Guide to WealthA collection of insights on finding a financial advisor from one of America’s most respected investing magazines

2 GUIDE TO WEALTH

its basic allocation service; Vanguard Personal Advisor Services, 0.30%; and the fast-growing Schwab Intelli-gent Portfolios doesn’t levy any man-agement fees (instead, it mandates a minimum cash position and makes money on the spread).

“If the only service an advisor provides is investment management, then that 1% fee is probably too high,” says Ric Edelman, co-founder and executive chairman of Edelman Financial Services, a network of independent financial advisors who manage more than $21 billion for more than 36,000 families.

“You should be receiving much more advice,” says Edelman, who adds that in a typical one- or two-hour review meeting with clients, about 10 minutes is spent on investment performance. All of the other mov-ing pieces of a client’s financial life—including tax planning, insurance needs, estate planning, college sav-ings, and the big kahuna of retire-ment planning—are where Edelman aims to deliver added value.

With so much at stake, even an inveterate do-it-yourselfer could benefit from having a co-pilot check in from time to time to make sure you are, indeed, on course. An ad-visor who charges an hourly or flat fee can provide a periodic checkup. That could be once a year, or when life milestones are approaching. The typical hourly fee ranges between $200 and $400.

Paying for professional advice can be especially helpful as you begin to move down the backstretch toward retirement. While you may have amassed an impressive portfolio, you need an entirely different set of skills to strategically spend down that nest egg so that it lasts at least as long as you do. The healthier you are, the more that should be a concern. According to the Society of Actuaries, a 55-year-old couple today, if both are in excellent health, faces a 52% probability that at least one spouse will still be alive at 95. While long life is often, of course, a welcome thing, it also poses a finan-cial challenge: You’ll need to create an income stream to last many years.

For everyone who lacks the time, confidence, or inclination to be the

By Carla FriedOriginally published

June 18, 2018

DO YOU NEED AN

ADVISOR?A good pro can help you solve

money challenges you didn’t even know you faced

Some people have no pressing need for a financial advisor. If you’re 26 and single, have no debt, earn more than you

spend, and are diligently stashing money away in a tax-advantaged retirement plan while saving money on the side, congratulations.

But whether you’re starting a family or starting retirement, there often comes a time when so many factors are in play—current spending needs, future savings and legacy goals, upkeep on a vacation house—that paying a financial advisor to serve as your expert juggler-in-chief will prove to be a far better investment than any hot stock could ever be.

Granted, the price tag can be a bit off-putting. In a world where it’s now possible to build a portfolio of exchange-traded funds with annual expenses below 0.10% and no com-mission when you trade, the typical annual advisor fee of 1% on a $1 million portfolio (the fee often drifts lower as assets grow) seems pricey. Especially now, when asset-return models are spitting out warnings that, over the next 10 years, the S&P 500 and investment-grade U.S. bonds will have returns below 1% after inflation.

And paying $10,000 a year to have someone oversee your allocation strategy and periodically hit the rebalance button on a $1 million portfolio can feel exorbitant when robo-advisors deliver the same basic service at a steep discount. Better-ment, for example, charges 0.25% for

CONTENTS

Page 2Do You Need an Advisor?

Page 4How to Find a Financial Advisor

Page 6Asking Advisors the Right Questions

Page 7Fire Your Hedge Fund; Hire an Advisor

Page 8Five Mental Tricks to Make You a Better Investor

Page 10Saving for Retirement When the Market Goes Crazy

About this Booklet

Barron’s publishes its “Guide to Wealth” quarterly in Barron’s magazine. This booklet is a compendium of the best articles from the past year. It is produced exclusively for the advisors in our rankings to help educate their clients and prospective clients. For more information on how Barron’s ranks its advisors, visit barrons.com/methodology.

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de facto family financial advisor, hiring a pro to create and maintain a comprehensive plan can be a solid investment.

How a Top Advisor Can Pay OffVanguard estimates that certain ad-visory services, including portfolio rebalancing and tax-advantaged allocation and withdrawal strategies, could add about three percentage points to a client’s annual returns. Granted, that presumes the advisor uses cheap ETFs and mutual funds and expertly executes. But those numbers factor in only the invest-ment aspect of advice. By whipping the rest of your financial plan into shape—insurance, will, trusts—a holistic advisor can further improve your situation.

In the Vanguard study, helping clients avoid buying high and selling low is one of the important benefits that advisors can bring to the table. “A financial advisor keeps you in your seat when you want to get up and run in a bad market, and keeps you from being too optimistic in a good market,” says Cheryl Holland, founder and president of Abacus Planning Group, based in Columbia, S.C., which manages more than $1 billion.

A similar study by Morningstar In-vestment Management that focused on retirement-income strategies estimates that an advisor can add an average 1.59% in annual return.

An advisor might also help you make more cleareyed decisions. A 2017 study sponsored by North-western Mutual watched the brain patterns of 45 people making finan-cial decisions, both on their own and with guided assistance. The neuro-science experiment found that with assistance, participants were less stressed and better able to absorb information.

