Book Reviews, Methodologies

Book Review of Get Wise to Your Advisor by Steven D. Lockshin

The full title of this book is Get Wise to Your Advisor: How to Reach Your Investment Goals Without Getting Ripped Off by Steven D. Lockshin (2013).

According to the bio in the book, Steve is the founder and CEO of Convergent Wealth Advisors and was Barron’s top-ranked advisor. I picked up the book because I was curious as to what a “top-ranked” financial advisor serving high net worth clients would advise in terms of investing. As you can see from the notes below, the advice is to go with the classic stock index investing advocated by Bogle and Buffett.

In terms of choosing your financial advisor, Steve recommends going with independent RIAs rather than advisors from broker-dealers. RIAs are regulated by SEC and are required to serve the client’s best interest while advisors from brokers do not. However, he warns that RIAs are allowed to have conflicts of interest, so long as they disclose them. Hence a number of RIAs play on this loophole and are in fact riddled with conflicts of interest, which investors need to be on the look out for when they choose their advisor.

Where the book shines is in providing a checklist for assessing advisors. The checklist, covering a number of categories, contains sets of questions and documents to review, including detailed commentary on what to look out for. I think those would be very helpful for people choosing their advisor to manage their assets.

Index Investing is the Way to Go

  • The simplest, least expensive, most tax-efficient, most worry-free, and historically most successful way to invest is index investing.
  • Actively managed funds have layers of costs of costs that can be ruinous, e.g. sales charge, expense ratio (cost of operations and marketing), trading fees (turnover), taxes.
  • For most people, the wisest approach to investing is to embrace two simple precepts: Be patient, and be passive.
  • The best passive investing strategy is to simply buy a diversified portfolio of broad-market index mutual funds or ETFs and to hold them for the long term, rebalancing as appropriate.
    • Patiently betting on the overall stock market to rise over the long term is far more profitable than making short-term bets on individual companies. I would argue that the only free lunch in investing is diversification.
    • Investing in the entire market is the equivalent of betting on capitalism as a whole…. over the long term, trusting the market has been richly rewarded.
  • If you need short-term investment thrills, set aside no more than 5% of your investable assets as “play money”.

Start with Independent Registered Investment Advisors (RIA)

  • RIAs have chosen to register and be regulated by the SEC, and must adhere to the 1940 Act and its associated fiduciary standard of care.
  • A fiduciary has six key duties
    • Serve the client’s best interest
    • Act in utmost good faith
    • Act prudently — with the care, skill, and judgement of a professional
    • Avoid conflicts of interest
    • Disclose all material facts
    • Control investment expenses
  • Typical RIAs use a third-party custodian. They can buy and sell investments on your behalf, but they cannot get hold of your funds or assets.
  • Beware of RIAs that have lots of conflicts of interest that they simply disclose in legalese.

Brokers Don’t Have To Act in Client’s Best Interest

  • Brokers are regulated by FINRA, a self-regulatory organization where the brokerage industry polices itself.
  • Brokers are held to a much looser standard of client care — the “suitability standard”.

Things to Review When Choosing an Advisor

  • Clients before profits
    • Client testimonials and references
    • Average account size, you don’t want to be one of the largest or smallest clients.
    • Fees for only asset allocation should be 0.25% or less.
    • Service agreement
    • Interview support staff
    • The firm’s SEC Form ADV. Filings here.
    • SEC/FINRA database search to identify any marks on the firm or individuals’ records
    • Regulatory record and third-party audits
  • Safeguards
    • Research the custodian
    • Third-party fund audits proving the money in funds is where they say it is.
    • Verification of insurance coverage
    • Written policies for managing discretionary relationships
    • Written policies and procedures used to guard against fraud
    • Privacy policy
    • Ethics policy
  • Professionalism
    • Succession planning documents
    • Disaster recovery policies
    • Advisor and staff resumes
    • Advisor’s social media accounts
    • Sample investment policy statement
    • Sample performance report

Calculate How Much Life Insurance You Should Buy

  • Figure out how much money the surviving spouse would need, in today’s dollars, to live a comfortable lifestyle. Don’t include taxes.
  • Multiply that number by 33.
  • Add to that the present value of major obligations (college tuition, mortgage payoff, etc.)
  • Add any outstanding debt that you might want to extinguish
  • Subtract your current liquid savings (cash, savings, stocks, bonds, etc.)
  • The sum of these numbers is the amount of insurance you should purchase.

Other Tidbits

  • On May 1, 1975 (aka “May Day”), SEC deregulated brokerage commissions by ordering the industry to stop fixed commissions. That resulted in the entry of discount brokers such as Charles Schwab, and public participation in the markets shot up.



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