Financial Experts?

Posted by   admin on    January 31, 2004

Who Do You Turn To For Financial Advice?

If you were seeking dental care, it isn't very likely that you would call on a cardiologist, or an ophthalmologist, or a pharmacist. Why not? Aren't they all health care professionals? No, it is quite commonly understood that you would call on the services of a dentist to meet your desire for dental care. In fact if you went to one of these other health care specialists - after overcoming the surprise of your inquiry - they would more than likely direct you to seek out a dentist. However, when seeking the services of a financial expert, there is much greater confusion in determining who to go to. And what makes matters worse, most incompatible financial experts would offer their services anyway!

As mentioned in our prior newsletters, we strive to provide articles on various aspects of wealth management to assist your understanding of why planning for the present and for your future has importance. Yes, we also promote our services; yet, you will find that we always seek to present thought provoking topics that are relevant to our wide audience. (By the way, with your help, our readership has grown and we have begun to archive past newsletters on our web site. Keep those referrals coming! We appreciate it!)

Over the past many months I have observed much confusion amongst prospective new clients, friends and, yes, even our existing clients when discussing the roles played by the multitude of financial experts assisting the public today. What I want to do with this months newsletter is give you an aha! moment: that insight, which helps you, understand a part of the mysteries of the investing marketplace.

At the end, please review our performance update. Then compare us against the Lipper data for low risk, balanced fund managers and youll find that we continue to be well on our way to becoming one of our nations top performing money management firms!

Financial experts 

Each and every day thousands of financial experts go to work to give you their expert opinions on how to best invest your money.  There are tons of services out there, from full service brokers with excellent executions, to data services with the most up to date research information.  The end result is simply information overload.

Emulating Warren Buffet, Peter Lynch or any other investment guru by reading their strategies is a hopeless task, simply because the real reason for their success, money management, is rarely discussed. Yes, we all know that Buffet is a value player, but so are millions of other value investors, so why are they not as successful?

The truth of the matter is that very few financial experts truly understand the science of money management.  Walk into any broker or investment advisor and have a meeting.  You will find that the whole process is simply geared toward putting you at ease, or, as one broker once told me, "We are not in the money business; we are in the relationship business."

9 times out of 10, you will end up leaving your money with the person that makes you feel the most secure, and not the one who is truly the most qualified. The same mistake is often repeated by most investors who often buy supposedly safe stocks recommended by analysts, as opposed to buying stocks that truly have the most potential.

How To Know If Someone Is Managing Your Money Correctly?

If you had to make a life and death decision, wouldn't you take your time to choose wisely? The more knowledgeable you become before making the decision, the greater your chances will be of making the correct one, right? Now, why is it that so many people ignore this common sense approach when it comes to choosing someone to manage their money? Successful money management depends on obtaining the knowledge necessary to either manage your own investments properly or hiring the right person to do it for you. Period!

Too many people assume that if they are not going to manage their own investments, then they do not need to know anything about investments. After all, they are going to have a "professional" doing it for them. This has never been further from the truth. Today's investor must realize that many of the "professionals" that manage other people's investments are simply salesmen that are very good at meeting their quota and not experts at investing money successfully for their clients. In the last few years, many investors have lost large sums of money for failing to hire the appropriate investment manager.

Unfortunately, without having the right investment knowledge, it is impossible for an investor to know if a money manager is good or not. Think about it. If your car is broken and you take it to the mechanic, how do you know if what the mechanic is telling you is true or not unless you know about cars? If you are like the typical person, whatever the mechanic says probably sounds pretty good and you have no choice but to believe him. This makes you vulnerable to be taken advantage of. Even though you can't really prevent this from happening when your car is broken, there is a way that you can make sure that it does not happen with your investments: become knowledgeable enough so that you know if someone is managing your money correctly.

Before you hire a stockbroker, financial planner, or money manager you have to make sure of a few things. First, the person you are hiring should have a formal education in a financial field (a degree in English Literature or Physical Education won't suffice). More importantly, he or she must also have enough years of experience in managing the investments of others (a background in selling insurance, cars or medical equipment is not appropriate). The most essential requirement is that the potential investment manager has a logical strategy to manage investments. How can you assure yourself of this? Ask the following question, "What is your investment philosophy or strategy?" The answer should include a detailed explanation of how investment decisions are made and what drives the decision to purchase or, more importantly, sell investments. Answers such as, "I select from an approved list, or I follow the research of , or "I throw darts at the Wall Street Journal," are inappropriate. Words like my research shows, is much better as you want a qualified, thinking manager, not a robot. Also, ask to see information reflecting their past performance history, risk profile and Sharpe Ratio. Caution should be taken if this information is not readily available as it generally separates the professionals from the pretenders.

As mentioned in my previous newsletters, the Sharpe Ratio is a commonly used measure of investment performance and earnings quality that tells you how well clients have been rewarded for the risk taken (the higher the number, the better). Risk profile is helpful for understanding one investment managers strategy from another  low, moderate or high risk. This will prove valuable in making sure you get the kind of investment help that best meets your expectations. However, be advised! The numbers will have little meaning for you until you have compared this information against other benchmarks. To begin, Morningstar, Inc. instructs that a Sharpe Ratio of over 1.0 is "pretty good" and outstanding managers achieve something over 2.0. Also, reflects that: The Sharpe ratio tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk.

If the potential investment manager does not do what it takes to invest correctly, or is not able to educate you on their past performance statistics, then you should not hire them. And, if you have made the mistake of hiring someone before taking the steps above, don't worry. Set up an appointment; take them through the above process, and find a replacement if these essential requirements are not met.

