Taking Steps to Safer Investment Decisions

It’s tough to tell how much one investor can do alone to preserve their assets through these tough times, particularly with unprecedented government intervention in world markets. But there are some general ideas to employ as markets and economies hopefully stabilize in the New Year:

Start with a plan – or review an old one

If you’ve worked with a good financial planner, you should be able to articulate your long-term investment goals by yourself. If you can’t discuss such goals in detail, it might be time to meet with a professional financial advisor. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.

Check all your assets in banks

As a result of federal economic bailout legislation, the Federal Deposit Insurance Corporation (FDIC) temporarily raised the per-deposit account, per bank coverage level from $100,000 to $250,000 through Dec. 31, 2009. Certain retirement-related accounts carry $250,000 of FDIC coverage, but again, check in with your bank to make sure you’re covered, and if not, get the right advice for moving funds so you don’t incur an unexpected tax liability or fees.

Review your risk tolerance

Having a plan doesn’t mean make the plan and leave it to sit for years. You and your planner should decide when it’s time for a review of your investment goals and your feelings about them. An annual conversation makes sense if nothing’s going on, but when unusual circumstances in life or the markets take place, a phone call might be a good idea.

Prepare to stay invested

Stock downturns are always filled with panic selling – and buying. If your financial plan is sound, be prepared to stay the course, but work with your advisor to make sure you have your priorities covered. While times are tough, it’s wise to examine all your investment choices, but if they make sense, definitely put what you can afford in. You’ll reap rewards when the market returns.

Check your credit

No one knows how long it might take to unravel the nation’s current credit situation. That’s why creditworthy individuals might want to delay looking for new lines of credit until things loosen, and it’s definitely a good time to schedule review of each of your latest credit reports at staggered intervals throughout the next year. Why? Because in tough economies and times of tight credit, identity theft might be on the rise, and you’ll need to make sure the information on your credit data is truly your own.

Pay attention to your cash

You should have an emergency fund of three to six months’ worth of living expenses in case your job situation goes south, but the market turbulence we’ve experienced also highlights the need to be somewhat liquid in your investment positions so you can take advantage of certain opportunities. Not every investment that’s lost value is necessarily a bad investment, and with careful study, you should be able to have cash on reserve so you can capitalize on legitimate opportunities.

Re-budget

It’s a good time to make a budget or re-assess the one you have. Though the federal government would love for consumers to start spending again to lift the economy, that doesn’t mean you have to jump in with both feet. Keep your spending smart, your debt low so it’s easier to set savings and investment priorities that will do you the most good when the economy and the market come back.

Check your retirement

How will the activity in the market affect your retirement timetable? You might want to continue working full-time or plan a phased-in approach as you continue to build assets. There is a great danger now that people may become either too risk-adverse or assume too much risk in planning for their retirement, and that’s why it’s wise to get advice.

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This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by Robert S. Jackson, PhD. and Patrick Murfin of Oaktree Capital Corporation.

Look for more great financial articles like this in our Document Library.

Comparing Costs of Investment Advise is Harder Than You Think

These days all of us have to watch our pennies. Whether you are buying gasoline or grand pianos smart consumers comparison shop for price. But when you go shopping for investment advice comparing costs isn’t so easy. It can be like comparing apples to oranges while the oranges are in a burlap bag,

TRADITIONAL STOCK BROKERS

When it comes to investment advice, most people probably think of traditional stock brokers first. Full Service brokers are considered your agent in buying and selling securities. The “bid-ask spread” means that the person buying the security pays a bit more than the person selling that security; the difference goes to the folks who maintain trading systems. In addition, brokers charge fees for each trade, whether buying or selling. There also may be an array of other fees for maintaining your account, even for fully reporting to you the status of investments. His or her income thus rises by maximizing the number of trades he or she performs for you. But the broker might also be paid incentives or commissions for promoting favored securities.

REGISTERED INVESTMENT ADVISORS

A Registered Investment Advisors (RIA) like Oaktree Capital has a fiduciary responsibility only to the client. We accept no commissions on or fees from any of the products or investments they recommend. Our only income is derived from fees for service paid by the customer. That means their only interest is in maximizing the client’s return on investment with in the parameters of that clients risk profile.

ADVISORS AFFILIATED WITH BROKERAGES

In recent years the Securities and Exchange Commission (SEC) has allowed brokerage firms to offer fee-based accounts similar to those offered by RIA’s if they proximately disclose account structures in which commissions or fees are paid to the broker ad the affilaited brokerage company not only by the client, but by the issuers of the product or security. An individual broker working as an agent of a brokerage firm can provide financial advice to clients and, like RIA, charge fees for maintaining and managing an account. And they can also collect fees and commissions from the instruments they are selling. They don’t have to disclose what or how much those other fees and commissions are. Some of these fees and commissions are called tails—fees paid continuously from the securities held by the client. Some are charged to you when you first purchase the product, and some are chraged when you sell. Since the broker doesn't know how long you will hold the security, he doesn't now that is tails will amount to, and when you will be paying a fee on the sale. Consequently, in this type of an account even the agent may not fully be able to tell you what those will be.

Furthermore, since these brokers or agents have no exclusive “fiduciary responsibility” to the client they may also benefit from pushing products that may not be in the client’s best interest. Because they are getting income from two sides of the same transaction, the fees to the customer might, at first glance, appear smaller than those charged by an RIA. But beware of this “bargain.” Because of the broker’s lack of a “fiduciary responsibility” to you, and the consequent presence of under-performing assets in your account, your brokerage-company account may cost you much more than the clearly-identified fees you may to an RIA.

