RECOMMENDATIONS FOR OUTSIDE ADVISERS:

Cornerstone exists to provide education and recommendations for individual investors.  We believe that it is possible for individual investors to function on a Do-It-Yourself basis so long as a disciplined process is implemented.  The advent of Robo-Advisery services makes the Do-It-Yourself mode even more effective.  Nevertheless, many individual investors would benefit from an outside adviser.  A good adviser can provide a combination of sound investment advice and financial planning services.

For individuals seeking an adviser, we offer the following information:

General Overview:  An adviser needs to spend significant up-front time with you so that they get to know your unique situation.  During this time they should help determine your investment objectives and they should provide a written financial plan.  They should explain if they do performance reporting and what benchmarks they use.  Unfortunately, most advisers don’t do performance reporting, and this makes it difficult for you to know how your investment performance compares to a benchmark.  They should also articulate the frequency of their investment reporting, the frequency of face-to-face meetings (usually annually).  They should explain the process for monitoring your portfolio and making appropriate portfolio rebalancing changes.  It is important to note that the first year will not be profitable for a good adviser because they will need to spend significant time with you.  Ideally, a professional relationship develops that provides a Win/Win long-term value for both the investor and the adviser.  Although there is significant time spent at the beginning, there are other times when there needs to be significant time with the adviser.  The 5-year time period leading up to your expected retirement date needs extra planning work.  As you approach retirement, it is critical to identify the sources of income for retirement living expenses for the time when you no longer have a paycheck.  Estate planning becomes particularly important as you transition to retirement. When the retirement income plan and estate plan are finished, the time with the adviser may revert back to quarterly reports and annual face-to-face meetings.

RIAs:  For advisers, Cornerstone recommends Registered Investment Advisers.  RIAs generally provide services related to investments and financial planning.  They often characterize themselves as Fee-Only and they often get paid on a % of Assets Under Management-AUM.  Planning services can help you determine if your investments are tracking to achieve objectives like retirement, college education for kids, a cabin up north or travel/a dream vacation.  Investment advisers registered with the Securities and Exchange Commission or a state’s securities agency have a fiduciary responsibility to act in their clients’ best interest.

It is important to understand your fees and exactly how the RIA is compensated and it is good to ask for a written fee schedule.   RIAs are often paid 1% of the AUM, and this fee covers managing investments and providing financial planning services.  The percentage tends to be higher for smaller portfolios and the percentage can be smaller for larger portfolios due to economies of scale.  Some larger RIA wealth managers may charge a percentage fee for AUM and another fee for financial planning services.  A good adviser is worth reasonable compensation because they need to attract and retain skilled and experienced people to provide good investment performance and an appropriate financial plan.  A cheap adviser can be very expensive due to poor investment performance and inappropriate financial planning advice.

Cornerstone is able to make some initial recommendations for people seeking an outside adviser.

Cornerstone is also able to offer a second-opinion review of existing advisers.  This can be particularly important for high-net-worth individuals who are paying high fees.  High-net-worth individuals may also want a second adviser.

brokersBrokerage Firms & Commissions:  In addition to the RIA/fee advisery business, there are some investment platforms that are based on commissions on trades.  Traditional stock brokers, insurance agents and commission-based advisers have business models where they are compensated for commissions on trades.  Some of these individuals offer both investment services and financial planning services.  Some of these businesses may also offer investment advice for a fee instead of commissions.  Cornerstone is generally cautious about this business model.  There are some highly skilled individuals offering excellent advice for a commission, but there are also many who do not.  Commissions may also be an economic choice for very small portfolios.  Whenever a commission is involved, there is the question about whether the trade benefits your portfolio or whether it is more beneficial to the broker.  Current laws and regulations hold brokers to a lower standard than RIAs.  Whereas RIAs need to act as a fiduciary in the best interest of the client, brokers must only provide investments that are “suitable”.  The Department of Labor has proposed rules that require brokers to have a fiduciary standard similar to RIAs for retirement accounts but there is a question of implementation with the new Trump administration.

 

Wealth Management Firms:  Wealth Management firms are typically Registered Investment Advisers that specialize in larger portfolios and that have more complex financial planning and tax management capabilities.  Estate planning is often a significant part.  There are a number of RIAs that describe themselves as wealth management firms even though it is more of a marketing ploy rather than an accurate description of their capabilities.