Successful money management requires that you become knowledgeable about investments and the investment management process, even if you plan on hiring or have already hired someone to manage your money and investments. Take your time to become prepared. It is not a matter of life and death, but it is a matter of long-term financial success or ruin

Should I Invest With a Stock Broker, Banker, or Money Manager?

In an age of do-it-yourselfers, handling your own investments might sound like a good idea. But many have found out during 2000, 2001 and 2002, that tackling the stock market is not as easy as some online stockbrokers made it seem. Going at it solo requires proper education in investments and finance. It requires knowledge of how to analyze economic and financial information thoroughly so that the process becomes "investing" and not "gambling." This knowledge is obtained through proper training, continual research and study of the financial markets. The entire ordeal requires a lot of time and dedication on the part of the investor; time that many are not willing to spend. For those that cannot or do not want to spend free time crunching numbers and researching financial data, entrusting their money to someone else is their best option (as long as that person is qualified to take care of it!). That basically leaves you three options: a stockbroker, a banker, or a money manager.

Stockbrokers are people that, based on passing various state and federal mandated exams, can work for a stock brokerage firm that opens investment accounts for the public. While there are online stock brokers that cannot give investment advice to their clients (only open their accounts and take orders), the brokers that I am referring to here are full service brokers, like employees of Merrill Lynch (or similar companies), who can give advice to their clients as to what investment to buy or sell. Many of these full service brokers have taken a lot of heat during the last few years because so many of their clients have gotten crushed in the stock market due to their recommendations to invest in financially shaky companies (like the "dot-coms" or should I say the "dot-bombs"). A lot of investors fell pray to the brand-name syndrome; that is, assuming that because their stockbroker worked for a well-known stock brokerage firm, their money was safe. These investors would boast at parties that their money was with Merrill Lynch or Solomon Smith Barney. Wrong!!! An investor's money is not with "Merrill Lynch." It is with an employee of Merrill Lynch (or of another well-known full service brokerage firm) who could be great at investing or not. Remember one thing, stockbrokers work for full service brokerage firms as long as they meet their sales quota (yes they are salespeople). They do not keep their job because their clients are making money in their investments. They keep their jobs because their clients' trading commissions and investment fees generate enough money for the brokerage firm they work for, even if the clients are losing money. Please don't be shocked by this. This is the way full service brokers work. This is also one of the biggest disadvantages of letting a stockbroker manage your investments. Another disadvantage is the fact that in order to survive as a full service stockbroker, a person must open a lot of investment accounts and thus, have a lot of clients. After a certain point, it becomes impossible to safely manage too many investments. Typically, the biggest clients get the red-carpet treatment and the rest are sort of forgotten, like certain New Year's resolutions. But we don't want anyone to misunderstand this information. There are also good stockbrokers. You just have to do a lot of interviewing to find a good one. Asking a lot of questions is very important, especially "What is your investment philosophy (that is, when and why do you buy a specific investment and when do you sell it)?

The second option for an investor who needs someone else to manage his or her money is to go to a banker. Even though bankers that offer investment advice to their clients are technically full service stockbrokers, I decided to put them in a separate category.

In the last few years, banks have aggressively expanded into the investment field, taking advantage of their already existing client base that have CD's and mortgage loans. It is interesting how banks automatically create a feeling of security in a lot of people. This is a result of social programming. Think about it. Complete this sentence by filling in the blank at the end: "Work hard, make a lot of money, so you can put it in the _________." Probably ten out of ten people would admit that the first word that pops into their heads is "bank." This is social programming at its best. Despite the fact that banks have obtained a solid footing in the investment industry, they do not have nearly enough experience managing investors' money as the stock brokerage firms do. It has been less than 20 years since banks have entered into the investment arena. So, even though you might be tempted to sit down and talk with your bank's investment person the next time you go deposit your weekly personal or business checks, I suggest that you pass. Go to a bank when you need a loan. They are good for that and have been doing it forever, but go to a stockbroker or money manager when you need someone to manage your investments; they have a lot more experience.

The last place an investor could turn to for investment management is to a money manager. Most people assume that the term "money manager" refers exclusively to the manager of a mutual fund. Even though a mutual fund manager is considered a "money manager," investing in a mutual fund is usually not the best option for someone with more than $50,000 to invest (despite popular belief). The inherent restrictions and narrow investing strategy of a mutual fund can hamper even a good investment manager from performing well.

As far as "money managers" go, a much better option for an investor in need of investment management is an investment adviser. Investment advisers (assuming that they don't work for a full service brokerage or insurance firm) are independent money managers; that is, they do not have a sales quota to meet and can thus, have a greater degree of flexibility and freedom to focus on what is best for the client. Investment advisors come in many different varieties. Some cater to smaller investors, while others accept only high net worth clients with a minimum investment above $1,000,000. Protect yourself by working with someone who has experience in the field of managing  not selling  investments for others. Having prior institutional experience (managing money for large corporate investors) is a great indicator. It tells you that the investment advisor has previously gained the trust of other professional investors. There are too many advisers nowadays that are hiding behind the excuse of "financial planning" and "diversification," and do not know how to do the analysis required to choose solid investments for their clients. Therefore, if investors want to make sure that their investments are being managed correctly, they must ask any potential adviser a lot of questions; questions that would demonstrate the adviser's knowledge about selecting investments. This is the only way that investors could rest assured that their money will be well taken care of.

ELF Capital Management Investment Performance Update

For the month ended January 31, 2004, our one-month performance is up 2.22% and our three-month return is up 6.41%.

For disclosure purposes, past performance is not necessarily indicative of future results and ELF Capital Management LLC (ELF), formerly Hoffman White & Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by ELF may lose a substantial amount of their initial value.

ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange-traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.

The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELFs ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results.

The performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELFs ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter. 

Copyright 2004 ELF Capital Management, LLC. All rights reserved.