By Len Clark

Salisbury Post

Many local, independent financial advisors do excellent work for their clients. They are transparent with their fees, attentive to client needs, knowledgeable about investment choices and have a track record of success. Ask your friends, neighbors and relatives and do your homework to find the one who is right for you. To quote Ronald Reagan: “Trust, but verify.”

It’s often said a TV weatherman has the least risk exposure of any job you can name. He may say there’s a “50 percent” chance of rain or it’ll be “partly” cloudy with the “possibility” of “intermittent” wintry mix precipitation or something or other. Right or wrong, no one remembers 24 hours later, and Mr. Weatherman still gets paid. We don’t keep tabs on Mr. Weatherman, we just like his friendly face and we trust his judgment.

There’s someone else with a much, much greater impact on our lives who often gets paid big bucks whether his forecasts are right, wrong or self-serving — whose decisions do not simply incur a passing, cursory imposition of carrying an unnecessary umbrella, but affect our entire life’s savings. We might like his friendly face and trust his judgment, but in most cases we don’t keep tabs on him any more than we keep grades on Mr. Weatherman. His forecasts might also be intermittent, partly accurate, 50 percent correct or 75 percent wrong.

Who is keeping score?

To put it in perspective — and with due deference to Mr. Weatherman — we believe someone is keeping his score. If he’s 75 percent wrong we presume the TV station manager will fire Mr. Weatherman. What about your financial advisor? Directly or indirectly, you’re the one who’s paying him and he won’t get fired even if he is 75 percent wrong if you’re not keeping score while he earns commissions on failed investments.

It’s rare these days to hear spontaneous admissions of failure. Not totally unheard of, but rare. Most of the time people only admit guilt, say they’re sorry and make excuses after they’ve been exposed. (Plug in your chosen politician or celebrity name here.) So do not rely on your financial advisor to be an exception. Do not blindly rely on his judgment or his friendly face. Do not rely on promised updates and do not rely on 50-page annual fund analyses; they’re designed to be incomprehensible. Chances are bad news will be ignored, foggy or completely obscured and veiled by promises for the future.

Keep your own tabs on your own investments. First do some simple math. How much did you start the year with? How much did you add? What’s the year-end balance? Miserable gain? Start digging.

Do you have an employer’s 401k, 403b, 457b, or personal IRA? Chances are you’ve got cash in a mutual fund. No matter who’s the operator, find out some basics about the funds. What to look for? Here’s an example of a mutual fund recommended a year ago. It had a “front-end load” of 4 percent, a 12B-1 annual fee of 0.25 percent, an annual management fee of 2 percent, the financial advisor’s annual fee of about 0.6 percent and a transaction fee of $20. An advisor intent on his own gains rather than yours is hardly likely to explain these fees to you.

You do the math

Suppose you put $100,000 in the fund. First, it would cost you $4,000 just to buy it – the “front-end load.” It then costs $250 per year for the 12B-1 fee — huh? A 12B-1 fee is what the fund bills you for them to promote the fund to the public. In other words they’re charging you for their advertising campaign. Then they deduct $2,000 a year for the annual management fee or “gross expense ratio” or, to put it another way, you pay them to do their job even if they do it dreadfully unprofitably. And finally your financial advisor charges either a fixed amount or a percentage every year, depending on how much you’ve entrusted to him, about $600 in this case. Throw in a $20 transaction fee if you ever want to sell the shares.

Your $100,000 is worth $93,150 before one cent of it is invested, so it has to make over 7 percent just to break even. And that’s just the first year. This particular fund made less than 6 percent for the 2014 year, so your $100,000 would now be $98,500 after one of the best years in stock market history. This is not unique; there are dozens of funds with similar and higher costs.

The good news is there are plenty of funds out there which are “no load,” — no purchase fee, no transaction fee, no advertising fee, and minimal annual management fee. And many, (make that most) are proven to out-perform the high-expense funds. If all you owe is a 0.25 percent annual fee (very doable) you’d be 6 percent better off right out the gate.

Ask the right questions

So ask the pertinent questions of your broker, get it in writing, and read your statements.

• Front-end load (purchase) fee?

• Annual fund expense?

• Broker annual fees?

• 12B-1 fees?

• Transaction (selling) fees?

• Any other fees?

How has it performed? Do not rely on a verbal answer or the fund’s own summary page. Go to Morningstar.com or a similar site and see for yourself. And don’t just look at the fund’s own performance; compare it to funds of similar style. There are plenty of resources to help you – Google away.

I was a commodity broker in Smithfield, London, many years ago. Every day my boss, CW, would hold his morning briefing and always end with the same nugget of wisdom: “Don’t forget, rain or shine gentlemen, the markets will go up, go down or stay the same.” His point of course was, it was down to us traders to determine which way the markets were headed: our knowledge, our instincts, our responsibility, our risk, our necks on the block. You should not take your own personal rainy day fund any less seriously.

Len Clark lives in Salisbury.