Avoiding big mistakes other financial advisers make

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

Among the most costly mistakes that money managers make:

They don't change a client's portfolio even when the client's situation changes drastically. For example, someone might have been investing for retirement many years away. But then he or she loses a job, becomes disabled, whatever. Now the portfolio should change to one producing income — but it remains heavily in stocks, light in bonds.

So says John M. Egan, who runs J.M. Egan Wealth Advisors in Madison and Point Pleasant.

Another example of a mistake Egan has seen: a money manager's not seeing to it that a client rebalances his or her portfolio, bringing the asset allocation back to where it was originally. (Maybe 50% stocks, 50% fixed income.)

"A client may come in, after having invested with someone five years ago and buying a 50-50 portfolio. There's been no rebalancing, so the portfolio is now 70-30. And all of a sudden, the market readjusts — and the investor loses a fortune. ‘I don't know what the hell happen to my portfolio!'"

What happened, of course, was that his 70-30 portfolio was far more risky than his 50-50 portfolio — and the adviser never suggested a rebalancing back to 50-50.

The firm of J.W. Egan is different in several ways. It contracts with various outside money managers to invest clients' money — managers such as SEI. It checks what each client needs (via interviews and a questionnaire), then chooses a suitable money manager and a portfolio, and monitors the performance.

While the firm does comprehensive financial planning — seeing that clients get good tax advice and good legal advice — it is dubious about insurance as an investment. Says the plain-spoken Egan, "A lot of clients have life insurance that they don't need. Why pay for it? We'll recommend it if there's an estate planning need, but even if we do it, we're usually recommending term insurance — 20-year term, perhaps."

The firm has no minimum first investment — "I know, it sounds crazy," says Egan. Still, his firm has 400 families as clients, and the average client has $500,000 under management. Charges are usually 1% of the portfolio.

It's a fee-and-commission firm, but 90% fees. Says Egan, "Unfortunately, in this world there are some products, like 529 College Savings Plans, that are commission-based." Egan winds up putting clients' 529 money mostly in the estimable American funds.

The firm doesn't put clients directly into individual stocks or funds. "We believe in third-party money managers," he says, "where a client gets a very diversified asset allocation portfolio. Many clients come to us when there's been an important life event — they retire, sell a business, there's a death, a divorce, an inheritance. We may use Russell, which is mutual-fund based, and has 55 individual funds within different Russell asset classes. Or SEI, with 50 asset-allocation portfolios, which charges the lowest fees in the industry. So the individual investor can get institutional money management.

"The nice thing," Egan goes on, "is that the money is held at SEI, not at the money managers that SEI uses. There's a comfort level in that. Some of these portfolios have 30 to 50 different money managers — and you don't want your money all over the map. It's held at SEI."

Not only that, but the outside companies regularly rebalance the portfolios — so 50-50 doesn't turn into 70-30.

For clients, Egan may use a variety of money managers — "Each one has a different flavor. One might be a bond shopper, another might be an equity shop or in emerging markets. We're independent, doing what's best for our clients."

What does he think of annuities?

"A lot of times, unfortunately, they're oversold to clients. But we have used them — when there's no surrender charge, if a client has a need for a guaranteed income and wants to sleep well at night. But even so we use them sparingly."

Index funds? "We do use some that track the S&P 500, because a lot of exchange-traded funds have such low expenses."

Overall, Egan says, his firm "is in the service business. We tie everything together for our clients. Beneficiaries, estate planning, cash flow, income planning, legacy planning. We spend a lot of time with clients, maybe an hour and a half. We may talk about investments for just 10 minutes."

Egan, a Certified Financial Planner, obtained a B.A. in business administration from St. Michael's College in Winooski, Vt., and has been in the financial world for 24 years.

Warren Boroson will answer financial questions sent to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .