10 Questions for Your Financial Advisor

By Dwight Cass

 

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

 

1. Is lumber a growing opportunity? In the mid- 2000s, financial advisors said high net worth investors should buy lumber properties, based on the theory that the housing boom would put a premium on the price of wood. Whoops— the housing bust caused building material prices to plummet. But now demand from China has pushed prices up to pre-crisis levels.

 

2. Is there an investment angle to the Volcker Rule? The part of last summer’s Dodd-Frank financial reform legislation named for the former Fed chair requires that banks stop placing bets with their own capital. The Volcker Rule will force them to get out of the proprietary trading and hedge fund businesses; some, such as Morgan Stanley and Goldman Sachs, are already doing so. Would it be a good idea to invest in one of the hedge funds banks are spinning off?

 

3. How do I cash in on the corporate cash bonanza? Companies started spending some of their cash hoards in the fourth quarter of last year, reducing the total held by S&P 500 companies from a record $2.46 trillion to a still-hefty $2.41 trillion. Should I be scouting for companies that may be planning big one-time dividend distributions or share buybacks?

 

4. Can I now expect straight talk from hedgies? Christian Siva-Jothy, the former star Goldman Sachs trader, is shutting his SemperMacro hedge fund, blaming its recent poor performance on his own bad bets. Is a recent trend of soso performances provoking some hedge humility?

 

5. Should I keep my money close to home? With the European default crisis still festering, the S&P 500 skyrocketing and emerging markets flustered by the political turmoil in the Middle East, U.S. markets aren’t looking half bad. The Federal Reserve revised its 2011 GDP forecast to 3.9 percent from 3.4 percent in February.

 

6. Is the muni market about to melt down? Meredith Whitney, whose advisory firm recently applied for government permission to become a credit rating agency, has set the market’s collective teeth on edge since her pronouncement last year that U.S. municipalities were on the brink of default. Muni bond experts say she’s off base; some even argue that munis present an opportunity. Is my muni fund about to implode, or is now a time to buy?

 

7. Is the refinancing window about to slam shut? Congressional Republicans are calling for Fannie Mae and Freddie Mac to be closed, signs of incipient inflation are popping up and bank balance sheets are about to be made more conservative by the Basel III capital rules. Will this mean a jump in interest rates on home mortgages?

 

8. If my hedge fund is now selling low-fee mutual funds, why am I still paying outsized fees? Hedge funds seeking to recoup some of the substantial costs of complying with the Dodd-Frank Act are trying to attract investors by getting into the mutual fund business. Alternative mutual funds have been around since the mid-1990s, but they are really starting to take off now. The new funds charge far less in fees than their hedge fund brethren, but mostly use the same investment strategies. So why would anyone invest in a hedge fund rather than a mutual fund?

 

9. Is private equity back? Despite crushing debt loads, buyout houses have successfully flipped some of their portfolio companies lately. And market statistics suggest that covenant light loans, which had far fewer restrictions on borrowers than normal debt and were buyout shops’ financing tool of choice, aren’t as toxic as their critics charged.

 

10. When bond houses talk up stocks, should I worry? Pimco, one of the largest bond investment firms in the world, is building up its equity investment capabilities. Does Pimco see problems ahead for the bond market?

 

Curator