This was the title to a recent article in Consumer Reports Money Adviser newsletter. (This is a newsletter to which I subscribe and highly recommend it.) The article lists seven reasons you may want to fire your financial adviser right now:

• High fees are eating into your returns.
• Investments aren’t keeping up with benchmarks
• She/he sells you products you don’t need
• He/she uses a one size fits all approach to investing
• She/he doesn’t ask about long-range plans
• He/she isn’t transparent about mistakes, fees or conflicts of interest
• She/he doesn’t understand taxes

I agree whole-heartedly about these factors. If your adviser fails on even one of these items, fire them immediately. Heck, I see advisers that fail on all seven of these criteria. I don’t know how they sleep at night, but that’s not my problem.  Of course, we make the grade on all of these factors. It’s just nice to see that Consumer Reports is endorsing the approach we use here at Juetten Personal Financial Planning, LLC. We sometimes feel like we’re the only financial advisers out there who pass this test. There may be more, but not many. If you need to fire your adviser, call us first.

One of the challenges in the financial services industry is the many different names that advisors use to describe what they do. (Another major issues is the confusing array of initials advisors use to convey their supposed expertise, but that’s a topic for another day!). Various advisors describe what they do as financial planning, financial management, financial advisory services, investing, investment management, portfolio management, and wealth management. “Wealth management” was first used as early as 1933 to describe a variety of services provided to wealthy families including investing, estate planning, tax planning, and personal insurance.

I’d like to suggest that we all need to think of managing our wealth as an important job. After all, people with modest incomes and relatively small portfolios consisting of one or two IRAs and a couple of employer sponsored savings plans like a 401(k) and 403(b) plan have to pay taxes, think about what happens if they die, buy auto/home/life insurance, take out a mortgage and how much to save for retirement and pay for college.

So the next time you’re thinking about your personal finances, think of yourself as your own “wealth manager.” It might change your mind set about how all your financial issues are linked together and the importance of managing them together to create the financial freedom you desire. That is what wealth management is all about.

There is at least one sure thing in investing: un-certainty. I’m reminded of this every time a client asks for a recommendation about whether now is the right time to invest. We get this question often these days after the U.S. stock market has gone up for six months in a row.

A psychologist friend of mine likes to say that people want certainty because we fear most that which we don’t know. It’s like standing in the lighted hallway in a building we don’t know. It seems much better to stand in the lighted area than to venture forth into a dark room. But progress demands taking risks and in investing, the risk is the chance that your investment might go down in value. It might go up in value too, but we fear a loss more than we might enjoy a gain. If you want certainty when it comes to your investments, keep your money in the bank. If you want your money to grow, you have to accept un-certainty.

“Even if you’re on the right track, you’ll get run over if you stand still.”

– Will Rogers

I get this question a lot these days. After all, the stock market has gone up for six months. It’s normal to ask this question so if you’re wondering the same thing,  you’re not alone. Keep in mind that the investment markets are un-predictable and therefore there is no answer to this question IN ADVANCE. Only in hindsight will we know if it was a good time to buy or sell. Better to stay with your overall investment strategy and take a long-term view of each moment.

Watching the investment markets is like watching a boy going up a hill while using a yo-yo. If we focus on the yo-yo, we’ll see lots of up and down movement. But if we focus on the boy, we’ll see a general upward movement.

Last month, I was talking with a prospective client and noticed that he held the SPDR Gold Shares ETF (symbol GLD) in his portfolio. I asked him how long his portfolio had held those shares and he replied “Several years. At least since mid-2010.”

I met with another prospective client the other day and noticed on her investment statements that she owned Apple stock (symbol AAPL). I asked her how long she had owned this stock, thinking that perhaps she had owned it for several years. To my surprise, she said that her financial advisor had bought it in the last month.

These two stories illustrate a hidden risk in your portfolio if you let a financial advisor or active mutual fund manager buy and sell individual securities in your investment portfolio. The risk is guessing wrong.

In the first investor’s situation, his advisor had bought gold in mid-2010 when the advisor had speculated that the Great Recession was not over. Since then, these shares have appreciated 17%. Not bad, except when one compares it to the return the investor would have had if he had bought the Vanguard Total Stock Market Index ETF (symbol VTI) at the same time. It has appreciated 53% since mid-2010 or three times the gain of gold.

The results for the second investor (the one who now owns stock in Apple) are un-known at this point. However the issue is the same: her financial advisor is guessing that Apple stock has been beaten down so much in price that now it’s under-valued. (Apple stock has fallen about 18% from it high-water mark last September).

The only way to avoid playing the guessing game with your money is to create a diversified portfolio of passive investments like index funds. Passive investing is based on academic research that shows investment success comes from low-cost, low turnover, consistent and patient investing. In other words, passive investing is the opposite of guessing the future price of gold or Apple stock. You choose. Which approach makes more sense to you?

“Fiduciary” is an odd word. In law, a fiduciary is a person whom the law obligates to act solely on behalf of the person he or she represents and in good faith.  The origin of the word comes from the Latin word “fiduciarius” meaning confidence and trust. The first known use of the word “fiduciary” was about the year 1641.