Tapping the services of a top advisor is a good way to gain new perspec-tive on your finances. “There is nearly always some motivating, triggering event that gets a potential client through the door,” says Ron Sages, an advisor at Eagle Ridge Investment Management in Stam-ford, Conn., and assistant professor of financial planning at Kansas State University. “But then we frequently

find other needs that they haven’t even thought about—or they think they have something taken care of, but it turns out it can be improved.” Not to mention the investor tenden-cy to obsess on short-term results as markets zig and zag. “Having some-one who’s keeping them focused on the long-term goal is really im-portant,” says Jennifer Marcontell, a Barron’s top-ranked advisor based outside of Houston. “I think there’s a lot of value there that people don’t realize.”

Advisors are also adept at navigating complexity. You may handle most financial challenges with aplomb, such as negotiating with contractors or managing your 401(k). But are you really prepared to compare the solvency of companies that offer long-term care policies? Can you build a portfolio that will provide a lifetime of income? Can you analyze annuities? Advisors have specialized training, knowledge, and resources to help you weigh all of your choices.

A professional advisor is often better able than the layperson to anticipate consequences. It’s the rare financial decision that exists in isolation. Make one move and, like Whac-A-Mole, it can set off a reaction elsewhere in your financial life. An advisor should be able to gauge the cascading effect of each decision. For instance, the arrival of a newborn child or grandchild may seem like the perfect time to set aside money for their college education. A good advisor will weigh in on how that decision might impact your ability to fund your retirement or other financial goals. Even when there are sufficient funds, an advisor can steer you toward the best ways to save for college today and minimize the impact on financial-aid eligibility years from now.

Diligence is another key talent that advisors offer. You may be hyper-motivated this year to tackle your financial life, but financial planning is an ongoing grind. Just when you get the busiest—a new baby, new job, or new spouse—is when you’re most likely to need a pro’s guidance. Plus, as laws and regulations change and the economy shifts, you’ll need to make adjustments. How much stamina do you have for putting a

plan into action, and fine-tuning it forever?

“You go to an advisor for execution,” says Holland. “It’s like a business where you can have a great strategy, but if you don’t execute—and keep executing—your strategy isn’t going to work for you. Same with a finan-cial plan. It’s all about a lot of little executions.”

In addition to helping you stick to your investment plan, an advisor can help you focus on the stuff you’d rather ignore. That can vary based on individual tics, but estate plan-ning seems to be a common blind spot. Holland says some of her firm’s wealthiest clients walk in without any estate-planning documents in place.

The human element can be essen-tial when addressing these and other emotionally laden topics. No robo-advisor is going to be able to facilitate a conversation with your siblings about moving Mom to an as-sisted-living facility or the financial implications of her ongoing needs—or be able to help initiate that same conversation with Mom herself.

A financial advisor can also be a backstop against cognitive decline as you age. Paying estimated taxes, keeping the insurance up-to-date, staying on top of required mini-mum distributions for retirement accounts, and serving as a line of defense between you and scam-mers who prey on the elderly are just some of the services an advisor can provide when you’re well into retirement.

Edelman suggests that even if you’re confident about managing your finances, you need to address the question, “If something happens to you, where does that leave your spouse?” He says his firm’s shining moment is often when someone dies and the family is relieved that there is a financial plan—and advisor—in place to ease the transition. n

Vanguardestimates that a series of advisorservices, includingportfolio rebalancingand tax-smart alloca-tion andwithdrawal strategiescould add about three percentagepoints to a client’sannualreturns.

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Start your hunt by asking for rec-ommendations from good friends and trusted colleagues who are in roughly the same financial position as you. You might also look for cu-rated lists of advisors who adhere to high standards, such as members of the National Association of Personal Financial Advisors or practitioners who make the Barron’s rankings of financial advisors.

Once you narrow down the list, search for each advisor’s name in databases run by the Financial Industry Regulatory Authority (brokercheck.finra.org) and the Se-curities and Exchange Commission (adviserinfo.sec.gov). (Barron’s, un-like some other advisor rankings, carefully vets the regulatory record of all advisors as part of its evalua-tion process.) Check the form ADV for red flags such as disciplinary actions and criminal convictions. The SEC database also allows you to search by firm, with access to infor-mation about the firm’s clientele, fee schedule, and conflicts of interest. The firm search turns up more useful information if you’re looking at a smaller or independent practice; big national firms have hundreds of pages of documents, very few of which are likely to be relevant to the particular advisor you’re considering.

Once you’ve ruled out advisors with lousy track records, plan to spend about two hours meeting with each of the names remaining on your list. Valerie Newell, managing director of Mariner Wealth Advisors in Cincin-

By Michaela CavallaroOriginally published November 30, 2018

HOW TO FIND A FINANCIAL ADVISORThe relationship should go much deeper than simply picking investments. Follow these steps to make the right choice.

Investors looking for a financial advisor will find an industry in a state of flux.

The rise of robo-advisors like Bet-terment and Wealthfront has made investment guidance available for pennies—but a robo won’t help you plan for the future. Following the repeal of the Department of Labor’s fiduciary rule, which would have required investment advisors to put clients’ interests first, how can investors gauge potential conflicts of interest? And if you’ve got decades before retirement, should you be concerned about the aging of the industry? (By some reports, four in 10 advisors are 55 or older.)

