but they represent solid investment options.

If I were back in the lab today, I'd suggest the low-fee balanced approach as a way to repair my colleague's broken portfolio.

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Read more from the Globe and Mail here…

Apple Investors: The iWatch Won't Save You (Now)

Following the best week for U.S. stocks since January, stocks are flat this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) up less than a point and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 11 points as of 10:10 a.m. EDT. Investors will no doubt be cheered by Citigroup's (NYSE: C  ) second-quarter results, released this morning. Citi is the third major bank (following JPMorgan and Wells Fargo on Friday) to convincingly beat Wall Street estimates, with adjusted earnings per share of $1.25 versus a forecast of $1.17. Lower credit losses and a reversal of loan-loss reserves in the amount of $784 million are more indications that the U.S. economy continues to heal.

Watching for the iWatch
It's coming -- but it could be longer than expected.

At the beginning of the month, I asked, "Is Apple's next "game-changer" on the way?" I concluded: "The evidence suggests the iWatch is on its way. If that is the case, it'll be very interesting to see what kind of market Apple can carve out/create."

In a story posted on its website yesterday, the Financial Times is reporting that Apple (NASDAQ: AAPL  ) has, over the last few weeks, begun an aggressive hiring campaign to fill out the team that will develop the iWatch. According to the report, the project is now past the exploratory phase and has "several dozen employees dedicated to its development." However, the report also suggests that the timing of these new hires is inconsistent with a launch this year, and the second half of 2014 is the likely time frame.

If that is the case, the iWatch is unlikely to be the near-term catalyst for a rebound in Apple shares, which are not much above their 52-week low -- and roughly 40% below their 52-week high:

AAPL data by YCharts.

Nevertheless, it will be interesting to see what kind of design magic Apple can weave into this "wearable technology." Although the company has not confirmed that it is developing an iWatch, I believe it is essentially inevitable at this stage. Apple's nearest rival in smartphones, Samsung, has confirmed it is developing a smart watch, and I don't see Apple simply ceding the market to Samsung without a fight. In the meantime, Apple shareholers will have to look to other product upgrades and releases for a lift in the shares.

Apple has a history of cranking out revolutionary products -- and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

Services Sector Index Slumps for June

The services sector experienced slower growth in June, according to an Institute for Supply Management report released today. The Institute's Non-Manufacturing Index dropped to 52.2%, down 1.5 points from May's 53.7%. Analysts were entirely off the mark, having expected expanding growth in June to 54.5%.

An above-50 rating signals overall expansion, and the services sector has managed to increase its economic activity for 42 consecutive months. The index is composed of 10 components, with five decreasing in June.

For May, the largest drop is also the most significant. New orders, a component that is interpreted as a proxy for economic expectations, plummeted 5.2 points to 50.8%, nearing the point of contraction. New export orders took a smaller 2.5 point dip but ended up in the red at 47.5%. As a sign of some longer-term optimism, the employment component registered a solid 4.6 point increase to 54.7%. 

Today's report comes after ADP announced that 161,000 services sector jobs were added to the market in June.