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Published August 2006

Value of advisers:
market perspective, wisdom

I had planned to talk about adviser teams this month, but with the recent volatility of the markets in May and June of this year I thought it would be a good idea to discuss the business of advice. If Tony Soprano were here, he’d probably say, “So how ya doin’?”

How did you fare during those volatile times? I’m not just talking about the value of your investments, though that is important, but were you able to keep the perspective necessary to achieve your goals? Who is your sounding board when the markets aren’t as cooperative? Did your long-term investment time horizon suddenly become short term?

According to research by Dimensional Fund Advisors, with data provided by S&P, Roger Ibbotson and Rex Sinquefield, the S&P 500 produced an 11.11 percent annualized return for the period January 1970 through December 2005. If, however, you missed just the 25 BEST single days during that period, your annualized return would have dropped to 7.64 percent.

The trick is learning how to predict those market changes with accuracy and consistency, which is near impossible to do for any length of time. Therefore, long-term investors should be less concerned about timing of the market and focus more on time in the market. This, of course, assumes a well thought-out and diversified portfolio.

The problem is that investors without a sounding board are likely to get scared more often and, when they get out of the market, they often don’t have a strategy to get back invested. It is natural to get back only when certain the market is rising again. But can we ever be certain of that in the short term? I think not.

Investors access the market mostly through three channels: do-it-yourself brokers, commission brokers and fee advisers. Often there is a combination of the three.

Investors who are do-it-yourselfers often are looking for the low-cost freedom that comes with making your own decisions. Some are very good at it or simply enjoy the process. This method does require time, experience, discipline, good systems and follow through.

Commission brokers are another channel used to access the markets. The challenge for the investor here is getting the right combination of time, planning and advice from the adviser. The challenge for the adviser is giving those things while understanding a sale must be made to pay the bills. Once that is accomplished, then the adviser must continue looking for the next sale.

Speaking as an adviser who was commission based for the first 18 years of my career, I believe you can find an adviser who is paid by commission and truly has your interests at heart. Most importantly, it is your perception of that objectivity that is important.

Then there are fee-based or fee-only advisers. Clients who prefer this method often do so because it puts the adviser on the same side of the table with them. It provides the ongoing resources necessary to provide excellent client service. The question of “how much is this going to cost me?” as it relates to commission is eliminated since there are no commissions.

In my case, it allows me the ability to do the necessary ongoing planning and service wanted by clients accessing this channel. There also is financial incentive to take care of clients because they can move their assets easily if they are not getting the value desired.

Whatever method is used, be sure to find someone who will develop the trusted adviser relationship you want. Like any good relationship, you also will need to be open to ideas and input from the new partner in your affairs. The wisdom, discipline in investing, planning expertise and professionalism could add tremendous resources in your situation.

Next month we will talk about adviser teams. Until then …

Dale Terwedo, certified as a CFP, ChFC and CLU, is principal of Terwedo Financial Services LLC, an independent financial services firm in Edmonds. In practice since 1983, Terwedo is affiliated with FSC Securities Corp., Atlanta, Ga., a member of SIPC/NASD. For more information, visit www.tfsadvisors.com, send e-mail to retire@tfsadvisors.com or call 425-776-0446.

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