The first rule for advisor seekers: Don’t underestimate the seriousness and rigor this task demands. The quality of the financial advisor you choose—and your relationship—can have a major effect on your future well-being.

Before beginning your search, consider what you want from the relationship. While a robo can effi-ciently build a diversified investment portfolio, most people benefit from a human touch. From insurance to college savings to retirement planning to charitable giving, a good advisor will help you with all aspects of your financial life, and solve prob-lems before they occur. Human advi-sors also earn their keep by helping clients avoid bad market-timing decisions—buying when the market is surging or selling during a crash.

nati, says the meeting should include a broad overview of the advisor’s capabilities. Ask about the following items:

The portfolio management processDoes the advisor use asset-allocation models dictated by the home office, customized allocations, or a mix of the two? The more assets you’re in-vesting or the more unusual your sit-uation—do you have a special-needs child or big exposure to a single stock?—the greater the likelihood that you’ll want an allocation cus-tomized to your financial situation.

Financial-planning capabilitiesIf you’re looking solely for invest-ment management, this function may not be high on your list. But many people find that once their investments are sorted out, they’re ready to tackle issues such as fund-ing their kids’ educations, planning for retirement and their heirs, and making charitable gifts. Your candidates may not be expert in each of these areas, but at a minimum they should be able to offer referrals to experienced professionals who are, whether within their firm or elsewhere.

Custody arrangementsAsk who the advisor uses as a custo-dian of client assets—that is, which institution will actually be holding your money. Most independent advisors are required to use a third party such as Fidelity Investments, Charles Schwab, or BNY Mellon

5GUIDE TO WEALTH

Pershing. (Bernie Madoff did not use a third party; you know how that worked out.) This is not an issue for huge firms such as Bank of America Merrill Lynch and Morgan Stan-ley, which use their own banks as custodians.

Fiduciary versus suitability standardUnder the fiduciary standard, an advisor is required to put a client’s interests first, and must disclose and avoid any conflicts of interest. Regis-tered investment advisors, known as RIAs, are still legally required to act as fiduciaries. Other financial advi-sors may act as fiduciaries voluntari-ly. Others comply with the suitability standard, which means they must believe that a particular investment

is an appropriate choice for a client. Advisors following the suitability standard don’t have to disclose con-flicts or even mention the existence of cheaper or more tax-efficient alternatives. Either option may be appropriate, depending on your circumstances and preferences, but if in doubt, go with a fiduciary.

FeesAdvisors use an array of pricing models, and the variety can make comparisons difficult. Many charge clients a percentage of assets under management. That fee is often 1%, with discounts for large accounts. Other advisors charge an hourly or project-based fee (for example, a few thousand dollars for a basic financial plan). And yet others are compensat-ed via the commissions they earn for selling products such as insurance or their firm’s mutual funds.

Aim to reach complete clarity about each advisor’s setup in this initial meeting. “If an advisor isn’t pre-pared to describe exactly how they’re compensated and how they run their business, then you probably don’t want to work with them,” says Ray Sclafani, CEO of ClientWise, an advisor-coaching firm in Mount Kisco, N.Y.

Ask advisors who pass the first hurdle for a second meeting. The agenda: a deep dive into your financ-es, including the specifics of who ex-actly would manage your money and a detailed conversation about your family’s financial-planning issues. Listen for content, but also observe chemistry. “A lot of people in this business are a mile wide and an inch deep,” Newell says. “Spending time with someone helps you determine whether they’re an expert.”

Experts say a solid investment track record is the bare minimum. In-creasingly, affluent Americans look to advisors for a holistic approach that includes advice on estate plan-ning, taxes, and family matters. “The financial advisor has turned into a family advisor,” says Lyon Polk, managing director, wealth manage-ment, and a private wealth advisor at the Polk Wealth Management Group at Morgan Stanley Wealth Man-

agement. “Clients expect us to be excellent at investments, but then the conversation turns to other things: How do I help my children have a purposeful life and not be messed up by wealth? How do I create the time to pursue my dreams? Is my life running smoothly, and how do I keep from getting bogged down?”

Given the advisor’s expansive pur-view, consider whether he or she is in it for the long haul. Do they have a multigenerational team ready to form long relationships with your children and grandchildren? Are they investing in technology to run their business and manage your affairs efficiently and effectively? To get at the latter topic, ask how im-portant technology is to the advisor’s practice—and only consider advisors who are enthusiastic about what tech can do for them, and for you.

These last points are particular-ly salient given the aging advisor population. “A lot of financial advisors have made a lot of money and don’t have the energy to invest in their business,” says Ron Carson, CEO and founder of Carson Wealth Management Group in Omaha, Neb. “They’re like doctors in their 60s who don’t keep up on the latest pro-cedures. You don’t want rich, tired people managing your money.”