 

Family Offices:  Family Offices cater to the wealthiest families.  For example, Okabena is a family office for the Daytons.  These firms provide Multi-generational, philanthropic, and tax sensitive services.  More content to come in the future.

 

Specific Brokerage Firms:  Cornerstone maintains opinions of various brokerage firms based on direct experience and also on the experience of highly regarded advisers.  Based on this information, we offer the following comments:

Schwab receives our highest rating based on a broad product slate, excellent customer service and good research capabilities.  This recommendation incorporates Schwab’s Intelligent Portfolio robo-advisory service.

Fidelity receives high marks for their product slate and customer service.  Fidelity is also rolling out their robo-advisory services.

JP Morgan also receives high marks.  They have a very good website that covers research with well-written commentary and informative graphics.  The website also has planning items for individuals in the accumulation phase and in the retirement stage.

Vanguard has a very strong product slate but Cornerstone finds weak customer service.

 

Professional Designations are important because they indicate knowledge and experience, but it is important to recognize the attributes for each designation.  Listed below are brief descriptions of each designation:

Chartered Financial Analyst-CFA designation.  To earn the CFA designation, individuals must pass a series of three rigorous six-hour exams with an estimated 250 hours of study time per exam.  Courses cover economics, financial reporting and analysis, ethics, equity and fixed-income investments and portfolio management.  Four years of investment work experience is also required.  A CFA offers greater investment expertise and would be most appropriate for clients with greater investment needs.

Certified Financial Planner-CFP designation.  A CFP must complete a CFP Board certified educational program that covers insurance, investments, tax, retirement and estate planning.  After completing the educational program, they must pass a two-day 10-hour exam and must have three years of full-time financial planning experience.  A CFP offers broad-based comprehensive guidance.  CFP will typically have more financial planning experience and less investment expertise.

Certified Public Accountant-CPA designation.  CPA Advisers must pass the Uniform CPA Exam and meet requirements set by the state Board of Accountancy.  CPAs offer the greatest tax expertise, but will have less experience with investments and financial planning.

There are other designations that are less rigorous than the three described above.  A Chartered Financial Consultant-ChFC has passed exams covering financial planning, income taxes, investments and estate planning.  A Chartered Life Underwriter-CLU has passed courses covering insurance and estate planning.

There are many other designations and some may require only a weekend of training to earn.

 

Financial Adviser Due Diligence:

It is obvious that you should interview several advisers so that you have more perspective in making your final selection.  Ask potential advisers for at least three referrals, and at least one from a client who has left the firm.

 

You can search for a fee-only financial planner through the National Association of Personal Financial Advisors website.  NAPFA is a Chicago-based organization of fee-only planners that has a 25-point list that you can ask potential planners to complete.  See NAPFA at NAPFA .

 

The Securities Exchange Commission-SEC has an Investment Adviser Public Disclosure website.  The SEC has a Form ADV federal disclosure form for advisery firms that lists fees, conflicts of interest, disciplinary history and other relevant information.  Form ADV has a massive amount of information including reports of employee convictions or “no contest” felonies occurring within the last 10 years.  See  SEC Adviser Info

It includes:

-Disciplinary actions.

-Firms are required to report material changes-anything that is new since the last filing.  Are there new conflicts of interest, new products that are being sold, or changes to the firm’s business plan.

-Fees and compensation are provided as a range (depending on asset size/whatever).  Brokerage transaction fees and custodian fees are also disclosed.  Your individual fees are contained in your client agreement document.

-Other financial activities and affiliations.  Affiliations that might constitute conflicts of interest need to be disclosed.  This includes investment companies, other investment advisers, banks, real-estate brokerages, and insurance companies.

 

Investment adviser representatives must register (through Form U4) with state agencies and are required to disclose regulatory, disciplinary and criminal activities.  You can research Reps and Broker-Dealers as follows: Broker Check .

– The primary disclosure involves customer complaint disclosures exceeding $15,000.

– Also includes bankruptcy.

– Termination disclosure for investment-related reasons.

– Criminal disclosures related to controlled substances like marijuana and cocaine.

– Operating a motor vehicle while under the influence of alcohol-DWI.

It is important to remember that many of these charges may have occurred when the advisor was in their 20s.

 

State securities regulator reachable through http://www.nasaa.org and search by adviser name and especially for disclosure events.  NASAA .