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The Informed Investor

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Five Key Concepts to consider in working towards financial goals

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The Informed Investor

  1. 1. the Informed Investor five key concepts to consider in working towards financial goals By S t e p h e n K . Ta k e da , C I M A Morgan Stanley Smith Barney
  2. 2. Letter from Stephen K. Takeda, CIMA Many people today are facing difficult choices in working towards their financial goals and, as well they should, are asking serious questions. Our goal with The Informed Investor is to help you see through the noise of the marketplace in order to make informed decisions about your money. Because educated investors are some of the most successful investors, we have created The Informed Investor to show you an approach crafted to help optimize your investment portfolio over time. We have designed it specifically to not only support you in your efforts to preserve what you already have, but to also help capture the market’s returns for your investments. In addition, because we recognize that reaching financial goals requires more than just good investment management, we have also described an approach—comprehensive wealth management—that helps to address an entire range of financial issues. We believe in empowering people to make decisions for themselves or, if they wish, to astutely choose a financial advisor who can implement wealth management principles. And we believe in sharing our own financial knowledge with everyone who wants to make decisions about his or her money. Morgan Stanley Smith Barney is pleased to present The Informed Investor to our clients and prospective clients. We sincerely hope that it will provide you with a framework for an approach to making financial decisions that will help you to achieve your financial goals. Sincerely, Stephen K. Takeda, CIMA Senior Vice President —Wealth Management Senior Investment Management Consultant Morgan Stanley Smith Barney
  3. 3. Table of Contents Taking a Comprehensive Approach to Your Financial Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Rising Above the Noise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Five Key Concepts To Consider in Working Towards Financial Goals . . . . . . . . . . . . . . . . . . . . . . . . .6 Concept One: Leverage Diversification to Reduce Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Concept Two: Seek Lower Volatility to Enhance Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Concept Three: Use Global Diversification to Enhance Returns and Reduce Risk . . . . . . . . . . . . . . . . .8 Concept Four: Employ Asset Class Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Concept Five: Design Efficient Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Your Next Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 About the Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 About Morgan Stanley Smith Barney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 The Informed Investor: Five Key Concepts To Consider in Working Towards Financial Goals © Copyright 2009 CEG Worldwide, LLC. All rights reserved. No part of this publication may be reproduced or retransmitted in any form or by any means, including, but not limited to, electronic, mechanical, pho- tocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may sub- ject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys’ fees. The information contained herein is accurate to the best of the publisher’s knowledge; however, the publisher can accept no responsibility for the accu- racy or completeness of such information or for loss or damage caused by any use thereof. Morgan Stanley Smith Barney • 1901 Main Street, Penthouse • Irvine, CA 92614 Phone: (949) 955-7527 Fax: (949) 833-3542 stephen.k.takeda@smithbarney.com • www.fa.smithbarney.com/feiblemantakeda
  4. 4. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS Taking a Comprehensive Approach to Your Financial Life oney means different things to different people. M Each of us has different goals. ¶ You may want to achieve financial freedom so that you never have to work again—even if you plan on working the rest of your life. You may want to make a top-flight college education possible for your children or grand- them with more than just investments. They children. You might want to provide the seed want real wealth management—a complete capital that will give your children or grandchil- approach to addressing their entire financial dren a great start in life, whether that’s with a lives. home or a business. You may dream of a vaca- As you’ve probably noticed, many financial tion home on the beach or in the mountains. Or firms these days say that they offer wealth you may have achieved tremendous success management. The trouble is that many of these throughout your career and want to leave firms just provide investment management and behind an enduring legacy that will enable your offer a couple of extra services—such as college favorite