In the end, select an advisor whose credentials, philosophy, fee struc-ture, and business approach make sense to you, and with whom you feel at ease. “You need to be willing to expose yourself to this person, almost like you would with a doctor or a shrink,” says Jill Schlesinger, a certified financial planner and a business analyst for CBS News. “If something doesn’t sit right with you, pay attention to that feeling.” n

“You need to be willing to expose yourself to this person, almost like you would with a doctor or a shrink.”

— Jill Schlesinger, CFP, on choosing a financial advisor.

Advisor Alphabet Soup

The financial-services industry is rife with certifications, designations, and acronyms used to denote professional credentials. Some signify rigorous courses of study; others represent little more than mail-order diplomas. A guide to the bewildering array of acronyms and designations used by financial professionals:

CFA—Chartered financial analyst. A designation held by portfolio managers and investment analysts as well as financial advisors, the CFA credential indicates completion of a graduate-level self-study program and a series of three exams covering ethics, investment tools, portfolio manage-ment, and wealth planning.

CFP—Certified Financial Planner.CFPs are required to complete a college-level program of study in personal financial planning and must pass the six-hour CFP exam. CFPs specialize in helping individuals and families to reach financial goals.CPA—Certified public accountant. CPAs must complete a college or university course of study in accounting and pass a rigorous 16-hour exam.

CIMA—Certified investment management analyst. CIMA is a technical portfolio-construction program emphasizing a combination of theoretical and practical investing assess-ment skills. CIMA candidates attend classes at one of three business schools and take a five-hour certification exam.

CPWA—Certified private wealth advisor. This designation is for advisors working with high-net-worth clients, or those with more than $5 million in investible assets.

PFS—Personal financial specialist. A designation created by the American Institute of CPAs, the PFS credential identifies a CPA who concentrates in personal financial planning. These professionals can be helpful for affluent families with substantial tax-related concerns. —M.C.

6 GUIDE TO WEALTH

to deliver the returns they’d promised. This has to make you wonder if their current recommendations will one day fall victim to the same fate—leaving you with the same poor returns they gave previous clients.

And it’s key to ask if they own the invest-ments they’re telling you to buy. Too many advisors don’t own what they promote—and you’d never want to dine at a restaurant if the chef refuses to eat there.

It’s important that your advisor’s goals and yours be aligned, and one of the best ways to do this is to insist that your advisor own the same investments that you own. Sure, the asset allocation might vary based on dif-ferent needs, but that’s very different from working with an advisor who invests his or her money totally differently from how you’re investing yours.

JOE DURAN, FOUNDER AND CEO, UNITED CAPITAL FINANCIAL PARTNERS

Ask, “How will I know if you’ve really earned your fee?”If your advisor says he will outperform the market or build a financial plan, then you can probably find a better advisor. Great ad-visors earn their fees by helping you live the best financial life you can. They bring value by improving the way you make financial decisions in a dynamic, engaging, and inter-active way. They give you a genuine sense of control over your financial life.

First, they start by understanding you (and your family) and what you want your life to be like. Second, they help you make trade-offs in an understandable way to help you optimize the choices you make. And lastly, they track, measure, and help you adjust as life unfolds.

They are mobile and connected to you through your phone 24/7 in every aspect of your financial life. If they can’t show you a system and set of tools that you can under-stand, then you’re relying on a yellow pad and the knowledge of one person.

Everyone wants more than they can have, and advisors worth their fees will help their clients live richly, not just help them die rich.

By Ross Snel Originally published November 30, 2018

ASKING ADVISORS THE RIGHT QUESTIONSThree experts reveal the best questions to ask a prospective financial advisor. Why it pays to favor the ones who personally own the stocks they recommend.

A single question, if it’s the right one, can provide considerable insight for individuals and families looking to choose the best financial advisor

to serve their long-term objectives. And that question, in turn, can offer savvy, well-pre-pared advisors the perfect opportunity to differentiate their practices from a multi-tude of competitors.

With this in mind, we asked three of the top minds in the financial-advisory business, “What is the most important question for a client to ask of their financial advisor, and what does the advisor’s response to it reveal?”

RIC EDELMAN, CO-FOUNDER AND EXECUTIVE CHAIRMAN, EDELMAN FINANCIAL SERVICES

It’s a two-part question: Has your in-vestment philosophy/strategy changed in the past 20 years, and if so, how? And do you personally own the investments that you recommend to your clients?”You want an advisor who has been in this business since the 1990s—someone who has gone through the dot-com bubble bursting of 2000, 9/11, and the credit crisis of 2008. Only with that lens can you be confident that the advisor has the experi-ence to understand what it’s like to manage assets and counsel clients during periods of unprecedented volatility, heightened uncer-tainty, and new depths of fear.

You don’t want the next crisis to be the first one that your advisor experiences. Instead, you want a skilled, tenured professional who can give you effective guidance, not someone who’s as new to this as you are.

And when you encounter an advisor with 20-plus years’ experience, you want to know that his or her advice has remained steadfast and consistent throughout these periods. That’s not to say that the specific investments might not have changed. But you do want to know that the approach itself is the same.

Many advisors are selling products or endorsing strategies that are vastly differ-ent from what they were promoting in the past—and they often changed ideas only after whatever they had been touting failed

They will understand that money is fuel; it’s not a destination.