You may be wondering how the word “fiduciary” fits in a blog about personal finance. Just this: not all financial advisors are fiduciaries when it comes to their clients. That’s right. Your financial advisor may NOT be obligated to act solely on behalf of you or in good faith.  If your financial advisor works for an insurance company or a big financial company like American Express, Edward Jones, Wells Fargo, RBC, Merrill Lynch, or Smith Barney, they are not fiduciaries. His or her first obligation is to do what’s best for their employer AND NOT YOU!

On the other hand, if your financial advisor is a fiduciary, she/he is legally obligated to work on your behalf and in good faith. Ask your advisor if she/he is a fiduciary. You might be surprised to find out for whom they work.

Note: the advisors at Juetten Personal Financial Planning, LLC. are fiduciaries and we have always taken this role.

On May 17, 2012, public investors could buy shares in this hugely popular social media company for the first time. People were lining up to buy shares. Some investors were upset that brokers were limiting the number of share they could buy. It was a “can’t miss” opportunity. Shares sold for $38 on that day.

Facebook shares closed yesterday at $26.82 a share — a 30% decline. Try to remember this the next time you are tempted to fall in love with a stock and/or get swept up in “the next great thing/can’t miss” stock euphoria. Stock picking is gambling, pure and simple. I wish I could get people to understand that.

This is from a story reported by Reuters earlier this week.

“Hedge fund billionaire John Paulson is emerging as one of the biggest losers in this year’s gold rout, further tarnishing his once legendary status in the $2 trillion hedge fund industry.

Paulson’s $700 million gold fund lost a whopping 27 percent in April, when the price of the metal plunged 17 percent over a two-week stretch, according to performance figures provided by a person familiar with the fund.

The jarring one-month decline in the Paulson gold fund brings the year-to-date loss for the fund to about 47 percent, the source said. The fund’s losses were magnified by the fact that its bullish bet on gold was enhanced with leverage, or borrowed money, and derivatives tied to the price of gold.

Paulson rose to fame after he made $15 billion for his firm in 2007 by betting against subprime mortgages before the housing collapse. Since then, however, he has struggled to duplicate that success, and several of his portfolios have lagged in recent years.”

Here is what I take from this story. With all of the resources at his command – the best “experts” money can buy, numerous bright, young MBAs from the best schools, the most sophisticated computer software – Paulson proves again that luck is not a long-term plan for investment success. My advice: stick to an age/risk tolerance asset allocation plan. Complete it with diverse passive investment vehicles and focus on the things you can control: your work, your relationships, how much you save and spend.

Last week, the Investment Company Institute (a mutual fund industry association) published their annual look at mutual fund expenses. The ICI noted that mutual fund expense ratios are trending down. This is good news for mutual fund investors because investors get to keep what’s left over after costs.  Still, it’s distressing to see that the average mutual fund expense ratio is 1.36% (more for funds that invest in stocks and less for funds that invest in bonds).

And that’s only part of the total cost of owning a mutual fund. Commissions and transactional costs are in addition to a fund’s expense ratio. According to William Bernstein, a fund’s trading costs are roughly double its expense ratio. In other words, the total cost of owning a typical mutual fund is 2.72% (1.36% X 2). Those costs are subtracted before the investor gets paid.  If the total return for a fund is 7%, the investor actually gets 4.28% (7% – 2.72%).

Compare these numbers to the total cost of owning a passive investment like an index mutual fund. The Vanguard Total Stock Market Index mutual fund (VTSMX) expense ratio is .17%. If we double the expense ratio, then its total cost is .34%. This probably overstates the total cost because an index fund has much less turnover compared to a typical mutual fund. However, to be fair, I wanted to use the same methodology. Again, assuming a total return of 7%, the investor gets to keep 6.6% (7% – .34%).

You choose: which is better, a 6.6% or 4.28% return?

In their excellent book, Investing for Change, Augustin Landier and Vinay B. Nair divide Socially Responsible Investing (SRI) investors according to their interests. These authors suggest there are three types of SRI investors:

Yellow investors want their portfolios to be exempt from “wrongly earned money.” They don’t want to be part of activities they disapprove of or from businesses they consider unethical. For this, they are willing to compromise financial performance.

Blue investors typically want to know how much it will cost them to invest responsibly, and whether it will ultimately have an impact. They are the more practical and less “ethical” of the responsible investors. If blue investors were persuaded that SRI would not affect the way companies behave or that its impact on their portfolio performance would be large, they would look for another way to participate in changing the world.

Red investors’ sole goal is to maximize their returns. If that means being responsible, they will promote corporate responsibility. However, if that means ignoring social obligations, they support that, too. They are not “amoral” or cynical, but they usually express their values through other aspects of their lives.

The good news is that you can have a sustainable portfolio no matter what color investor you are. In the most recent data published by DFA on their two core sustainable investing funds, the U.S. sustainable fund achieved a comparable five year rate of return as the broad Russell 3000 index 6.32% per year vs. 6.72% per year for the index) and the International sustainable fund return was slightly better than the broad MSCI World (except U.S.) index.

If you’re interested in creating a sustainable investing portfolio using our “Better Planet Investing” service, please give us a call at 425-373-9393 and visit the tab on this website by that title to learn more.