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Advisers and Publishers

How to Get the Most from Investment
Advisers and Investment Publishers

When investing and planning your financial future, there are great advantages of getting help, provided it’s the right kind of help for you. Here are some steps to follow.

Step #1. Make sure you understand the differences between advisers and publishers.

Here are three:

One-size-fits-all information vs. customized advice: An investment publisher sends out the same information to all subscribers to a particular publication. In contrast, an investment adviser typically provides customized recommendations tailored to the individual goals and circumstances of each investor.

Reader or client? An investment publisher, like an author, has no information about the individual financial circumstances of its readers. In contrast, an investment adviser not only must have all the required information about his clients but also must assume certain responsibilities for each and every one of them.

FTC and SEC: The primary regulator of investment publishers is the Federal Trade Commission (FTC). The primary regulator of investment advisers is the Securities and Exchange Commission (SEC).

Step #2. Use investment newsletters as a source of research and investment ideas.

Investment newsletters can provide a rich source of research, information and opinions of the authors or editors. And unlike newspapers or magazines, they often give you more specific, actionable recommendations about investments that you may not find in other sources.

However, it’s not a good idea to use an investment newsletter as a substitute for an investment advisor.

Remember: The newsletter editor or publisher has no knowledge of your invidividual circumstances and is not keeping track of your investment portfolio.

So it’s entirely up to you to decide which recommendations to act on, when, and with how much money.

If you’re not sure, one approach is to begin by “paper trading” all of the investment recommendations made in a publication: Rather than experimenting with real money, merely keep a record of each trade on paper. That will give you a better sense of not only how well those investments perform, but also whether or not the investment approach is suited for your needs.

For example, you may find that some publications recommend too many different investments, recommend trading them too frequently, or recommend investments that are too volatile for you. If so, you may want to be more selective in acting on those recommendations, or you may want to refer to them primarily as a second opinion about recommendations you get from other sources.

Or, conversely, you may find that the publication does not give you enough actionable recommendations.

Fortunately, most investment publishers are sensitive to these issues and strike a good balance between these two extremes. They don’t make money unless you renew your subscription. So they have an incentive to do everything they can to recommend investments that are most likely to perform well and to make sure they are meeting your informational needs.

Overall, the best use of an investment publication is usually as one of several sources of investment ideas and information. And to give you a broad variety of opportunities to choose from, the best approach is often to subscribe to several different publications.

Use them to learn as much as you can about each investment opportunity. Then, make your own decisions or consult with an investment advisor for additional guidance. (More on advisors below).

Step #3. Avoid acting on recommendations contained in stock-tauting marketing pieces.

A small group of unethical publishers has developed a practice of accepting compensation to recommend a stock to investors.

In a typical arrangement, the company issuing the stock pays for the printing and mailing of the publisher’s direct mail marketing pieces. The publisher, in turn, agrees to recommend the company’s stock in that same piece.

We consider this “research for hire” to be a form of payola: The stock recommendation isn’t based on the actual merits of the company. It’s based almost exclusively on how much the company is willing to pay. Consequently, investors who buy the shares often wind up with a stock that performs poorly, is difficult to sell, or both.

How can you know spot this kind of marketing?

The first sign is that the name and stock symbol of the company is often prominently displayed in the first page or two of the marketing piece.

And the second, more conclusive evidence is a box, typically placed on one of the back pages, which states that the printing and mailing is paid for by a sponsoring company, which, in turn, is financed by the company that issues the stock.

Important note: A prerequisite for membership in the Financial Publishers Association is avoidance of this practice. Our members never accept payments from companies for making recommendations either in their marketing or their regular issues.

Step 4. Avoid so-called “free advice.”

You can get “free advice” from many sources — your stockbroker, your insurance agent, your financial planner and other professionals. But it isn’t really advice. And it may not even be free.

With “free advice,” you can actually get hurt in three different ways:

In short, taking “free advice” can be like walking into the ring with a professional wrestler. First, he socks it to you with fees. Then, he dumps you into bad investments. And last, he pins you down on the mat and won’t let you go. So avoid acting on so-called “free advice.”

How can you tell? It’s actually quite simple. Everyone you deal with in the financial industry should be either a salesperson or an advisor. Due to conflicts of interest, it is not really possible for anyone to do a good job at both.

The salesperson will often tell you he’s not charging you for the advice. He’ll tell you it “comes with the service” or it’s covered by the transaction fees or commissions. That’s a dead giveaway.

The advisor will generally tell you, up front, what fee he’s going to charge you. And unless you have a very large, complex estate, you shouldn’t have to pay more than a few hundred dollars per year for most of the advice you need.

Still not sure how to distinguish between a salesperson and a true advisor? Here’s what we suggest. No matter whom you encounter in the financial industry — stockbroker, insurance agent, financial planner or banker — ask these questions:

1. Do you (or your company) make more money the more I buy? If the answer is yes, you may have a problem. Often, the best investment decision is not to buy. And sometimes an even better decision is to sell, stashing the proceeds in cash. If buying nothing or selling is going to be a negative for your advisor’s earnings, you don’t have an advisor. You’ve got a salesperson posing as an advisor.

2. Who pays your commissions or fees? If he says it’s someone other than you, it’s probably not true. No financial institution we know of really pays sales commissions out of its own pocket. If a salesperson is making commissions, it almost always comes out your pocket, directly or indirectly.

3. Where are you getting the information or report you’re giving me? If the answer is a source that will benefit from your purchase, it’s questionable. Even the factual data may be used selectively to lead only to one conclusion: Buy.

But with these three questions, you can distinguish the salespeople and find the true advisors. True advisors are those who are:

we repeat: In reality, “free advice” is neither free nor advice. Sooner or later it could cost you a lot of money in terms of mediocre performance, or worse, outright losses.

These conflicts of interest can impact more than just some individual investors. They can also become incorporated into the broader culture of the investment world, generating some “rules of thumb” that are may really be myths in disguise:

Myth 1. “Always invest in stocks for the long term.” Or you may have heard this same concept expressed this way: “Historically, stocks have always moved higher.”

A better rule of thumb: As soon as an investment loses more than a certain percentage that you predetermine, say 10% or 20%, get rid of it and move on to greener pastures.

Myth #2. “Just buy this one mutual fund. That will give you the diversification you need.”

The reality: Mutual funds are not the holy grail of investing. In the great stock market years between 1997 and 1999, only 24% outperformed the S&P 500.

In 2000-2001, the smart, sophisticated, mutual fund managers running tech funds lost money just like everyone else. In fact, every single one of 200 tech stock funds lost money, with 72.5% of the funds losing more than the Nasdaq Composite Index.

A better approach: Diversify over a broad spectrum of different asset classes, including not only cash and bonds, but also investments tied to natural resources, real estate and even foreign assets. But don’t count on diversification alone to protect you from adversity.

Myth #3. “Buy more and you will lower your average cost.” Their rationale is: “If your 100 shares of stock was a good buy at, say, $50 a share, then they’ve got to be truly a great buy at $10 per share.” So all you have to do is buy another 100 shares and you can lower your average cost to $30 per share.

The reality, however, may be this: The stock is in a fundamental, confirmed downtrend, and the natural tendency is for that trend to continue. If it does, you’ll be losing money twice as fast. Instead of losing $100 every time the stock drops one point, now you’ll be losing $200.

Stop for a moment and look behind each of these “words of wisdom” from so-called advisors who are reall sales people in disguise: They want you to buy. After you buy, they want you to buy more. And when the day comes that you want to sell, they’ll want you to hold.

A better approach: Add to your winning investments — not to losers.

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