DALAL MARIA SALOMON, CEO AND FOUNDING PARTNER, SALOMON & LUDWIN

Here’s the question: Most advisors say they can create a financial plan. Be-yond creating an initial plan—how do you make sure that the plan remains relevant to me and my family, and how do you incorporate it into our overall ongoing relationship?And here’s the answer: Life is not stagnant, so your financial road map needs to change and transform accordingly. Whether it’s dealing with the cost of paying for un-planned health issues or preparing for a wedding of a child, new grandchildren, the desire for a second home, college-education expenses, or any myriad of possibilities—your advisor should be the first person you contact in order to incorporate those chang-es, desires, and needs into your financial plan.

Your plan should never be a one-time pro-cess that happens to fall only at the begin-ning of your relationship with your advisor. It should be discussed and tweaked at every opportunity to keep it relevant.

It is from this plan that so much of the mon-ey-management and cash-flow management decisions can be made.

For example, with a clear understanding of your financial requirements and when those requirements are needed, we can create a clear sense of dollars and dates. With enough foresight of those dollars and dates, lifestyle cash can be created at more opportune times.

For example, if the plan shows that $50,0000 is required for a new car in two years and the markets are hitting all-time highs—securities can be sold to raise that cash while markets are favorable (as opposed to waiting two years when the markets may be less favorable).

By understanding when and how much is needed, your advisor should be able to make thoughtful and logical cash-flow deci-sions on your behalf. n

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In the early days, the funds employed var-ious techniques, like short selling, option strategies, and mathematical models, to mit-igate risk for their clients. But as the great tech rally of the 1990s took hold, managers were no longer helping clients manage risk; they were gunning the accelerator, seeking to deliver outsize returns (or alpha) in any asset class or market they could. As the bull market roared, managers found an easy way to juice performance: They used borrowed money.

With a market-friendly Federal Reserve under Alan Greenspan, Ben Bernanke, and Janet Yellen, “hedge funds morphed. They had nothing to do with style or risk man-agement,” says Bill Fleckenstein, president of money manager Fleckenstein Capital. “People believe there is something magical about them, but essentially a hedge fund has become an investment manager plus the carry,” which is the 20% slice of the profits.

Mark Spindel, the CEO and chief invest-ment officer of advisor Potomac River Cap-ital, warns that over the long term, active managers of almost all stripes, whether it’s hedge funds or mutual funds, “rarely outperform consistently.” Yet investors continue to demand outperformance, so the minute a hedge fund falters, they run in search of the next bright shiny object.

Spindel says the vast majority of investors would be wiser to prepare for an inevitable downturn, or a surprising life event, with a diversified, balanced portfolio. “Sure, good managers can help, but over the long haul, smart asset allocation should help most of all, and that’s where you should spend your time,” he says.

That’s why ditching your hedge fund and hiring an advisor is a better way to build wealth. A certified financial planner (or a CPA/PFS, a certified public accountant who is also a personal financial specialist), whose job isn’t to herd you into risky assets, will help you achieve your long-term finan-cial goals.

The uncool CFP will help you avoid pitfalls and attend to the necessary but perhaps boring aspects of your financial life, such as ensuring you have sufficient life insurance or figuring out how to juggle the needs of your aging parents and your young children, all the while making sure you can retire at some point.By Jill Schlesinger Originally published

June 26, 2018

FIRE YOUR HEDGE FUND; HIRE AN ADVISOR

In three decades working on or cover-ing Wall Street, I have held different positions in the hierarchy of hip. When I began as an options trader on the floor of

the Commodities Exchange of New York in the late 1980s, that was considered a pretty cool gig. Later, many friends left trading floors and desks to become hedge fund managers, because that was the place to be. But when I handed in my trading jacket to become a financial planner and investment advisor, I was guilty of a decidedly uncool move.

I quickly learned not to care, because the impact that I could make on people’s lives as an advisor far outstripped anything my pals were doing running their funds. Sure, they could buy exotic financial instruments while I was toiling away trying to convince clients to squirrel away more for retirement. Sure, they were making way more money by charging 2% of assets under manage-ment, plus 20% of any upside gains—the well-known “2 and 20”—versus the measly 1% that most advisors were charging. But were they really helping their clients?

Maybe early on, in the late 1980s and early 1990s, hedge funds were delivering on their promise to provide pension funds, endow-ments, foundations, and wealthy individ-ual investors with a means to defray—or hedge—some of the risk they carried in their portfolios. Many investors believed these managers had “skin in the game” because of the 20% part of the equation, but as one former hedge manager told me, “the dirty little secret of the hedge fund business is that it’s the two, not the 20, that really matters.”

Let me use myself as an example. After a career in trading and then advising clients, I became a financial journalist in 2009. As for my own investing, I had put some money in a couple of those high-sizzle hedge funds, and did a little trading on the side, but mostly I adhered to a plain-vanilla passive index strategy, which was just fine.

Although I was completely capable of managing my financial life, nearly six years ago I found myself out of the time, energy, and discipline to implement and track the progress of my own comprehensive finan-cial plan. I turned to my friend Michael Goodman, the founder and president of Wealthstream Advisors in New York, who forced me to do what I knew I needed to do: relinquish control and go all-in on the planning process.

