The Separate Role of the Investment Adviser

SOME people, particularly active investors and recipients of six figure rollovers from retirement accounts, find it worthwhile to hire an investment adviser. This professional may be a financial planner, a money manager recommended by a planner or broker, or a specialist whom you find on your own.

An investment adviser recommends stocks, bonds or mutual funds that, in his or her judgment, are suitable to your goals and taste for risk. You may give this adviser the power to buy and sell securities for you without first consulting you. This is called a discretionary account, Or you may give him discretion only to sell your holdings or to do nothing without your permission.

Until recently, investment advisers wouldn't even look at you unless you could give them custody of $250,000 or more. But competition and loss of business after the market crash of October 19,1987, have forced many advisers to accept much smaller accounts, sometimes starting at $10,000 or less. Annual fees generally start at 11/2% to 2% of assets up to $500,000, with a sliding scale of lower fees on larger accounts. An adviser might charge from 0.75% to 1.25% of a million dollar stock portfolio, 0.5% to 0.75% for a more easily managed portfolio of bonds. But many firms charge a minimum of $ 1,000, which can be prohibitive if you have $25,000 or less to invest. Clients also pay brokerage costs, which are likely to add I% a year to the total freight.

Financial planners and brokers often use talent scout services to match you with the right investment adviser. Firms including CDA Investment Technologies of Rockville, Maryland, Investment Management Institute of New York City, and Stolper & Co. of San Diego calculate the total returns, risk factors and other gauges of performance for hundreds of advisers. This information is updated quarterly and piped to subscribers' computers over telephone lines. Stolper & Co. is the only talent scout that deals mainly with individuals. It will choose a manager for you from among 600 in its files for a fee of $1,500. Then, for $500 a year, it will monitor your results.

To determine for yourself whether an adviser measures up to your needs is no simple task. The performance statistics that money managers hand out may be more inflated than the Goodyear blimp. Nevertheless, ask for figures going back at least 10 years. If they have been audited by an outside accounting firm, so much the better. Check the results in years when stocks fell as well as when they have soared. A first rate manager preserves your capital in bad years. You can't expect him to beat Standard & Poor's 500 stock average every time, but he should demonstrate that he has turned in a superior long term record.

Find out an adviser's investment philosophy before making your choice. It should harmonize with your own. A growth manager tries for capital gains by picking companies whose earnings will go up more than the average for their industry. A pursuer of aggressive growth leans toward riskier small capitalization stocks. A conservative growth seeker looks for blue chip stocks. A market timer tries to get you into the market near the bottom of the price cycle and out near the top, while a value investor ignores market trends but buys neglected stocks of well managed companies and holds them indefinitely. A contrarian takes the same approach but doesn't make long term commitments to the stocks he buys.

Once you have contracted with an adviser, be patient. In general, wait at least a year before you judge the record but sometimes less than that. If the value of your holdings drops 20% while the market is rising or holding steady, the adviser should take corrective action. If he does not, it may well be time to fire him.