Questions to Ask a Financial Advisor
by Robert B. Gordon, Sc. D.
January 6, 2003

Finding a good financial advisor with proven ability to grow capital safely in a severe bear market is, in my considered opinion, an extremely difficult job. There are almost certainly a few such individuals in this country, but finding them and confirming their ability will be a difficult task. Later in this essay, we will provide information on several advisors who can perhaps serve as a model or standard for comparing others.

As our regular readers know, we are not a licensed advisor, but in our 62 year experience we have lived through and survived one moderately severe bear market in 1972-1975 and have closely studied every severe bull/bear cycle from 1637 in Holland to 1989-2003 in Japan. We are very well aware of the knowledge and skills it takes to manage assets successfully in a great bear market. The number of licensed advisors with this ability is surely limited, so finding one to satisfy your needs may require a substantial effort. We hope the information provided herein will be helpful.

For this essay, our definition of a financial advisor is an individual or firm whose principal business is the management of the assets of its clients for a fee. We are not considering anyone like a Certified Financial Planner, or a salesman in a broker's office, bank office or insurance office who receive commission income on investment products that they sell.

OUR BULLISH SOCIETY

There are reported to be 40,000 certified financial planners in this country, who took courses in various major aspects of financial planning, as well in other areas. A rather large percentage of them probably took the course and exam in the last five years of the recent stock mania. They earn their living through commissions on sales, fee-only advice or a combination of the two. There is a much larger number of less well-trained individuals, working in Wall Street and the many brokerage, bank and insurance offices scattered across the U. S., most of whose living comes from selling something like the "daily special" in that particular company or office.

We know from opinion surveys and public pronouncements that the employees of the financial service firms are currently bullish on the market. They pretend to be unaware that it took 25 years for the Dow index to regain its 1929 peak or that the 13-year Japanese bear market still defies all efforts to end. The "experts" that parade before the CNBC camera are bullish. Famed author, Dr. Jeremy Siegel of the Wharton School, recently stated that he is convinced the bear market is over and the Dow will not go below 8000. We think he will live to rue that statement. On December 31, 2002, CNBC took a quick public poll asking their viewers their opinion on the market in 2003. We guessed it would be 2/3 bullish and it turned out to be 61/39 for the bulls. So the general public, in great part, continues to follow their "experts."

With mutual fund redemptions still low and the public looking for the next bull market, one has to believe that the great majority of financial advisors hold this very same view. Another meaningful observation is that large financial institutions, presumably with expert advice, are currently selling low yielding bonds and buying more stocks.  With our 50 state governments suffering severe revenue deficits, and carrying heavy bond debts, are financial advisors warning clients of possible mammoth defaults in tax-free bonds? We doubt it.

Large hedge funds are reported to have done poorly in 2002, despite having access to the best advice available to wealthy clients. Corporate and government pension funds have lost huge amounts from increasing their stock to bond ratio in the final bull mania. With the abysmal performance of the big institutions (and their advisors), it seems that now is the time to seek the advice of people who are serving individuals rather than institutions.

CURRENT BEAR MARKET STATUS

STOCK BUBBLE - It is almost incredible to me and others studying the current scene that standard signs of optimism are still at the 1999 peaks. For instance, the current Wall Street recommendations for stock/bond ownership is now at 67% stocks and 33% bonds, essentially the same as 3 years ago. In fact, despite the trillions of dollars lost to date in stocks, the big institutions and pension fund are in the process of selling bonds and buying stocks. In an even more alarming note, tens of millions of workers are still making monthly contributions to their 401K plans and have been joined by 3 million more wage earners in the past 3 years. It?s true that some plans do not give individuals the option to leave and there are also tax considerations. People in that unfortunate situation will probably suffer serious losses. Nevertheless, most investors who are able to leave, do not yet see any reason to do it.

Wall street "experts" are calling the market bottom almost daily despite the historic fact that bear market bottoms end with deep apathy by buyers, a dead Wall Street and stock valuations at a small fraction of present numbers. So my conclusion, and that of independent experts I respect, is that this bear market has much further to go in both depth and duration.

