Pro talk

By Vic Covey
Special to the Coastal Point

Normally, “Pro Talk” doesn’t begin with a disclaimer, but it does this month. Strzelczyk is my financial adviser, and UBS manages some of my assets. Also, UBS has “vetted” this article.

We senior Americans are facing unprecedented challenges preparing for retirement. Many companies have discontinued “managing” retirement money for their employees; the venerable lifetime annuity pension is going the way of the dodo bird; many plans have been frozen, and in all too many instances companies have unloaded their under-funded plans onto the federal government, while dropping medical coverage completely.

The other stand-by source of retirement income, Social Security, will be facing significant funding problems as baby boomers begin to retire, plus Social Security will only provide about 25 percent of your retirement income.

Defined benefit contribution plans (401-K’s, etc.) place the burden of management on your shoulders. Unfortunately, not many of us are adequately prepared to self-manage our retirement assets. The financial world is complex; mistakes can be financially disastrous. Where does one go for expert advice, how do you evaluate a potential financial adviser, and what should that adviser do for you? “Pro Talk” explores these timely issues with UBS’s Jeff Strzelczyk.

Please understand, this article is not about “how to” manage your money, nor is it a recommendation of a strategy, or adviser. We explored with Jeff what a person should know, and what questions they should ask and be asked when shopping for a financial adviser. We also discussed why you should consider using a financial adviser.

And finally, unless you are a sophisticated investor who knows the ropes, with time to actively manage, you are more than likely not maximizing returns or protecting your wealth. A good adviser can solve all these problems. In this article, you will frequently see the phrase “understanding risk tolerance”; pay close attention to the discussion of this key principle.

“Anyone seeking financial advice, or interviewing a potential advisor, should recognize that developing mutual trust is perhaps the key ingredient in forming a relationship. Simply put, if you interview an advisor and decide you do not trust that person, you will never put your money in that person’s hands.”

According to Jeff, that says nothing about a potential adviser’s experience, or the firm employing that adviser; however, if you have done your homework, there is a good chance you will know something about the person and firm or you wouldn’t be there.

Jeff’s advice: do prepare a list of questions for the adviser. Do ask about the adviser’s experience, and how much money he or she has under advisement. That answer should assist you in making a “value” judgment about the adviser’s experience and customer base. Do ask about the potential costs of managing your money. Do be prepared to openly discuss your financial aspirations and objectives.

Perhaps most importantly, spend a lot of time discussing your “risk tolerance,” since the potential to lose a lot of money does exist. Do discuss your time line for investing and ultimately retiring. Your plan should be very different if retirement is coming up quickly, versus a longer time horizon for such a major event. Do remember that in any circumstances, being prepared for financial independence requires discipline and a clear understanding of how much money you will need to maintain your life style.

Jeff pointed out that rising cost of health care, energy, taxes, and that age-old nemesis, inflation, now suggest that your retirement income should be approximately 85 percent of your working wage.

“Look at your activities, the cost of those activities, housing cost, and medical coverage expenses very carefully. Then ask yourself whether you plan to make major changes to your life style, or continue living as at present. Significantly, medical costs alone will eat up 13 percent of your total income, and those costs are rising twice as fast as inflation,” he advised.

Why use a professional adviser? Jeff made this very insightful observation: “A major difference between managing your own investments and having a competent adviser manage for you, is that it takes the ‘emotion’ out of the equation.”

Personally, I wish I hadn’t fallen in love with LU — Lucent, for those of you unfamiliar with stock symbols.

Jeff went on to describe investment alternatives that you should thoroughly understand and discuss. “Generally, there are three major risk/return options. Each option has a significantly different potential outcome. They are Aggressive, Moderate and Conservative. Yes, there are variations on the themes, but in reality, those are the choices.”

Very aggressive strategies can yield outsize returns or losses. Are you prepared to see your portfolio decrease 25 percent in a bad market? If not, you should avoid a very aggressive strategy since statistics show that short term losses can be that high and possibly higher.