charity to continue its work. education planning and estate planning—and Whatever your goals are, you need a frame- call that wealth management. So the challenge work for making decisions about your money for anyone who wants help addressing all their that will help enable you to achieve what is comprehensive financial needs is finding a firm important to you. Chances are good that you that provides true wealth management. have a wide range of financial goals, as well as We define wealth management as a formula: diverse financial challenges. Common sense tells us that such a broad WM = IC + AP + RM range of issues requires a broad comprehensive outlook. It’s for this reason that most affluent Investment consulting (IC) is the manage- clients want their financial advisors to help ment of investments over time to help achieve [2]
  5. 5. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS financial goals. It requires advisors to deeply To address their clients’ needs effectively, understand their clients’ most important chal- they must foster solid, trusted relationships lenges and then to design an investment plan with them. Second, wealth managers must man- that takes their clients’ time horizons and toler- age a network of financial professionals they can ance for risk into account and that describes an call in to address specific client needs. Finally, approach that will help enable clients to achieve wealth managers must be able to work effec- what is important to them. It also requires advi- tively with their clients’ other professional advi- sors to monitor both their clients’ portfolios and sors, such as their attorneys and accountants. their financial lives over time so that they can Our focus in this resource guide will be on make adjustments to the investment plan as the first element of wealth management— needed. investment consulting. But bear in mind that Advanced planning (AP) goes beyond invest- managing your investments is just one part of a ments to look at all the other aspects that are comprehensive approach to your financial life. important to your financial life. We break it At the end of this guide, we’ll describe what you down into four parts: wealth enhancement, should expect from a true wealth manager so wealth transfer, wealth protection and charita- that you can make an informed decision when ble giving. In our experience, very few financial choosing which financial professional to work advisors offer these services. with. Relationship management (RM) is the final Let’s turn now to our discussion of the con- element. True wealth managers are focused on cepts that can help make you a more successful building relationships within three groups. investor. The first and most obvious group is their clients. [3]
  6. 6. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS Rising Above the Noise ome investment professionals work hard to make their S work confusing. They believe they have a vested interest in creating investor confusion. They use jargon that can intimidate and make it difficult for you to understand relatively straightforward concepts. But investing is actually not that complicated. Unfortunately, most of the public is in this It can be broken down into two major beliefs: quadrant because the media play into this think- I You believe in the ability to make security ing as they try to sell newspapers, magazines selections, or you don’t. and television shows. For the media, it’s all about I You believe in the ability to time markets, or getting you to return to them time and time you don’t. again. Let’s explore which investors have which Quadrant two is the conventional wisdom belief systems and where you should be with quadrant. It includes most of the financial serv- your own beliefs. ices industry. Most investment professionals Exhibit 1 classifies people according to how have the experience to know they can’t predict they make investing decisions. Quadrant one is broad market swings with any degree of accu- the noise quadrant. It’s composed of investors racy. They know that making incorrect predic- who believe in both market timing and security tions usually means losing clients. However, selection. They think that they (or their favorite they believe there are thousands of market ana- financial guru) can consistently uncover mis- lysts and portfolio managers with MBAs and priced investments that will deliver market- high-tech information systems who can find beating returns. In addition, they believe it’s pos- undervalued securities and add value for their sible to identify the mispricing of entire market clients. Of course, it’s the American dream to segments and predict when they will turn up or believe that if you’re bright enough and work down. The reality is that the vast majority of hard enough, you will be successful in a com- these methods fail to even match the market, let petitive environment. alone beat it. [4]
