Zweig Questions

What made you want to become a financial advisor?

My father had a big influence on my decision to become an investment advisor. He wanted me to learn about corporations and how one could invest in them. When I finally saved up some lawn mowing dollars, he took me to his Piper Jaffray & Hopwood Inc. broker on the corner of Mineral Point Road and Gammon in Madison. My very first stock was two shares of Wisconsin Power & Light – a recommendation from my father’s stockbroker. I will never forget it. I loved the fact that I was an OWNER of a company and I was only eight years old at the time. I remember telling my dad that I didn’t want him ever skipping his monthly WP&L bill – not that he ever had. I eventually sold WP&L and purchased a stock I enjoyed even more: Coca Cola. I held this stock through the 1980’s Pepsi vs. Coca Cola Wars and the New Coke vs Coke Classic marketing blunder. If you will recall, that was all free publicity for Coke and Coca Cola turned out to be a winning pick. Not only could you be a partial owner in a company you admire, but you could also make money at it over the long run. I was hooked.

As the years went by, I diversified the portfolio by adding other individual stocks. I remember calling my discount stockbroker during my Economics class while in high school on October 19, 1987. On that day, Black Monday, the Dow Jones fell 508 points or 22.6%. How did I react? I called Allan Topp, the co-founder of American Investment Advisors, Inc., that week. He said that he was sitting tight – it was an overreaction, and he thought that the market would recover. He was right. By September of 1989 the Dow had recovered all of the Black Monday losses. It was a good lesson: Buy and hold works.

Thus, I knew from an early stage that I enjoyed watching and investing in the stock market and I felt like I may be able to help others who might not be as interested or might not have the time to watch and review their own portfolio.

 

Do you focus primarily or exclusively on asset management, or do you also have expertise in taxes, retirement, and estate planning, as well as budgeting and debt management? What education, training, experience, and licenses do you have in these practice areas?

American Investment Advisors, Inc. (AIAI) specializes in asset management as well as financial planning. We would stay in touch with your accountant and attorney to make sure everyone is on the same page regarding tax planning and estate planning. I currently hold the series 65 license and have been working at AIAI since December 1996.

 

What is your philosophy of investing? Do you rely mainly on lower cost index mutual funds? (If the answer is “No,” ask to see evidence that the alternatives actually have worked as well or better).

• I strongly believe any investor’s portfolio should have a foundation of index funds. We start with the total stock market index and build from there. We
prefer the Schwab Total Stock Market Index fund as it is market cap weighted, meaning the largest companies are more heavily weighted than the small companies, and I like that it has a sizable percentage invested in small-cap stocks. The expense ratio is 0.03% for this index fund.
• We tend to be buy and hold investors. We are not likely to make drastic changes to the portfolios when the waters become choppy. We also avoid
unnecessary trading or tax costs.
• We review each portfolio several times per year. That does not mean we will rebalance that often. I like to see holdings become out of balance by 4-5% or
more before we trigger a rebalance.

 

How high an annual return on my investments do you think is feasible? (Anything above 10% suggests the adviser is either delusional or dishonest. Answers below 8% start to make sense.)

According to Morningstar, the annual return for large-cap and small-cap domestic stocks has been approximately 10% over the past 10, 20 and 30 year time periods (gross of AIAI management fee). The average return for bonds is 1-6% over the past 10, 20 and 30 years (gross of AIAI management fee). Depending upon your allocation, you can expect a portfolio to have a return within that range. Thus, a 60% stocks and 40% fixed income portfolio might return 7.2%

• 10% x 0.6 = 6
• 3% x 0.4 = 1.2
• 6 + 1.2 = 7.2% – gross of AIAI management fee

 

How do you manage risk?

AIAI believes the steadier the ride we can provide for a client, the smaller the chance a client will request us to sell in a volatile market. After all, our largest concern is not a temporary loss, but a permanent loss of capital (e.g., inflation).

The biggest decision an investor can make about their portfolio is the percentage they elect to allocate to stocks and the percentage they allocate to bonds. That asset allocation will determine to a large extent what kind of return an investor will receive – as well as what kind of risk they are willing to assume. Stocks are inherently more volatile while bonds are less so.

Beyond the asset allocation decision, we also have separate holdings in mid- and small-cap funds, overseas investments and we also diversify our fixed income with approximately half of our fixed income in short-term bonds and half in intermediate bonds. We also include several securities that have a long-term track record of holding up better than an index in down markets but might not participate 100% in the up-markets.

 

What needs and goals does your typical client have?

Most of our clients want to retire with a nest egg that they can draw from for the potential 30 or more years they will have in retirement. We guide clients in the build-up of this portfolio as well as when the time comes to start drawing on it. Many clients also have educational funding goals which we help them attain.

 

How many clients do you have, and will you personally manage my account? How much time should I reasonably expect you to devote to me over the course of a typical year?

AIAI does not assign accounts to one particular advisor. You can expect a team approach when it comes to the management and communication of your portfolio. We have met with clients as often as quarterly, but usually an annual review is sufficient. Obviously, we encourage clients to contact us whenever they have questions or if their personal financial situation changes. It is vital that AIAI and the client are on the same page in regard to portfolio management and the financial planning process.