“A moderate strategy will still entail some risk, but over time, should yield a good return, however, this approach can still yield losses in any given year.”

Want safety above all? “A conservative strategy is safe, reliable and when properly invested, will always yield positive returns.” Those returns will still fluctuate, and may not provide the results needed to fund your plans for the future.

Your adviser must understand your risk tolerance; however, you must understand it first. Spend as much time as you need on this critically important issue.

Experience has proven to Jeff that “achieving an understanding of risk tolerance will determine, in large part, the success or failure of the relationship with your adviser.” “Most people do not understand their level of investment risk tolerance.” He cautions, “Be honest with yourself and the adviser when developing your investment profile.”

My suggestion to you is don’t pretend to be a riverboat gambler if you stuff money under the mattress and are nicknamed “Scrooge.”

What should a financial adviser do for you, aside from charging you fees, being honest and protecting your money?

First and foremost, develop an asset allocation plan. Set a timeline for the investment of your money to achieve your goal. Determine your liquidity needs. Evaluate and understand your risk tolerance. Finally, balance the allocation of your money in various assets classes to reduce risk and fluctuation.

The bottom line is to accumulate the wealth needed to fund your retirement, while maintaining the asset base. Remember, the withdrawal rate versus income generation determines how long your money will last. A 5 percent annual withdraw is a good rule of thumb, and should allow your account to keep up with inflation.

Getting specific requires some preparation; Jeff offered a couple of questions you should ask regarding an adviser’s philosophy and investing practices.

“If your adviser is investing in stock and mutual funds, how many positions will he or she typically take? The answer is that for stocks, 25 maximum diversified positions will spread risk adequately. Beyond 25 will not add to diversification. If mutual finds are the preferred vehicle, eight to 10 well-diversified funds are entirely adequate.”

When does your adviser make the decision to “pull the plug” or re-evaluate investment choices? What about his or her “sell discipline”? In particular, Jeff watches mutual funds closely for changes in managers. A new manager may alter the fund’s composition, but most importantly, what is the manager’s history and performance?

Does your adviser set targets or objectives? Since the market cycle is typically three to five years, your adviser should be able to identify where the market is in the cycle and the relative upside and downside potential before committing your money.

What about the firm your adviser works for? Remember, your money is in that firm’s control while being invested or reinvested. Be absolutely certain the firm is reputable, financially sound and well managed. How can you check? Ask the adviser to provide financial reports and market reports, and how you may check out the firm with the FTC or federal banking sources. Explore whether there are any actions pending against that firm which may create doubt in your mind. “Buyer beware” always applies.

Ask what the firm’s conflict resolution policy is, being sure to understand your rights should a problem arise. Do you understand “arbitration”? If not, ask for an explanation.

What are some of the pitfalls encountered by those self-managing retirement funds? Jeff offered some examples, first citing a study of college professors.

“This group essentially managed their money just like other everyone else. They selected three or four mutual funds and let it ride. They failed to reallocate assets’ classes over time, thus ending up with outsized risk exposure in some areas — a basic mistake which can kill you in a down or up market.”

Expectations rise with an up market and fall with a down market; however, usually what goes unrecognized is, “the key to successful investing is the time horizon.” On market sentiment, “Negative sentiment is the best indicator of buying opportunities.”

“Over an extended period, market timing is impossible.” And finally, “Individuals frequently act contrary to their best financial interests,” Wow. Does that one ring a bell?

I suppose that no money guy can avoid quoting “The Sage of Omaha” at some point in an interview. Jeff was not an exception as he offered his favorite: “Warren Buffet is famously quoted: Be greedy when others are fearful. Be fearful when others are greedy.” Excellent advice.

Oddly, as I was writing this article, a most inane picture continued to cross my mind. That picture was of Scrooge McDuck, Donald Duck’s rich uncle, driving a miniature bulldozer around in his vault arranging vast mounds of money. I guess you now know what I dream about. And I hope Jeff reads this article.