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
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
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.
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