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MAKING CENTS OUT OF THE NEWS
Blog #2
(January 8th, 2009)
THROW OUT THE BATHWATER, NOT THE BABY!
By Tom McAllister, CFP™
The Madoff scandal, coming hard on the heels of last fall's market collapse, seems almost too much to bear. Bernie Madoff generally made his "money management" services available to upper-crust, high-echelon investors, keeping them happy for years by using funds deposited by new clients to pay off earlier investors, a strategy was first devised by Charles Ponzi in Boston some ninety years before. Needless to say, such pyramids inevitably collapse under their own weight, needing greater and greater sums to keep older victims unaware of the true sources of their "investment returns". Apparently the fact that Madoff charged only commissions (legitimate money managers charge portfolio management fees) escaped the notice of even the largest of his investors.
Undoubtedly this scandal serves as yet another reminder to investors to exercise extreme caution in selecting money managers for their nest eggs. On the other hand, I feel I must warn my clients and blog readers: Erring too far on the side of caution by shunning all professional money managers can wreak financial planning havoc of its own. We financial planners strongly believe most investors need benefits that can be gained only by using professional money management, in the form of personally managed stock and bond accounts, mutual funds, or exchange traded funds. For most investors, needed diversification could not be achieved in a portfolio consisting solely of individually held securities, nor could most individual investors have access to the research capabilities of money management firms.
The safest approach may well be to engage the services of a Certified Financial Planner® to aid in the selection and monitoring of money managers. All investment advisors need to perform thorough due diligence on each money manager selected for their clients, and communicate their ongoing findings to clients and potential investors.
Now in our thirtieth-fourth year, we at McAllister Financial Planning are proud to report on the manner in which we handle client funds. Our two investment managers, Robert Walker and Associates out of Louisville, Kentucky and Trust Investment Advisors here in Indianapolis, are investment veterans. I have known each for more than thirty years, and, having selected them to manage portfolios for my clients, I've continued to monitor their successful management results for the past twenty-five.
Together with these money managers, we financial advisors offer the benefits of a two-fold approach to managing client money. My functions include interviewing clients, handling communications, and staying in touch with my clients, responding promptly to questions and concerns. The money managers, in turn, make the day-to-day decisions about which individual stock or bond securities are appropriate for different accounts, often consulting with me before acting on their own recommendations. Clients are free to contact their money managers directly if they so choose. (This is not always the case with larger firms.)
Very reassuring to know, neither of the two money management firms to whom we've entrusted client funds, directly holds those funds. Instead, the money resides in a custodian institution (Charles Schwab, Fidelity Investments, OR a major brokerage firm are all possibilities). Accounts at those custodial institutions are insured by the Securities Investor Protection Corporation (SIPC) against failure of the custodian firm up to $500,000. Virtually all custodians carry additional account insurance up to five million dollars per investor.
Robust as any adviser's due diligence effort might be, fraudulent operators exist. What I do strongly caution my clients and readers is to avoid falling into another sort of investment decision "trap." Through our firm's due diligence and monitoring, plus your own ongoing interchanges with us, let's "throw out" the dishonest investment practitioners who may cross your path (the "dirty bathwater", if you will). But, in that process, I say, let's preserve for ourselves the many benefits of the precious professional money management "baby"!
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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