Goodman concentrated on overall goals and objectives, and he has made recommen-dations that have been far more beneficial to my financial life than finding “the best” investment manager. For example, a few years ago, he suggested I establish a defined benefit plan, which allowed me to quadru-ple the amount of money I was contributing on a pretax basis to fund retirement. He scoured my partner’s corporate benefits to better take advantage of what was available.

Meanwhile, money continues to pour into hedge funds, which now hold more than $3.2 trillion, a record, according to Hedge Fund Research. And how did those funds perform? For calendar year 2017, they gained just 8.5% on average (though some did far better) and their managers pocketed billions in fees. The unmanaged S&P 500, by contrast, returned a total of 21.8%.

Charles Brighton, a Barron’s top-ranked advisor in Washington State, used to use hedge funds for diversification, but has moved away from them because of their cost and long lockup periods. He argues that he hasn’t sacrificed diversification, only saved clients a ton of fees. “There are so many ETFs where you can replicate a lot of the risk/reward scenarios we used to get from hedge funds,” he says.

You don’t have to chase performance or market-beating investment managers. Instead, hire a comprehensive financial advisor who will put your best interest first by adhering to a fiduciary standard and will caution patience and prudence. Now that would be delivering real alpha. n

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Advanced imaging technol-ogy can pinpoint regions of the brain that light up when stimulated by fear

and euphoria. But you don’t need a brain scan to see the market toying with those emotions: The Dow Jones Industrial Average plunged about 5,000 points from early October to Christmas last year, only to recov-er nearly 3,000 points in trading through Jan. 30, one of the biggest whipsaws in recent history.

Signals like this can be gut wrench-ing. Do you buy, sell, or do nothing? Should you ignore the noise and just be Zen? That’s fine if you’re a disciplined long-term investor, but it won’t help much if you’re paid to trade or make money for clients.

The field of behavioral finance offers a few answers. For one, it’s well established that investing is an emo-tion-laden act (even for the quantita-tive-minded). Much of our emotions and feelings about the market are driven by brain biochemistry. And we have no choice but to live with this software—evolved over millen-niums going back to our ancestry in the African savanna. Unfortunately, the same instinct that saved your forebears from lions won’t help you escape getting killed by a bear market.

It’s not all bleak, though. By recog-nizing how emotions can lead them astray, investors can take steps to protect themselves from their worst impulses. Financial advisors can play a crucial role—some say it’s their most important role—by coach-ing clients to understand their inner selves and avoid investing mistakes.

Many financial firms are training advisors to be more like therapists

By Daren FondaOriginally published February 4, 2019

FIVE MENTAL TRICKS TO MAKE YOU A BETTER INVESTOR

Are you reluctant to sell because that would mean admitting it was a failed investment?

Consider reframing a loss as an opportunity, says Hersh Shefrin, a pioneer in behavioral finance at San-ta Clara University. View a loss as a “transfer of assets” from stocks that have gone down to stocks or funds that make sense in the current envi-ronment, he says. “Avoid the phrase ‘selling your losers’ because that makes you feel like a loser. Winners transfer their assets.” Remember: A tax-loss is an asset from an account-ing point of view. Don’t squander it, harvest it.

2. You Sell Your Winners Too SoonIf you have some paper gains, the temptation to sell and lock in profits may be powerful. This can over-whelm the tug of the endowment ef-fect (believing what you own is more valuable than it really is). But many studies find that investors are more likely to sell assets that have gone up than those that have declined—a tendency known as the “disposition effect.”

One way to avoid disposition bias is to obscure the purchase price of a stock on your trading screen, say by changing the screen view to hide your cost basis. The more salient the purchase information, the more likely you are to trade, and “manip-ulating the salience of information can improve trading performance,” says Cary Frydman, a behavior-al economist at the University of Southern California who has studied such effects.

Focus on more relevant informa-tion—whether you think a stock or fund still has good long-term pros-

and coaches. At U.S. Bank Wealth Management, candidates for advisor jobs take a personality test, partly to see how empathetic they would be with clients, says Daniel Far-ley, a market leader with the firm. Vanguard is encouraging advisors to view behavioral coaching as a key service. “Advisors should know that their job is to understand the people they’re working with, not just build portfolios,” says Donald Benny-hoff, a Vanguard senior investment analyst who focuses on coaching techniques.

Unfortunately, it’s not an exact science. There’s scant scientific evidence to identify an intervention or coaching technique that always works, says Brad Barber, a finance professor at University of California, Davis. It’s like trying to find a singu-lar cure for cancer; genetic variations are so vast that everyone needs a personalized remedy.

With those caveats in mind, we asked leading experts in behavioral finance for tips on recognizing our behavioral tripwires and how to prevent them from blowing up our portfolios.

1. You Hold Losers Too LongMany investors can’t seem to part with money-losing stocks. That type of behavior—well documented in ac-ademic studies—can be quite costly. According to a 1998 study of 10,000 accounts at discount brokerage firms, the average return of winners that investors sold was 3.4% higher over the next year than the return of the losers they held on to.

