1. How does a registered investment advisory firm such as yours differ from a brokerage firm such as Merrill Lynch, Morgan Stanley, etc.?
Advisory firms and brokerage firms operate under different federal and state regulations.
Representatives of advisory firms receive compensation only from their clients and directly from their clients for the investment advice and investment management they provide them. Representatives of brokerage firms receive commissions from the firms that employ them for selling investment products to the firms' customers.
Representatives of advisory firms are by law fiduciaries to their clients. As such, they are legally obligated to act in the best interests of their clients. Representatives of brokerage firms are not fiduciaries to their customers. They are obligated to sell suitable investments, but they are perfectly free to sell investments that may not be in an investor's best interest compared with other investments. In fact they are sometimes under pressure to sell what their brokerage firms want sold, looking more toward firm profits than the good of firm customers.
Update 2018: The Department of Labor (DOL) is in the process of requiring all representatives of financial service firms (including representatives of brokerage firms) to act as fiduciaries when being compensated for work on retirement accounts. The DOL fiduciary rule changes very little for representatives of investment advisory firms. It has, however, stirred a great deal of controversy at brokerage firms, which cannot conduct business as usual under the new rule. The rule is currently under review. Stay tuned.
2. How are you compensated, and do you have a minimum account size?
Clients pay an advisory fee based on assets under management. This fee is my only compensation. The annual fee schedule is as follows:
First $1,000,000 .8%
Next $1,000,000 .65%
Next $3,000,000 .5%
Above $5,000,000 .35%
These fees are paid quarterly in arrears. Under most circumstances, these fees are tax deductible. If you are paying these fees directly from an IRA, you are not taxed on the withdrawal. My usual minimum is $1,000,000 of assets per family relationship.
3. Do you take personal possession of my assets?
No. Not ever. At the time of establishing a relationship with my firm, you will personally open an investment account (or accounts) at one of several institutional brokerage firms which custody assets for the clients of registered investment advisers. All deposits are made directly to your accounts.
To facilitate managing your accounts, I will ask you to give me limited authority to act on them, an arrangement overseen by the relevant institutional brokerage firm. Approximately $2 trillion are managed by registered investment advisers in this way. The vast majority of this money is held in accounts at Charles Schwab, Fidelity, and TD Ameritrade, the principal institutional brokerage firms working with registered investment advisers. If a client chooses to end his relationship with me, his accounts remain under his control while my limited authority to act on them is rescinded.
4. How do you arrive at an appropriate investment strategy for me and my family?
In the course of our first conversations, we will learn a lot about each other. One of the first things I will do is provide a brief overview of my approach to investing. It is, in short, passive asset class investing. If this kind of investing makes sense and appeals to you and if we think we might like to work together, then we will have a detailed conversation about your particular circumstances and needs. To spur and guide this conversation, I may ask you to complete a brief but thorough investment planning questionnaire.
My clients are typically concerned in the first place with taking care of themselves when they are no longer working. This is true whether they are in, near, or some years from retirement: they want to know how much they can reasonably expect to spend from year to year given their resources as well as the least risky way to be able to spend what they wish. We will address these questions during our conversations, and you can expect your investment strategy to reflect what I learn from you.
5. What is passive management and why do you recommend it?
Passive management is based on the simple observation that markets work. Capital markets are the mechanisms for pricing securities, quickly incorporating new information as it comes to light. As such, capital markets are the best determinants of a security's value. Grasping that there is no better measure of a security's value than its ever-changing market price and that the future is unpredictable, the basic strategy of passive management – owning the market as a whole so as to gain market returns – is a very sensible strategy. This basic strategy is my beginning point in developing investment strategies for my clients.
The alternative to passive management is active management. Active management is nothing other than buying and selling securities in light of predictions about the future – future stock prices, future broad market prices, future interest rates, future economic growth, and so on. The great goal of active management is to beat the market consistently and predictably. The evidence demonstrates overwhelmingly that it fails in its goal. And so I recommend passive management.
6. What is your relationship with Dimensional and why do you recommend its funds?
Dimensional has authorized my firm to use its funds in my clients' portfolios. There is a relatively small number of registered investment advisory firms – roughly a thousand across the country – which are so authorized. I receive no compensation from Dimensional and Dimensional none from me. I recommend Dimensional passive asset class funds to my clients because I consider them to be the best investment vehicles available.
7. Do you regularly review my portfolio?
Yes. I review daily the investments that make up your portfolio. I also review your entire portfolio on a monthly basis when I receive copies of your monthly statement or statements from your custodian. Quarterly, I review the performance of your portfolio and send you a detailed performance report. I am always available for any questions you may have. I request that you inform me of any significant changes to your financial situation, anything that might affect your investment strategy. At least every quarter, I compare the allocation of your portfolio with its target allocation. Whenever your portfolio requires rebalancing, I will discuss this with you, and upon your approval, I will rebalance. I like to arrange annual meetings, or, better still, quarterly ones, especially during the first years of working together.
8. Do you provide services other than investment management?
I work closely as needed with my clients' attorneys and accountants to coordinate their estate and tax planning with their investment planning. As for services typically outside the competence of attorneys, accountants, and investment managers, I have strong working relationships with service providers who share my fee-only approach and my view that clients are best served by independent specialists. With the help of these service providers, I can assist my clients very effectively with corporate trust services, foundation administration, and the acquisition of life insurance.
9. How do your services compare with those of a bank trust department?
Bank trust departments combine trustee services and investment management, sometimes to the detriment of trust beneficiaries. Trust beneficiaries may be dissatisfied with either their trust officers or their investment managers. With an individual bank performing both functions, trust beneficiaries have little recourse. Clients of mine who need or desire corporate trust services do not have this difficulty. There are a number of independent trust companies which have evolved to serve the trust needs of clients of investment advisory firms. Flexibility is built into the arrangements among client, investment advisor, and trust company. Typically, trust beneficiaries will have the authority, readily exercised, to replace a corporate trustee or an investment advisor or both if the need should arise.