Protect Your Money with Three Questions

It’s your money! Know what you own, know what you made and know what you paid.

By: Jeanie Wyatt

Investing today is global, complex and confusing! Information overload perhaps best describes the state of the average investor. This situation is made worse by an unending stream of new investment products and strategies, combined with nonstop news coverage of economic events, relevant or not. Turning to an investment manager under these circumstances feels a lot like taking your car to the shop. You can’t fix it yourself, but you are not sure if the repairs you are paying for really are necessary, either.

Businessman analyzing investment charts with laptop. Accounting

So what should you do? How do you find an investment advisor who doesn’t leave you wondering, ‘Are they doing what’s best for me, or are they doing what’s best for them?’ Fortunately, this is one of life’s dilemmas that has a fairly simple solution – one that centers on transparency. You need to arm yourself with a little information. Specifically, you need to know what you own, know what you made and know what you paid. Your financial advisor should be able tell you these three things on a regular (quarterly) basis. If your advisor cannot, you should find an advisor who can. Here’s why they are important:

» Know what you own
Sixty years of modern finance theory can be summarized by the simple assertion that you shouldn’t talk about investment returns without talking about investment risks in the same sentence. But you can’t know the risks you are taking if you don’t know what securities you own. In fact, many of the bad outcomes that people experience with their investments occur because they don’t know what they own down to the individual security level (e.g. 100 shares of IBM stock; a State of Texas General Obligation bond). That’s when clarity or transparency is at its highest, at the individual security level, and it only goes down from there.

For example, combining just a few mutual funds or exchange-traded funds (ETFs) makes it very difficult to know what exposures you have to specific companies or sectors, like energy. And even expert financial analysts have difficulties figuring out what is owned in many of the annuities and insurance “investment” products that advisors routinely pitch. For other investments, like hedge funds, transparency is often impossible. Finally, security-level transparency makes it easier to detect excess trading or portfolio “turnover.” This can indicate a manager more focused on short-term speculation than long-term investing.

» Know what you made
Money managers are notorious for obfuscation and game-playing when it comes to reporting their performance numbers. Sometimes this takes the form of creating a lot of different portfolios, and then later only picking the best one in hindsight to talk about. And managers can also cleverly attach historical “back-tested” numbers or charts of hypothetical portfolios with more recent numbers or charts from real portfolios in order to give a very misleading picture of their historical performance.

Fortunately, the Chartered Financial Analyst Institute has worked toward helping investors navigate these misleading waters by developing global investment performance standards, or GIPS. Make sure your manager is “GIPS compliant,” and make sure that these GIPS-compliant performance numbers are regularly discussed with you and compared to reasonable benchmarks, like the S&P 500 or Wilshire 5000 for U.S. portfolios, or the MSCI World Index for global portfolios.

» Know what you paid
As difficult as it is to get transparency with respect to holdings and performance, it is often even more difficult to get transparency on fees. Like performance numbers, investment management fees should be clearly laid out in simple dollar or percentage terms during your quarterly or annual meetings with your investment advisor. In general, investment products that are opaque or lacking in transparency have the highest and hardest-to-find fees. This is particularly true of high-commission products like annuities and life insurance products, but it can also be true for many types of mutual funds.

A recent Cerulli Report shows that the average all-in fee for mutual funds is 2 percent. Sometimes advisors get paid commissions for putting their clients into these products, so you should always ask your advisor how he or she gets paid. Indeed, many of the large global money center banks started focusing on individual “wealth management” businesses because automated trading systems had greatly reduced the trading commissions that historically made up a lot of their business. They turned to individuals because they saw a need, their need, to replace lost trading commissions with high-commission investment products.

Keep your investment life simple. Know what you own, know what you made and know what you paid.

South Texas Money Management Ltd. is an independent registered investment advisor with $2.7 billion in assets under management and claims compliance with the CFA Asset Manager Code of Professional Conduct. It is located at 921 N. Chaparral, Ste. 112, and may be reached at 361-904-0551. For more information, you may also visit


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