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PERSONAL BUSINESS

9.17.98  
Should You Use a Broker or a Planner? That's the Wrong Question
Focus first on whether your adviser knows anything about small business

Russ Maney's broker at Merrill Lynch structured a complicated deal that allowed the entrepreneur to buy into Data Advantage Corp., a database company in Louisville, Ky., without cashing out valuable stock options from his previous employer. "That's the kind of thing you're not going to do on Etrade or something like that," says Maney, who gladly paid his broker's commission. "He was able to do it all for me over the phone."

Meanwhile, Ted Leonhardt in Seattle is shedding his broker of 10 years and shopping for a financial planner who charges a flat fee. Leonhardt, whose design firm bears his name, says top executives of client companies have taught him over the years how to invest, and now he wants a professional with no commission ax to grind to implement his plans. "I want good advice and fair prices," he says. "I also want 24-hour access. I want Web access."

Which small-business owner is doing the right thing? Both are, because at least they've made the mental leap about having an adviser. Many wage-earning individual investors haven't. Lured by the proliferation of do-it-yourself magazines and stock-trading Web sites, they don't believe they need a professional.

Perhaps so. Let's just hope they don't have a real business to run at the same time. The fact is, smart investing is a complex and time-consuming job. Doing it all by yourself would probably mean neglecting your company, which is still the chief source of your wealth. In short, you probably need an adviser more than most other investors.

Does this mean you can't apply some of your street smarts to picking an occasional stock? Hardly. You can still play your favorite hunches while delegating the drudgery of implementing investment decisions, monitoring your portfolio, and watching out for taxes. In reality, that's no different than employing outside accountants, attorneys, and marketers for your company.

BEST PICK. Which kind of adviser is right for you -- a broker who collects commissions or an adviser who charges a flat fee? Again, the answer is both. We're not trying to be clever here, but unlike ordinary individuals, small-business owners shouldn't view compensation as the biggest issue. Rather, the first question is whether your adviser knows anything about the pressures and priorities of running a small business and can tailor your financial plan accordingly. If he does, the advice can be invaluable, as Russ Maney found. If he doesn't, you could wind up with a strategy that's totally unsuited to your goals. (For more on this, check out our story on balancing your portfolio.)

Here are some points to consider when hunting for an adviser:

Does the person have any small-business experience? Let's face it, unless he or she has had to meet payroll or to placate a big customer who's threatening to bolt, it's hard for your adviser to truly understand the pressures you face. At first blush, this would seem to favor an independent adviser who runs his own shop, regardless of whether he charges commissions or a flat fee. Don't, however, automatically disqualify a broker or employee of a big firm like American Express. He may have owned a business in a previous life. And although brokers are nominally full-time employees of their firms, they are often cottage industries unto themselves, hiring their own assistants and taking clients with them when they switch firms. But you have to ask. Don't meekly accept whichever broker or planner is "up" on the day you happen to walk into the office.

Can the adviser create an integrated plan? Just because a broker is a good stock-picker doesn't mean he knows anything about Keogh plans. By the same token, an independent planner who runs his own shop may not be able to offer the sophisticated products that a large brokerage offers its business customers, such as financing. Ideally, you want someone who can do it all -- from choosing investments to setting up an estate plan.

Here's where the method of payment can come into play. The family broker of yore can't pay the rent selling you a few thousand utility shares every few years. He's under constant pressure to sell you products, like initial public stock offerings and wrap accounts. Since things like wills and medical savings accounts don't pay so well, they aren't necessarily his strong suit -- a point drilled home by independent planners who say they provide broader services.

ADVISOR TRENDS. There are signs this is changing. Big brokerages are making efforts to offer a wider array of financial planning products, using the broker to refer you to other specialists within the firm. Perhaps the most comprehensive effort has been made by Merrill Lynch, whose Working Capital Management account was specifically designed for small and midsize businesses. In addition to personal services, the account serves as a ready source of credit, offers charge cards and card-processing services, payroll processing, and automatic funds transfer. Merrill has also trained about 100 experts in small-company affairs who are available for consultation. Beyond that, the firm offers business valuation, private sale and divestitures, lending services, retirement plans, and employee stock ownership plans -- all of which might be beyond the scope of an independent planner.

What kind of investor are you? Whether you decide to go with a broker or a planner, you want someone who understands your goals, your temperament, and your tolerance for risk. The adviser who can build a buy-and-hold portfolio of conservative stocks or funds is very different from the one who can get you in on the latest Internet deal.

BOTTOM LINE. The more aggressive you are as an investor, and the more sophisticated your methods, the more apt you are to want a full-service broker, given his or her access to financial products such as hedge funds that planners often don't have. Some use strategies, such as options and shorting, that are easiest to implement at a giant firm. Maney's broker, for instance, showed him how he could avoid paying a huge tax bill on stock options by holding them until they qualified for the long-term capital-gains rate of 20%, rather than his personal tax rate of more then 30%. Meanwhile, the brokerage used the options as collateral for a loan to buy a stake in Data Advantage, where Maney is in charge of marketing.

Yes, the broker is making money in fees and interest, but they add up to less than Maney's tax savings, so he comes out ahead, too. And the broker, Jeffrey Waxman of Boston, provides Maney with research when he's studying a purchase of stocks or mutual funds and has helped him develop a well-rounded portfolio. Maney trades only a few times a year, so commissions are a fraction of the fees a planner would charge.

Planners shine on more straightforward tasks -- for instance, when you give them a bundle of money, like an IRA rollover, which they deploy and oversee along lines you develop jointly. Most use no-load funds, rather than the load funds sold by brokers, so upfront charges can be reduced dramatically -- for example, to zero on the purchase of $500,000 worth of funds. Potentially, with sales charges averaging 5%, you'd save $25,000.

What do other small-business execs say about this adviser? Treat the task of finding your investment guru the way you'd treat any other new hire or contractor. Ask friends, colleagues, and business associates who they use, and find out whether they do transactions similar to yours before passing judgment. Don't settle for vague generalizations or isolated stock tips that worked out -- people don't like to talk about their losers. Instead, ask for specifics on particular deals -- a trust, a loan, a retirement plan -- and see whether your friend is happy with the results. (If he or she doesn't seem to understand the actual details or goals, that's usually a bad sign.) Then, spend some time with the candidate to see if you actually like him or her. As with any business partnership, personal chemistry plays a big role. If something makes you uneasy or worried about the adviser, find someone else. Remember, you're paying him to do the worrying.

By now, it's probably clear that picking an adviser takes plenty of work all by itself. But finding the right one is crucial to your personal wealth. After all, your company is where your biggest returns are likely to come from, not the stock market, so that's where you ought to be investing most of your time. By that standard, a good adviser is worth the price, no matter how you ultimately choose to pay him.

By Timothy Middleton in Short Hills, N.J.
timothy@middleton.net


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