One solution is to ask yourself why you keep clinging to a losing stock. Is it because you truly believe it’ll rebound, based on new information?

When the market gets volatile, it’s time to resist yourfight-or-flight instincts.

9GUIDE TO WEALTH

If all else fails, stick a Post-it note on your com-puter with Warren Buf-fett’s advice: Be greedy when others are fearful.

FIVE MENTAL TRICKS TO MAKE YOU A BETTER INVESTOR

Shefrin. Leading bearish strategists these days include Albert Edwards, David Rosenberg, and Nouriel Roubini. “If overconfidence leads us to take imprudent risks, then a little more emphasis on gloom might in-duce us to be a little more prudent,” he says.

4. You Tend to Wing It and Focus on the Wrong CuesMany of us (journalists included) aren’t systematic in how we invest. And we constantly seek explana-tions for the chaos around us. We look for patterns that represent the past (“This is just like the dot-com bust!”), confirmation of our prior theories (“I knew the market was heading for disaster”), or signs of a streak (like a “hot hand” at the blackjack table). Mostly, we wind up with false insights, prompting us to trade on distorted data points or headline-grabbing events.

If you find yourself batted about by market signals, consider playing Moneyball with your account: Take a hard statistical look at your invest-ments, and probe what you’re get-ting right and wrong, says Terrance Odean, professor of finance at the University of California, Berkeley. “It’s amazing how much investors kind of wing it,” he says. “Individual investors tend to be really swayed

by what catches their attention. My advice is to study what you did and didn’t do, keep records, and look at what’s working.”

5. Stocks Are Tanking and You’re Itching To SellIt’s easy to pay lip service to the idea that recent history won’t last, but convincing yourself is harder. We’re all prone to recency bias—expecting the latest trends to continue. And it’s hard to tolerate short-term pain in exchange for a reward that will come many years from now (like a higher retirement account).

Rather than making the mistake of selling when things look bleak, reward yourself for not acting impulsively. A psychological trick that works for exercise could help; instead of focusing on the pain of hitting the gym, substitute a reward for a good workout, like getting a massage or lining up a date night with your spouse.

It’s also helpful to put recent turmoil in context. Shefrin recommends quizzing yourself on market history: What’s the longest bull market in history or consecutive days of stock gains? You’ll probably find comfort in knowing that market dips and volatility are quite common histor-ically. Make a trivia game of it and play with friends; whoever gets the right answers doesn’t pay for the beer.

If all else fails, stick a Post-it note on your computer with Warren Buffett’s advice: Be greedy when others are fearful. Market declines never turned him into an ostrich. If he racked up losses, they didn’t get him down. Instead, he seized the opportunity to buy stocks when they

pects and whether you have some in-formational advantage that everyone else is missing—rather than things that aren’t relevant to performance, like the price you paid or its role in your portfolio.

3. You’re Overconfident and Take Excessive RisksMany investors overestimate their skills and underestimate exter-nal risks, says Cornell University behavioral economist Vicki Bogan. Investors may believe that they can outsmart the market by picking individual stocks (most studies say that’s unlikely). They may also be overly optimistic about the prospects for stock returns, resulting in too much equity exposure in a retire-ment account.

If you pick stocks or use active-ly managed funds, do so with an amount that won’t heavily affect your retirement, says Barber. Main-tain a small “gambling” account to scratch the trading itch. And avoid the temptation to trade often. “There’s a reason there are no choc-olate-chip cookies in my cupboard,” he says. “I’d eat them if they were there.”

If you tend to underestimate risk, look for media stories or analysts with the opposite point of view, says

10 GUIDE TO WEALTH

Jarring stock market volatility has been a blunt reminder of the risks in retirement portfo-lios, and investors are under-

standably concerned. Many are sec-ond-guessing strategies that fattened their nest eggs in recent years and have fled to safety in money-market funds, which had their best monthly inflows in December since 2008.

If recent volatility proves to be the precursor of a market dive, then those fleeing to safety will look smart. But just as no one rings a bell at the top, no bells ring at the bot-tom, either. Selling off investments during gyrating markets can result in unrecoverable setbacks in portfo-lio value. In search of more nuanced advice for managing your portfolio through volatile times, we turned to leading financial advisors for

By Karen HubeOriginally published February 4, 2019

SAVING FOR RETIREMENT WHEN THE MARKET GOES CRAZYTop financial advisors explain how they are positioning client accounts for the year ahead

guidance. They shared their views on 2019 and recommendations for keeping portfolios on track.

Favor Stocks Over BondsTrouble spots in the U.S. and global economies—ranging from rising interest rates to the trade standoff with China—are likely to fuel inves-tor uncertainty and cause higher than average volatility through 2019, advisors say. But barring major missteps by policy makers, advisors are generally optimistic that the U.S. economy will grow this year, albeit at a slower pace of 1.5% to 2%, compared with 2018’s 2.9%. (For a contrary view, read the interview with Pamela Rosenau.)

Meanwhile, the S&P 500 index’s riotous decline in December—the worst monthly pullback since 1931—

11GUIDE TO WEALTH

challenging markets,” Newell says.

For zip, Newell likes cyclical stocks such as Boeing (BA) and truck carrier Knight-Swift Transportation Holdings (KNX), which do well when economic growth is being underestimated. Also consider companies that capitalize on secular, innovative growth opportunities and have earnings-per-share growth rates at least 150% higher than S&P 500’s. “ Salesforce (CRM) and Visa (V) have growth rates two to four times that of the S&P 500, with out-standing business models, brands, and catalysts,” Newell says.

Be Selective OverseasAdvisors continue to favor U.S. stocks over international, but some of them recommend shifting some assets from slower-growth Euro-pean stocks to emerging markets. Stocks in both are trading at 17% discounts to historical valuations, but emerging markets—particularly

in Asia—have better earnings and overall profit growth, says Jason Pride, managing director and chief investment officer of private wealth at Glenmede. “Meanwhile, in Europe you see Brexit, in-fighting among European Union members, and unhealthy debt dynamics.”

Brace for extreme volatility in emerging markets, cautions Michael Chasnoff, CEO of Truepoint Wealth Counsel in Cincinnati. Consider that after returning 80% in two years through January 2018, emerging market stocks cratered 16% last year

as the U.S. dollar strengthened and trade tensions grew.

Chasnoff avoids country-specific exposure and favors funds weighted by market valuation, such as DFA Emerging Markets Core Equity (DF-CEX), Vanguard Emerging Markets Stock Index (VEMAX), and iShares MSCI Emerging Markets (EEM). “This results in relatively strong exposure to China, Korea, India, and Brazil,” he says.

Balance RiskSize up your portfolio’s risk alloca-tion. A 60/40 stock/bond portfolio with emerging markets exposure and high-yield bonds is going to have a very different risk profile than one with blue-chip stocks and Treasury bonds. In your stock bucket, if you add emerging market stocks, consid-er paring back risk in U.S. stocks by adding more dividend payers, Pride says. If your overall stock alloca-tion is higher than usual, use fixed income as a pure safety play rather than chasing high-yield bonds. “We have risk in the market, so we’re not going to have risk in bonds right now,” Kaplan says. “We’re talking insured municipal bonds or triple-A rated corporates with durations of five years or less.”

Callable municipal bonds are par-ticularly attractive as a safe, tactical play, Saperstein says. On a 20-year muni callable in three to five years, “we can earn anywhere from a 2.7% to 3.1% tax-free yield,” he says. “If they’re not called, the yield is around 4.5% tax free. Heads you win; tails you win.”

Kevin Grimes, president and chief investment officer of Grimes & Co., in Westborough, Mass., says that cash is nothing to scoff at as an asset class these days. It’s earning more than 2%, and a small allocation not only dampens volatility but also provides flexibility to rebalance portfolios and buy on dips. “You don’t want to base your retirement on market timing,” Grimes says. But when rebalancing your portfolio, “volatility is your friend.”

That’s not a bad mantra for these times.

was a welcome reset for valuations, says Spuds Powell, managing di-rector of Los Angeles advisory firm Kayne Anderson Rudnick Wealth Advisors. “Lower than long-term average equity valuations combined with some evidence that we’re closer to an agreement with China on trade, and evidence that the Federal Reserve will be more reasonable and patient with rate hikes, present a relatively positive outlook,” he says.

This all bodes well for an overall overweight position to stocks. Still, it’s important to set realistic expecta-tions: Stocks have delivered blister-ing average annual returns of 12% since 2008, and investors should not base their retirement plan on a repeat performance over the next decade. Advisors we spoke to expect that selective investing, rather than hugging indexes, will be rewarded.

Smarten Up U.S. Stock HoldingsBig companies powered the 10-year bull market, meaning that many portfolios have heavy exposure to U.S. large-cap stocks. It’s time to trim those large-caps and boost holdings of potentially higher-growth domes-tic small- and mid-caps, says Rich-ard Saperstein, managing director of New York–based Treasury Partners.

“Small- and mid-caps will contin-ue to benefit from tax reform and the underlying strength of the U.S. economy, and they have the added benefit of being less impacted by tariffs,” Saperstein says. He recom-mends iShares Core S&P Small Cap exchange-traded fund (ticker: IJR), Virtus KAR Small-Cap Growth (PX-SGX), and Virtus KAR Small-Cap Value (PXQSX).

Within big-company stocks, expect divergent performance, with cash-rich companies rising to the top and debt-laden businesses seriously trailing. So, rather than leaving your fate to a broad index, position your holdings with clear goals. For defen-sive-minded investors, Valerie New-ell, senior wealth advisor at Mariner Wealth Advisors in Cincinnati, likes companies with healthy dividends and superior dividend growth, such as UnitedHealth Group (UNH) and Becton Dickinson (BDX). “They preserve capital and go down less in

13%Average annual return for U.S. stocks since 2008

17%Discount of historical valuations of European and emerging market stocks

If recent volatility proves to be the precursor of a market dive, then those fleeing to safety will look smart. But just as no one rings a bell at the top, no bells ring at the bottom, either.

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