Talk About Money: Choose an adviser wisely

When I was working as a grocery clerk in my late teens, I saved up $1,000 and opened an account with my father’s stockbroker in Los Gatos. When he asked about my goals, I said, “Just find me something that will go up.”
His name was Sam Weisberg, and he was an old-fashioned broker. He pored over annual reports, visited corporations and questioned their managers. He built long-term positions in great companies and long-term relationships with clients.
When you bought or sold something he recommended, you paid a commission. That compensated him for the time, effort and expertise that went into the recommendation.
In recent years, that business model has come under attack. Investors looking to choose a financial adviser have been steered away from commission brokers and toward fee-based advisers, who are paid either a percentage of the assets they manage or by the hour.
But are you, as an investor, really better off with a fee-based adviser, rather than one who is paid by commission?
The rap against commission brokers is that they have a conflict of interest: The more you buy and sell, the more your broker gets paid. Some brokers, perhaps under pressure from their firms to increase sales, push clients to buy and sell unnecessarily, just to generate commissions — a practice known as “churning.”
Regulators caution firms about churning, and brokers guilty of it have been drummed out of the business. Nonetheless, it still goes on.
Now, as clients have gravitated toward fee-based brokers, a new problem has arisen. It’s called “reverse churning,” but it could also be called adviser neglect.
If a broker is paid, say, a flat 1 percent of the assets in a client’s account that holds stocks and bonds and a year or two goes by without any buying or selling in that account, regulators are starting to ask, “Is the adviser paying attention?”
For an adviser to call a client and suggest changes to a portfolio requires time and effort, and there’s a risk that the changes might be a mistake. If the adviser is paid the same whether he or she makes changes or not, the path of least resistance for the adviser might be simply to let things be. But that might not be the best route for the client.
I’m not saying a buy-and-hold strategy is bad. The greatest investor, Warren Buffett, when asked what his ideal holding period was for a stock, replied: “Forever.” He tries to find undervalued companies with great management, buy their shares and never sell them.
The point I’m making is that there is no easy formula for selecting a financial adviser. A fee-based adviser is not necessarily better than a commission adviser. In my practice, I use both models.
What investors should look for is an adviser with experience and training not only in picking securities, but also in tax and estate planning, someone who is looking to build long-term relationships with clients and isn’t afraid of hard work.
And, ideally, one who’ll find you something that will go up.
Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or [email protected].