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10 Questions For your Financial Advisor

By Dwight Cass

How savvy is your investment advisor? Ask these questions and find out.

1. Should I stop lending to Uncle Sam? Bill Gross, manager of Pimco Total Return, the world’s largest mutual fund, recently sold all of Pimco’s U.S. government securities. Gross believes the decades-long bull market in government debt is finally over. With S&P threatening to downgrade U.S. debt, is it time to follow Gross’ lead?

2. What are the risks in off-exchange private shares? The Securities and Exchange Commission is reviewing its rules on share sales by private companies such as Facebook and Twitter. As things stand, if a company has 500 or more shareholders, it is considered public and must file financial reports as a public company. If the SEC makes it easier for investors to buy stock in private companies without forcing those companies to go public, should I consider it?

3. Can mortgage “scratch and dents” be hammered out? Wall Street is once again packaging dodgy mortgages to sell to yield-hungry investors. These mortgages are not as bad as those stuffed into CDOs during the subprime boom. They’re just a bit banged-up—hence the name “scratch and dents.” Is this an asset class I should reconsider, or is history repeating itself?

4. Are CoCos going to pop? Contingent convertible bonds issued by banks to buttress their capital buffers might appear attractively priced. But the instruments convert into the issuer’s equity when their capital level falls below a predefined point. Buyers are behaving as if the CoCos will never convert—but even a modest banking crisis could trigger them. Does that risk offset their upside?

5. Will private equity fall victim to federal fiscal discipline? After successfully fighting off the government’s last few attempts to increase its taxes, the buyout business is looking vulnerable. A combination of anti-Wall Street sentiment, the government’s desperate need for revenue and the public’s flagging belief in the curative power of massive amounts of debt has put private equity firms on the defensive. How would a change in their tax treatment affect my investments?

6. Are ETFs the next CDOs? The International Monetary Fund and the Financial Stability Board both released reports in April urging regulators to keep a close eye on exchange-traded funds. The low cost of these instruments has made them popular with individuals and institutions alike, with the global market now worth $1.5 trillion. But the IMF and the FSB say many of the socalled synthetic ETFs, which use derivatives to mimic an index or other investment, could pose risks to investors and the financial system.

7. How do I vet my munis? With higher taxes looking probable, how can I tell which tax-free municipal bonds have an acceptable level of credit risk? Ratings agencies review these bonds infrequently, leading to the possibility of sudden, multistep downgrades when raters finally examine the securities. How do I avoid those risky bonds while constructing a tax-sheltered portfolio?

8. Will my Swiss bank spill the beans? Starting in January, foreign banks will have to report all of their U.S. clients’ identities to the Internal Revenue Service or see any income from U.S. investments slapped with a 30 percent withholding penalty. Is my bank about to air my dirty laundry?

9. Should I seek solace in booze and tobacco? Shares of cigarette makers Lorillard and Philip Morris have performed well despite the stock market’s overall volatility. Defense contractors, handgun manufacturers and booze merchants are also doing well. With most other stocks stuck in ruts or flailing about, is it time for me to leave my scruples at the stock exchange door?

10. Is Brazil a play on China? The Latin American powerhouse is a major raw materials exporter to the Middle Kingdom. Senior Brazilian trade officials have been seeking ways to move the country’s exports up the value-added ladder. If I invest in Brazil, can I get two BRICs for the price of one?