  7. 7. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS EXHIBIT 1 THE INVESTMENT DECISION MATRIX Market Timing Yes No Noise Quadrant Conventional Wisdom Quadrant 1 2 Yes Financial planners Most individual investors Stock brokers Financial journalists Mutual funds Security Selection Tactical Allocation Quadrant Information Quadrant 3 4 No Pure market timers Academics Asset allocation funds Institutional investors Source: CEG Worldwide. As un-American as it seems, in an efficient Quadrant four is the information quadrant. capital market this methodology adds no value, This is where most of the academic community on average. While there are debates about the resides, along with many institutional investors. efficiency of markets, most economists believe Investors in this quadrant dispassionately that, fundamentally, capital markets work. research what works and then follow a rational Quadrant three is the tactical asset allocation course of action based on empirical evidence. quadrant. Investors in this quadrant somehow Academic studies indicate that investments in believe that, even though individual securities the other three quadrants, on average, do no bet- are priced efficiently, they (and only they) can ter than the market after fees, transactions costs see broad mispricing in entire market sectors. and taxes. Because of their lower costs, passive They think they can add value by buying when a investments—those in quadrant four—have market is undervalued, waiting until other higher returns on average than the other types investors finally recognize their mistake and of investments.1 selling when the market is fairly valued once Our goal is to help investors make informed again. We believe that it’s inconsistent to think decisions about their money. To accomplish this, that individual securities are priced fairly but we help investors move from the noise quad- that the overall market, which is an aggregate of rant to the information quadrant. We believe the fairly priced individual securities, is not. No this is where you should be to help enable you to prudent investors are found in this quadrant. achieve what is important to you. 1 Michael C. Jensen, “The Performance of Mutual Funds in the Period 1945–1964,” Journal of Finance, May 1968. Mark M. Carhart, Jennifer N. Carpenter, Anthony W. Lynch and David K. Musto, “Mutual Fund Survivorship,” unpublished manuscript, September 12, 2000. Christopher R. Blake, Edwin J. Elton and Martin J. Gruber, “The Performance of Bond Mutual Funds,” The Journal of Business, 1993: 66, 371–403. Edwin J. Elton, Martin J. Gruber, Sanjiv Das and Matt Hlavka, “Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios,” The Review of Financial Studies, 1993: 6, 1–22. [5]
  8. 8. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS Five Key Concepts To Consider in Working Towards Financial Goals. hile investing can at times seem overwhelming, the W academic research can be broken down into what we call the Five Key Concepts To Consider in Working Towards Financial Goals. If you examine your own life, you’ll find that it is often the simpler things that consistently work. Investing is no different. However, it is easy to have your attention drawn to the wrong issues. These wrong Concept One: issues—the noise—can derail your journey. Leverage Diversification to In this section, we’ll walk through the five Reduce Risk concepts and explain how institutional Most people understand the basic concept of investors incorporate each of these concepts diversification: Don’t put all your eggs in one into their investment plans. These plans help basket. That’s a very simplistic view of diversifi- both meet their fiduciary responsibilities and cation, however. It can also get you caught in a financial goals. dangerous trap—one that you may already have It’s important to note here that while these fallen into. concepts are designed to help maximize poten- For example, many investors have a large part tial return, no strategy can eliminate risk, which of their investment capital in their employers’ is inherent in all investments. Whenever you stocks. Even though they understand that they invest, you have to accept some risk. It’s also are probably taking too much risk, they don’t do important to remember that you’re responsible anything about it. They justify holding the posi- for reviewing your portfolio and risk tolerance tion because of the large capital gains tax they and for keeping your financial advisor current would have to pay if they sold, or they imagine on any changes in either your risk tolerance or that the stocks are just about ready to take off. your life that might affect your investment Often, investors are so close to particular stocks objectives. that they develop a false sense of comfort. [6]
  9. 9. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS EXHIBIT 2 THE EMOTIONAL CURVE OF INVESTING Greed/Buy Hope/Idea Fear Disappointment Panic/Sell Source: CEG Worldwide. Other investors believe that they have effec- begin to consider that this just might be the one. tively diversified because they hold a number of What is the new emotion? It’s greed. You decide different stocks. They don’t realize that they are to buy the stock that day. in for an emotional roller-coaster ride if these You know what happens next. Of course, soon investments share similar risk factors by belong- after you buy it, the stock starts to go down, and ing to the same industry group or asset class. you feel a new combination of emotions—fear “Diversification” among many high-tech com- and regret. You’re afraid you made a terrible mis- panies is not diversification at all. take. You promise yourself that if the stock just To help you understand the emotions of goes back up to where you bought it, you will investing, let’s look for a moment at what hap- never do it again. You don’t want to have to tell pens when you hear about a stock. (See Exhibit 2.) your spouse or partner about it. You don’t care If you’re like most investors, you don’t buy about making money anymore. the stock right away. You’ve probably had the Now let’s say the stock continues to go down. experience of losing money on an investment— You find yourself with a new emotion. What is it? and did not enjoy the experience—so you’re not It’s panic. You sell the stock. And what happens going to race out and buy that stock right away. next? The stock races to an all-time high. You’re going to follow it awhile to see how it We’re all poorly wired for investing. Emotions does. Let’s assume, for this example, that it starts are powerful forces that cause you to do exactly trending upward. the opposite of what you should do. That is, your You follow it for a while as it rises. What’s your emotions lead you to buy high and sell low. If you emotion? Confidence. You hope that this might do that over a long period of time, you’ll cause be the one investment that helps you make a serious damage not just to your portfolio, but lot of money. Let’s say it continues its upward more important, also to your financial goals. trend. You start feeling a new emotion as you But truly diversified investors—those who [7]
  10. 10. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS EXHIBIT 3 LESS VOLATILITY = GREATER WEALTH Consistent Investment—$100,0000 Volatile Investment—$100,000 Rate of Return Rate of Return Year Over Five Years Ending Value Over Five Years Ending Value 1 8% $108,000 30% $130,000 2 8% $116,640 -20% $104,000 3 8% $125,971 25% $130,000 4 8% $136,049 -20% $104,000 5 8% $146,933 25% $130,000 Arithmetic return 8% 8% Compound return 8% 5.39% Source: CEG Worldwide. Note: This is a hypothetical series of returns to indicate the significance of volatility and does not represent any specific investments at any specific time. invest across a number of different asset However, this is true only if the two funds classes—could lower their risk, without neces- have the same degree of volatility. If one fund is sarily sacrificing return. Because they recognize more volatile than the other, the compound that it’s impossible to know with certainty which returns and ending values will be different, asset classes will perform best in coming years, which illustrates the mathematical fact that the diversified investors take a balanced approach fund with less volatility will have a higher and stick with it despite volatility in the markets. compound return. You can see how this works from Exhibit 3. Concept Two: Two equal investments can have the same arith- Seek Lower Volatility to metic rate of return but have very different end- Enhance Returns ing values because of volatility. You want to If you have two investment portfolios with the design your portfolio so that it has as little same average or arithmetic return, the portfolio volatility as necessary to help you achieve your with less volatility will have a greater compound financial goals. rate of return. Exhibit 4 shows two portfolios with the same For example, let’s assume you are considering average return. As a prudent investor, you want two mutual funds. Each of them has had an aver- the smoother ride of Portfolio A not only because age arithmetic rate of return of 8 percent over it helps you ride out the emotional curve, but five years. How would you determine which more important, also because you may create fund is better? You would probably expect to wealth towards financial goals. have the same ending wealth value. [8]
  11. 11. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS EXHIBIT 4 same time. The price movements between inter- TWO PORTFOLIOS WITH THE national and U.S. asset classes are often dissim- SAME AVERAGE RETURN ilar, so investing in both could increase your portfolio’s diversification. Portfolio A Portfolio Concept Four: B Employ Asset Class Investing It is not unusual for investors to feel that they could achieve better investment returns, if they only knew a better way to invest. Unfortunately, many investors are using the wrong tools and Source: CEG Worldwide. put themselves at a significant disadvantage to institutional investors. It’s often the case that Concept Three: using actively managed mutual funds is like try- Use Global Diversification to ing to fix a sink with a screwdriver when you Enhance Returns and Reduce Risk really need a pipe wrench. You need the right Investors here in the U.S. tend to favor stocks tools, and we believe that asset class investing is and bonds of U.S.-based companies. For many, an important tool for helping you to reach your it’s much more comfortable emotionally to financial goals. invest in firms that they know and whose prod- An asset class is a group of investments whose ucts they use than in companies located on risk factors and expected returns are similar. another continent. Originally, institutional asset class funds were Unfortunately, these investors’ emotional not available to the great majority of investors. reactions are causing them to miss out on a way Often the minimum investment for these to potentially increase their returns. That’s mutual funds was in the millions of dollars, because the U.S. financial market, while the effectively keeping them beyond the reach of largest in the world, still represents less than all but large pension plans and the wealthiest half of the total investable capital market world- individual investors. Fortunately, these institu- wide.2 By looking to overseas investments, you tional asset class funds are now accessible to all could increase your opportunity to invest in investors. You can gain the same advantages pre- global firms that can help you grow your wealth. viously enjoyed only by large institutional Global diversification in your portfolio also investors. helps reduce overall risk. American equity mar- Four major attributes of asset class funds kets and international markets generally do not make them attractive: move together. Individual stocks of companies 1. Lower operating expenses around the world with similar risk have the 2. Lower turnover resulting in lower costs same expected rate of return. However, they 3. Lower turnover resulting in lower taxes don’t get there in the same manner or at the 4. Consistently maintained market segments 2 McKinsey Global Institute, Mapping the Global Capital Market 2006. [9]
  12. 12. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS We’ll look at each factor in turn. mutual fund manager wants to have his or her performance reduced by paying corporate 1. Lower Operating Expenses income taxes. All mutual funds and separately managed In one study, Stanford University economists accounts have expenses that include manage- John B. Shoven and Joel M. Dickson found that ment fees, administrative charges and custody taxable distributions have a negative effect on fees. These are expressed as a percentage of the rate of return of many well-known retail assets. According to the Investment Company equity mutual funds. They found that a high- Institute, the average annual expense ratio for tax-bracket investor who reinvested the after- all stock funds is 1.54 percent.3 In comparison, tax distribution ended up with an accumulated the same ratio for institutional asset class funds wealth per dollar invested of only 45 percent of is typically only about one-third of all retail the fund’s published performance. An investor equity mutual funds. All other factors being in the middle tax bracket realized just 55 percent equal, lower costs lead to higher rates of return. of the published performance. Because institutional asset class funds have 2. Lower Turnover Resulting in Lower Costs lower turnover, the result is lower taxes for their Many investment managers do a lot of trading, investors. thinking that it adds value. This is costly to shareholders because each time a trade is made 4. Consistently Maintained Market Segments there are transaction costs, including commis- Most investment advisors agree that the greatest sions, spreads and market impact costs. These determining factor of performance is asset alloca- hidden costs may amount to more than a fund’s tion—how your money is divided among different total operating expenses, if the fund trades asset categories. However, you can accomplish heavily or if it invests in small-company stocks effective asset allocation only if the investments in for which trading costs are relatively high. your portfolio maintain a consistent asset alloca- Institutional asset class funds generally have tion. That means your investments need to stay significantly lower turnover rates because their within their target asset classes. institutional investors want them to deliver a spe- Unfortunately, most actively managed funds cific asset class return with as low a cost as possible. effectively have you relinquish control of your asset allocation. On the other hand, because of 3. Lower Turnover Resulting in Lower Taxes their investment mandates, institutional asset If a mutual fund sells a security for a gain, it class funds must stay fully invested in the spe- must make a capital gains distribution to share- cific asset class they represent. holders because mutual funds are required to distribute 98 percent of their taxable income Concept Five: each year, including realized gains, to remain Design Efficient Portfolios tax-exempt at the corporate level.4 They dis- How do you decide which investments to use tribute all their income annually because no and in what combinations? Since 1972, major 3 2006 Investment Company Fact Book. 4 Subchapter M, Internal Revenue Code. [10]