LOOK FOR BROKER DISCLOSURE STATEMENT

How can you distinguish whether you are getting our apples or their oranges? If the person you are working with is functioning fundamentally as an agent of a brokerage company, even if your account with this person is called “fee-based” and so might appear to you to be identical to an account with us, the SEC requires that this agent prominently disclose the following in account applications, advertisements and sales materials:


“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore our profits and our salesperson’s compensation may vary by product and over time.”*

Brokerage also may not offer Discretionary accounts, except in accounts regulated as investment advisory accounts or Financial planning services, except in accounts regulated as investment advisory accounts.*

So go ahead, go price shopping. But if you notice that "prominent" disclaimer, ask a lot of questions. You will be glad you did.

Then come back and talk to us. See if our apple doesn’t shine just a little bit more than it did before you had full informantion.

*Cited by TD Ameritrade Institutional in What You Need to Know About Financial Advice, 2006.

Also of interest see the SEC publication
Investment Advisers: What You Need to Know Before Choosing One.

And check out the Oaktree handy Glossary of financial terms.

Financial Information at Your Finger Tips—Introducing the Oaktree Document Library

Immediately below this entry you will find a useful article on consumer credit. It is one of many articles I have edited and adapted provided by the Financial Planning Association (FPA), the membership organization of the financial planning community.

These timely articles cover a wide range of personal financial issues including planning for retirement, planning for your children’s or grandchildren’s education, portfolio management and investment, estate and legacy planning, business ownership, real estate investment, taxes, employment, insurance, and government benefits. I’m sure I left something out. But you get the picture—if there is an issue affecting your financial well being, one or more of these articles will cover it.

From time to time, I will post an article here.

But if you are looking for guidance, you can find many articles in our Document Library on the Oaktree Captial web site. Just visit the library, select articles of interest and use the handy Request for Information Form to request copies. We will e-mail you the requested documents within one business day.

Now scroll down to see the kind of information you can have available!

Consumer Borrowing Now Means Making a Plan

If you’re planning to buy a home or a car in this year, the process is going to be a lot tougher without an excellent credit score and a significant down payment. That means you’re going to have to work harder — and possibly wait a little longer — to make those key purchases.

What’s a good credit score?

According to credit scoring giant Fair Isaac Corp., the best FICO score range as of late 2008 stood at 760-850. That minimum is roughly 20 points higher than it would have been a year ago.

Barring any major federal action to loosen up these markets on the consumer level, these factors make it particularly important to make sure there are no skeletons in your credit closet.

The Federal Reserve Board’s statistics show that outstanding consumer credit has increased from a bit more than $2 trillion in 2003 to $2.5 trillion by the end of the second quarter of 2008, representing a 25 percent increase over five years. These high levels of debt, combined with a global credit crunch, have tightened up lending to all but the best customers — and they’re having trouble too.

If you have extraordinarily high debt levels, a record of late payments or very little money to put down on that home or car, you need to do some advance planning before you contact any lenders.

What you need to incorporate into your planning

Get some advice: You might be focused on paying down debt or saving up your down payment, but credit is only one part of your lifetime financial picture. It might be a good idea to talk with a tax professional or a financial planner to learn how to best use credit. It’s always good to determine what your limits should be.

Pay down the balances you have: Next year, Fair Isaac Corp., the company that created the FICO score, will be adjusting the way it computes its credit scores. One of the top changes will be a greater negative weight on credit utilization — how close you get to the borrowing limit of each of your accounts. The company says that for optimal scoring, each account’s outstanding credit should be no more than 50 percent of the credit line and hopefully less. As you’re paying down your balances, it’s wise to focus on the highest-rate credit cards or loans first.

Set a credit report review schedule: You have the right to get all three of your credit reports — from Experian, TransUnion and Equifax — once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. By spreading out the dates you receive each of your credit reports, you'll get a continuous view of how your credit picture looks because the three bureaus feed each other the latest information. It's a good way to clean up errors and keep a steady watch for identity theft.

Don’t swallow the bait of all those ads that advertise free credit reports on TV: Most of them will demand a credit card number from you, which means at some point those reports won’t be free. www.annualcreditreport.com is the best place to get reports that are truly free of charge.

Pay on time and pay more than the minimum: If you’ve been late with payments or have stuck only to paying the minimums, it’s time to give that up now. Here’s what you do. To avoid late payments, note the due dates when the bills arrive and then set a date for payment five to seven days ahead so you’ll definitely be able to mail your payment on time. To put more toward the balance, finally do a budget–this will help you identify the non-essential spending you’ve been doing so you can pay your outstanding credit balances faster.

Cut up cards, but don't close the account: Closing accounts — even those that have had zero balances for years — is a bad idea. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.

No-doc or low-doc loans? Find another way: If you are self-employed or otherwise don’t have a lot of verifiable income, you may have the most trouble getting a loan. While banks and other lenders two years ago might have bent over backwards to lend to people with unverifiable income, that gravy train is over now. If you do get a loan, you’ll pay far more for it than you would have before the credit markets blew up.

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This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by Robert S. Jackson, PhD. and Patrick Murfin of Oaktree Capital Corporation.