10 Questions for Your Financial Advisor

By Dwight Cass

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

1. Is the smart money fleeing bonds? Fixed income giant Pimco said in December that its flagship Total Return fund would consider investing in equity securities, although not common stock itself. With QE2 rattling foreign politicians, and the equity markets flirting with their pre-Lehman levels, is it prudent to rebalance my portfolio toward equities?

2. Are banks’ returns on equity going to plunge? The new Basel III Capital Accord, updated in December, will require banks to hold significantly more common stock as capital, and will disqualify a lot of subordinated debt-like instruments from capital. This could mean the days of 20 percent bank returns on equity are over, and the bank stocks will generate a more utility-like 12 to 15 percent. Should I get out now?

3. Should I invest with the new hedgies? The Dodd-Frank Act’s Volcker Rule prohibits banks from proprietary trading or owning hedge funds or private equity funds. Many banks are considering spinning these out, but the funds face formidable logistical barriers. Is it wise to try to get in on the ground floor at their initial fund-raisings?

4. Will CoCos be tasty? The market for banks’ contingent capital securities is about to get a big push from the new bank capital rules. These debt instruments convert automatically into equity if a bank’s health deteriorates beyond a set threshold. These could be good investments, but the risk of ending up with a chunk of bank shares at just the wrong time should give investors pause.

5. Is scandium the new black for investors? The element is one of the 17 so-called rare earth metals crucial to emerging technologies like renewable energy and electronics like the iPod. China currently has a near monopoly on these elements, and the markets have been increasingly worried that its own rapacious appetite for them will crimp supply. Is there a way to get in front of this possibility from an investment angle?

6. Are investors giving up on Spain? The embattled country has been slashing government spending in an attempt to retain access to the international capital markets. But like most troubled economies, its real prospects depend on interest from private investors. That scene darkened late last year when JC Flowers, the investment firm run by bank turnaround artist Christopher Flowers, pulled out of his deal to acquire one of Spain’s community banks, or cajas. Is this the final blow for Spain’s banks?

7. Are credit card companies going to join the financial spiral? Master- Card and Visa shares have done reasonably well through the financial crisis. But the Federal Reserve’s mid-December announcement that they can no longer charge extortionate interchange fees on debitcards—the limit is now an average of 12 cents per transaction, down from 44 cents—is a big blow. Should I be culling their stocks out of my portfolio?

8. Are we seeing the return of the S&L Robber Barons? The big investors who bought savings and loan institutions out of government receivership two decades ago got them for a song and made a killing. History may be repeating itself. Blackstone Group and Carlyle, along with others, made an 80 percent return in four months on their purchase of Florida thrift BankUnited. If the vultures are really circling the FDICowned bank carcasses, should I be tiptoeing back into private equity?

9. Is social networking partying like it’s 1999? Recent rounds of financing have implied the values of Twitter and Facebook at $3.7 billion and $50 billion, respectively. That’s a bundle for Twitter especially, since it remains unprofitable. Is the social networking craze as much of a bubble as it seems?

10. How useful will hedge fund transparency measures prove? Almost all hedge funds will soon have to register as investment advisors with the Securities and Exchange Commission, meaning they will have to disclose great reams of information. Will I get a better idea about my funds’ performance, or will it simply be harder for them to keep their trading secrets safe?

Curator