  13. 13. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS institutions have been using a money manage- EXHIBIT 5 ment concept known as Modern Portfolio The- THE RANGE OF EFFICIENT PORTFOLIOS ory. It was developed at the University of Chicago by Harry Markowitz and Merton Miller and later expanded by Stanford professor Expected • S&P 500 Return William Sharpe. Markowitz, Miller and Sharpe subsequently won the Nobel Prize in Economic Sciences for their contribution to investment Efficient Portfolios methodology. The process of developing a strategic portfo- • Treasury Bills lio using Modern Portfolio Theory is mathe- Standard Deviation matical in nature and can appear daunting. It’s important to remember that math is nothing Source: CEG Worldwide. more than an expression of logic, so as you examine the process, you can readily see the commonsense approach that it takes—which is expected return at each incremental level of risk. counter-intuitive to conventional and overcom- By plotting each investment combination, or mercialized investment thinking. portfolio, representing a given level of risk and Markowitz stated that for every level of risk, expected return, we are able to describe mathe- there is some optimum combination of invest- matically a series of points, or “efficient portfo- ments that will give the highest rate of return. lios.” This line forms the efficient frontier. The combinations of investments exhibiting Most investor portfolios fall significantly this optimal risk/reward trade-off form the effi- below the efficient frontier. Portfolios such as cient frontier line. The efficient frontier is deter- the S&P 500, which is often used as a proxy for mined by calculating the expected rate of the market, fall below the line when several asset return, standard deviation and correlation coef- classes are compared. Investors can have the ficient for each asset class and using this infor- same rates of return with an asset class portfolio mation to identify the portfolio with the highest with much less risk, or higher rates of return for KEY DEFINITIONS the same level of risk. Exhibit 5 illustrates the efficient frontier rel- Expected rate of return is typically calculated as the risk-free rate of return plus the risk premium ative to the “market.” Rational and prudent associated with that equity investment. investors will restrict their choice of portfolios to those that appear on the efficient frontier and to Standard deviation is a description of how far from the mean (average) the historical perform- the specific portfolios that represent their own ance of an investment has been. It is a measure of risk tolerance level. Our job is to make sure that an investment’s volatility. for whatever risk level you choose, you have the Correlation coefficients measure the dissimilar highest possible return on the efficient frontier price movements among asset classes by quantify- ing the degree to which they move together in so that we can maximize the probability of time, degree and direction. achieving your financial goals. [11]
  14. 14. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS Your Next Steps s we discussed at the beginning of this guide, taking a A comprehensive approach towards achieving all your financial goals requires wealth management. This means more than just taking care of your investments. It also means addressing your advanced planning needs, including wealth enhancement, wealth transfer, financial services, including the four areas of wealth protection and charitable giving. advanced planning that we mentioned above. Such a wide range of financial needs requires a As we’ve said, the wealth manager should be wide range of financial experience. Because no backed up by a network of professionals to pro- one person can know all subjects, wealth man- vide these services. agers work with networks of experts—financial Second, the wealth manager should work professionals with deep experience and knowl- with you on a consultative basis. This allows the edge in specific areas. wealth manager to uncover your true financial These wealth managers, then, are experi- needs and goals, to craft a long-range wealth enced at relationship management—first build- management plan that will help meet those ing relationships with their clients in order to needs and goals, and to build an ongoing rela- fully understand their unique needs and chal- tionship with you that helps ensure that your lenges and then coordinating the efforts of their needs continue to be met as they change over professional teams in order to help meet those time. needs and challenges. Wealth managers must This consultative process usually unfolds also work with their clients’ other advisors— over a series of meetings: such as attorneys and accountants. I At the discovery meeting, the wealth manager Many in the financial services industry today determines your current financial situation, call themselves wealth managers but offer little where you want to go and the obstacles you more than investment management. How then face in working towards your goals. will you know whether you are dealing with a I At the investment plan meeting, the wealth true wealth manager? manager, using the information he or she First, the advisor should offer a full range of gathered at your first meeting, presents a [12]
  15. 15. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS EXHIBIT 6 THE CONSULTATIVE WEALTH MANAGEMENT PROCESS Investment Mutual Initial Regular Discovery plan commitment follow-up follow-up meeting meeting meeting meeting meetings Wealth Investment plan management plan Wealth Wealth management management network network meeting Source: CEG Worldwide. complete diagnostic of your current finan- plan—a comprehensive blueprint for cial situation and a plan for working towards addressing your advanced planning needs your investment-related goals. that has been developed in coordination I At the mutual commitment meeting, with the wealth manager’s network of pro- assuming that the wealth manager can truly fessionals. At subsequent progress meetings, add value, both you and the wealth manager you and the wealth manager decide how to decide to work together. You now officially proceed on specific elements of the wealth become a client. management plan. In this way, over time, I At the initial follow-up meeting, the wealth every aspect of your complete financial pic- manager helps you to organize your new ture is effectively managed. account paperwork and answers any ques- Exhibit 6 shows an overview of the consulta- tions that may have arisen. tive wealth management process. I At regular progress meetings, which are typ- In addition, you should expect outstanding ically held quarterly, the wealth manager service from any financial advisor you choose. reports to you on the progress you’re making Your phone calls should be returned on the toward achieving your goals and checks in same day, you should receive quick and com- with you on any important changes in your plete responses to all your questions, you should life that might call for an adjustment to your be able to meet with your advisor as often as investment plan. In addition, at the first reg- you wish, and your advisor should always take ular progress meeting, the wealth manager your unique needs and preferences into presents to you a wealth management account. In short, you should expect to be [13]
  16. 16. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS treated like who you are—a very important nostic of your situation so that you have a sec- client. ond opinion. If you are currently working with a financial You owe it to your family and yourself to advisor and are unsure whether he or she is make sure that your investment plan—and using the consultative wealth management overall wealth management plan—is designed approach we’ve discussed here, we recommend to effectively address your very specific financial that you have another advisor complete a diag- needs. [14]
  17. 17. THE INFORMED INVESTOR: FIVE KEY CONCEPTS TO CONSIDER IN WORKING TOWARDS FINANCIAL GOALS About the Financial Advisor York times best-selling book, The Roaring 2000’s Stephen has been providing investment man- Investor Strategies for the Life You Want by H.S. agement consulting services to both the Private Dent, Jr. He was also chosen as one of Orange Client and the Small Institutional Market since Counties Top 30 Wealth Advisors by the Orange 1983. Stephen attained the Certified Investment County Business Journal in 2008. Management Analyst (CIMA) designation Stephen is a past speaker at national confer- through the Investment Management Consult- ences for Smith Barney Consulting Group, ants Association taught in conjunction with the Investment Management Consultant Associa- Wharton School at the University of Pennsylva- tion, and APIC. Stephen graduated from the Uni- nia. Stephen is a charter member of the Associ- versity of Southern California with a degree in ation of Professional Investment Consultants Finance. He resides in Orange County with his (APIC). He is a former board member of the H.S. wife, Karen, and has three daughters, Stephanie, Dent Advisory network. He is also a past mem- Allyson, and Vanessa. ber of Smith Barney Director’s Group of select advisors elected by their Divisional directors, to facilitate communication between financial My Mission advisors and senior Citi Smith Barney manage- My mission is to help my clients master the art ment in discussing the firm’s strategic initia- of life. My goal is to help my clients define suc- tives, platform enhancements, and business cess and create purpose in their life, so that they issues. Steve was also a contributor to the New can pursue their vision of excellence. [15]
  18. 18. Morgan Stanley Smith Barney 1901 Main Street, Penthouse Irvine, CA 92614 Phone: (949) 955-7527 Fax: (949) 833-3542 stephen.k.takeda@smithbarney.com www.fa.smithbarney.com/feiblemantakeda

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