CREDIT BUBBLE - Major corporate bankruptcies are occurring at alarming rates and more are expected as companies run out of cash and are unable to pay interest on their heavy debt loads. Defaults on credit card debt are growing and will probably become overwhelming. The total government, corporate and personal debt in the U.S. is 30 trillion dollars, or three times our GDP. The future appears grim to all informed observers.

HOUSING BUBBLE - The general air of optimism and the extremely low interest rates have fed this bubble which continues to this date. It will take a scary break in the stock market, which is now overdue, to burst this bubble. The recent bear market rally has peaked and the Elliott Wave theory now predicts a severe drop in the stock market.

RELATED PROBLEMS - Major institutional stock and bond assets have had huge losses which lead to very negative consequence. Lower insurance company assets affect their ability to meet contractual commitments to clients. They are now raising rates across the board to re-build reserves. Losses in state and corporate pensions funds, college endowments etc. are gone forever and will have serious effects on the entire society. All 50 states are experiencing huge decreases in their tax revenues and are taking mostly temporary stop-gap measures due to the current optimism that pervades our country. If my experts are correct that we are on the brink of a devastating depression, the budget problems will become enormous at state and local levels. I get no pleasure in bringing any of these predictions to my readers.

CONCLUSION - Stock markets in all major countries are in the grip of major bear trends with no end in sight. World economies are in poor condition and weakening. The dollar is weakening against other currencies. Federal Reserve attempts to re-inflate the domestic economy are failing. Our conclusion is that the bear market has much further to go on the downside. We expect consumer sentiment to weaken and the housing bubble to burst as depression conditions begin. We conclude that investors must place capital preservation first and use only those asset classes that have proven capable of growth in a bear market.

CHOOSING A FINANCIAL ADVISOR

The CFPs and other advisors we see and hear on CNBC do not use words of advice that convey a real understanding of the current situation in our stock market and economy. They do not seem to have anything to suggest but various combinations of stocks, bonds and cash. They also do not envisage a grueling bear market and use the same old clichI`s about asset allocation and diversification.  They talk about growth over the long term and only occasionally use words like capital preservation.

The current environment is probably the most difficult for money managers since the Great Depression. It is extremely important for all are readers, regardless of their age and circumstances, to recognize this very basic fact. The rules for success in the last bull market do not apply to this severe bear market. There are very few asset classes with the capability to grow and/or preserve capital. From this simple fact, we draw the conclusion that the supply of financial advisors you can trust to manage your money is quite small.

How can an individual succeed in this search, if the large institutions have been unable to do it?  There are two reasons, first, because accounts measured in six digits are much easier to manage than accounts in 8 digits and, second, individual investors can go to the Internet and gain ready access to the words and deeds of a variety of experts. Later in this essay, we will give you the results of our search on the Internet. We will now consider some conventional questions to ask an advisor and then follow with our own special list.

QUESTIONS THAT ARE  NO LONGER PERTINENT

Here are some items in a financial analyst?s resume that are no longer very important:

1.  Details like age, education and experience in non-financial activities.
2.  Years of investment management experience in the 1982-1999 bull market.
3.  Investment results of model accounts in the 1982-1999 bull market.
4.  Amount of client assets managed before 2000.

QUESTIONS PEOPLE ARE BEING TOLD TO ASK

The list below is suggested by the Certified Planning Board of Standards as questions for prospective clients to ask of a Certified Financial Planner. They are all serious questions, but not particularly helpful in finding the right person to manage your money at this time.

  1. Do you have experience in providing advice on the topics below?
    If yes, please indicate the number of years.
             Retirement planning ________
             Investment planning ________
             Tax planning ________
             Estate planning ________
             Insurance planning ________
             Integrated Planning ________
             Other

  2. What are your areas of specialization? What qualifies you in this field?

  3. A. How long have you been offering financial planning advice to clients?
    B. How many clients do you currently have?

