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Recently, I chatted with Josh Brown, the outspoken gent behind the Reformed Broker blog. Brown is a former commission-based broker -- thus, the blog name -- and is now a fee-only advisor with Fusion Analytics. He's also author of Backstage Wall Street, and his views can frequently be found in places including Forbes, The Wall Street Journal, and CNBC.
In short, the guy lives and breathes finance, the markets, and the business of financial advising.
Some of what I discussed with Brown showed up in the Fool's recent special report "How to Thwart the Opaque, High-Fee, Underperforming Financial Advisors Who May Be Mismanaging Your Money," but he had plenty more to say. Below are some more of the views that this candid commentator had to share.
Is the commission-based model ever the right way to go?
Brown kept it short and sweet, quipping, "No, no qualifiers." The only group that commissions make sense for are the institutions that rake them in. In Brown's words: "Fee-only is the only way to go."
Should investors shy away from big firms like Morgan Stanley (NYSE: MS ) and Bank of America's (NYSE: BAC ) Merrill Lynch?
The aggressiveness of brokers "depends on the firm," Brown said, and he noted that at the "larger firms it's a little toned down." As far as those really aggressive boiler-room-type pitches, "Merrill and [Smith Barney] did that in the '80s and '90s, but during the dot-com bust in '01 and '02, it became too much of a risk compliance-wise. They sent their guys off to get insurance licenses and CFPs."
But the boiler-room pitch isn't dead, Brown warned. "The smaller firms are still doing it," he said, explaining that "smaller firms" are those with fewer than 100 salespeople. Brown pointed out that a clutch of these smaller firms were recently put out of business after getting slammed by industry regulator FINRA for selling billions in faulty securities that were inappropriate for their investors.
How should customers measure the performance of their advisor?
What's very clear to Brown is what doesn't work. He said that there's "no good way to do performance based on returns."
Elaborating, he added, "If you're focused primarily on performance, you're asking the wrong question. I could make a proposal and back-test it over 10 years and make [SPDR Gold Shares (NYSE: GLD ) ] 90% [of the portfolio] and it'd look amazing." That, of course, would be a dangerous portfolio because it relies almost exclusively on the backward-looking performance of gold -- not to mention that few people will sleep well with their portfolio that overweight in one asset class.
Brown also said that it can get tricky to measure on performance because many clients have very specific requirements -- like the client that says "Oh, and you can't sell my dad's Intel shares" -- that may affect returns regardless of what else the advisor does.
Instead, the key for Brown is how an advisor formulates portfolios. "If an advisor can't articulate his process, it's much more worrisome than if they don't show a track record."
Does an advisor need to be able to beat the S&P 500 (INDEX: ^GSPC ) ?
"A big misconception," Brown said in a very strong tone, "is that clients need to beat the S&P 500."
Instead, Brown's focus is on the question "What is the client's real need?" In terms of the S&P, he said the more important question is, "How much of the S&P return can I capture for this client given their risk level?"
Emphasizing the point, Brown said that "a guy with $10 million put away who's making $300,000 per year doesn't need to make 20% per year." Focusing on the client's goals, Brown suggests that a better approach than simply trying to top the S&P is to look at the client's assets and say, "You have X assets today, you need them to be at Y level in 20 years" then "work backward between then and now."
What is the single biggest thing that an advisor can help an investor with?
Nodding to the crucial role that behavior and emotions have in investing, Brown said: "Controlling emotions is the thing that advisors can help the most with when they're at their best. They can help people understand what the real impact will be from things in the market."
And closing out with my favorite of Brown's quips from the conversation: "Sometimes it's a lot more about not screwing up than doing something wonderful."