  4. Briefly describe your work history.

  5. What are your educational qualifications? Give area of study.

  6. What financial planning credential(s) do you hold?

  7. What financial planning continuing education requirements do you fulfill?

  8. What licenses do you hold?

  9. A. Are you personally licensed or registered as an Investment Adviser with the State(s)?  Federal Government? 

  10. What services do you offer?

  11. Describe your approach to financial planning.

  12. Who will work with me on my plan?

  13. How are you paid for your services?

  14. What do you typically charge?

QUESTIONS THAT SHOULD BE ANSWERED

These questions are those that I would use if seeking a financial advisor.

  1. Details of any money management experience (if any) prior to 1982.

  2. Details of any financial experience in the 1987 crash and recovery.

  3. Details of any participation in the great 1997-2000 internet/telecom mania.

  4. Did the advisor read Robert Prechter?s "At the Crest of the Tidal Wave" and if so, when?

  5. Does the advisor understand and use the Elliott Wave Principle in his work?

  6. If so, please explain in detail how it is used.

  7. Investment results of model accounts in the 2000-2003 bear market.

  8. Does the advisor fully understand the history of all completed bear markets, including the fact that all of them have ended at a price below the starting price?

  9. What is the advisor?s current market view, bullish, bearish or neutral?

  10. What is the advisor?s market view for the years 2003-2004?

DISCUSSION

We have a hunch that most of the advisors who started work in the 1990s bull market are still using the old tools despite being in a completely different environment - the biggest bear market since that of the 1930?s. Asking the above 14 questions posed by the CFP Board will never locate expert advisory talent for our current bear market environment.

There are probably a small and unknown number of brilliant money managers with a superb track record in the bear market to date.  We are not aware of any central information bureau listing their names and addresses. Some of them undoubtedly choose to work exclusively with wealthy clients. Multimillionaires have one advantage in seeking experts to manage their assets; they can choose to split their assets between several managers and not have to rely on one. Of course numbers will not help the investor, if the advisor?s talents resemble those that helped major institutions lose huge sums in the past three years.

When the investor?s assets are in the low six figures, selecting the one best advisor may be more difficult but certainly not impossible.  Fortunately, our large expenditure of time on the Internet studying the economy and the stock market has led us to the names of three exceptional managers we will discuss below. One of these advisors contacted me by e-mail to discuss one of my earlier essays and we have been communicating back and forth since that time. He informed me that he has been managing money since 1966 and uses Elliott Wave Theory and Point and Figure analysis. I have had no direct contact and received no comparable information from the other advisors.

In preparing this report, I have been reading the brochures available on two of the advisors web sites. In addition, I have been reading the expert bear market views on their web pages over the past several years. As a result, I feel comfortable in the belief that the principals of all three advisors understand the lessons of stock market history and the problems associated with money management in a major bear market. They can probably score very well on my ten tough questions listed above. It?s up to an investor seeking help to ascertain the answer.

INFORMATION ON THREE FINANCIAL ADVISORS

As my older readers well know, I do not make specific recommendations on stocks and mutual funds and I am not going to recommend any financial advisor now or in the future. But I am going to make it possible for you to have access to information from all three firms mentioned above.

I believe there is an advantage to the investor in dealing with a small advisory firm rather than a large one. My preliminary information indicates that these firms fall in the desired range. They are headed by a very experienced individual supported by others who could continue in the event of illness or death of the principal.

The three advisory firms are located in the East, South and West in populous areas. I would imagine that many of our readers are within driving distance of their offices. Two of them require minimum client assets of $100,000, the third is higher.

I am not going to name these firms, other than by East, South and West, in this essay. I will be happy to give their names and web addresses to qualified U.S. investors who send me an e-mail requesting this information on one, two or all three firms. I want to prevent a flood of e-mails coming to these firms from unqualified investors in all parts of the world.

In your e-mail requesting names and addresses, please do not include any other information. I expect to be busy for a few days filling these information requests and ask that our readers hold e-mail on other subjects for a few days so that I can give them a suitable answer.

We wish our readers, far and wide, a very happy and prosperous New Year.


(C) 2003 Robert B. Gordon, Sc. D.
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