 

Describe something you achieved for a client that makes you proud.

In the depth of the 2008 financial crisis, we sold some of our managed mutual funds that were saddled with higher expense ratios throughout client accounts and added to our tax-efficient, low-cost total stock market and S&P 500 index funds. I never looked back. What is the old saying? “In the midst of every crisis lies great opportunity.” – Albert Einstein

 

What’s the worst mistake you’ve made with a client?

I cannot think of the “worst” mistake I made with a client. I can tell you about one of the worst mistakes I made as an individual investor. Just to reiterate this point: Absolutely no client funds were invested in this fund – only my personal funds. Back in 1998, amid the .com boom, I had a hunch that the NASDAQ 100 index (tech and bio-tech heavy stock index) was going to continue to increase in value. I did some research and decided to purchase the ProFunds Ultra OTC fund which essentially created a return that was double whatever the NASDAQ 100 did. If the NASDAQ was up 1%, this fund was up 2% and if the NASDAQ finished the day with down 5%, my fund was down 10%. It was one of the first leveraged funds in its day. Over time, I eventually invested more than $5,000 and saw my investment climb to over $30,000 in two years. As the .com bubble burst, I thought I could continue to hold it just like any other security. It turned out I should have sold. By the time I did sell, my investment was below my purchase price. That fund dropped so fast, it was like trying to catch a falling knife. There are several lessons learned:

• Leverage funds are like playing with fire.
• It is very difficult if not impossible to try to time this market. In many ways, purchasing the investment is the easy part; determining when to sell is the
hard part.
• Don’t become greedy: Six times your investment in two years? Sell!
• Invest in the same funds I use for clients.
• Make sure you have plenty of Pepto Bismol on hand when investing in leveraged products.

 

How do you go about resolving conflicts with clients?

Communicate, communicate, communicate. Making sure AIAI and our clients are on the same page is one of our top priorities. As long as this communication takes place, conflicts will be minimized.

 

Describe the process you have in mind for helping me to achieve my goals. How will you monitor our progress?

Our progress is monitored by:

• Comparing our results to your financial goals that are defined in the financial planning process.
• Monitoring portfolio returns against their applicable benchmarks in our quarterly portfolio management reports.
• Annual or more frequent financial planning or portfolio review meetings.

 

Would any investments you recommend create a potential conflict of interest between doing what’s best for me and doing what benefits you?

I don’t see how this could be possible as we are fee-only in that we do not receive commissions on client purchases or sales or any other compensation or kick-backs from other third parties or vendors. The only compensation we receive are the management fees we charge clients at the end of every calendar quarter. When a client’s portfolio does well, we make more and vice versa. We also eat our own cooking. My personal portfolio contains the very same securities that are held in client portfolios.

 

When recommending investments do you accept any form of compensation from any third party? Why or why not?

No – there are no kickbacks, shared revenue or commissions from the mutual fund or exchange traded fund families we use in client portfolios. We strive to be independent and accepting a commission, kick-back, etc. most likely will create a conflict of interest. Thus, we steer clear of these situations.

 

What are your services likely to cost me in a typical year? What percentage of my assets will you charge in annual fees? How do you report your fees and commissions?

The AIAI Account Management Fee Schedule:

Market Value of Assets in Account	Annual Fee Percentage	Quarterly Fee Percentage
$0-$100,000	1.00%	0.250%
Next $400,000	0.80%	0.200%
Next $500,000	0.50%	0.125%
Over $1,000,000	0.40%”	0.100%

We ran a few examples of how our fee would be calculated if you had $500,000, $1 million or $2 million under AIAI management:
If a client had $500,000 under management, his/her fee schedule would be the following:

Market Value of Assets in Account	Annual Fee Percentage	Dollar Amount
$0-$100,000	1.00%	$1,000
Next $400,000	0.80%	$3,200
Next $500,000	0.50%	$0
Over $1,000,000	0.40%”	$0

 

The annual fee for that $500,000 under management would total $4,200 or would equate to 0.84% or 84 basis points.

If a client had $2 million under management, his/her fee schedule would be the following:

Market Value of Assets in Account	Annual Fee Percentage	Dollar Amount
$0-$100,000	1.00%	$1,000
Next $400,000	0.80%	$3,200
Next $500,000	0.50%	$2,500
Over $1,000,000	0.40%”	$0

 

The annual fee for that $1 million under management would total $6,700 or would equate to 0.67% or 67 basis points.

If a client had $2 million under management, his/her fee schedule would be the following:

Market Value of Assets in Account	Annual Fee Percentage	Dollar Amount
$0-$100,000	1.00%	$1,000
Next $400,000	0.80%	$3,200
Next $500,000	0.50%	$2,500
Over $1,000,000	0.40%”	$4,000

 

The annual fee for that $2 million under management would total $10,700 or would equate to 0.535% or 53.5 basis points.

No matter the dollar amount under management, I believe you will find our management fee to be quite competitive when compared to other investment advisors and financial planners. This fee schedule remains unaltered from AIAI’s founding in 1992. All fees are deducted on a quarterly basis and are calculated on the AIAI fee statement that accompanies our quarter-end reports.

 

May I see a sample account statement, and can you explain it to me clearly?

A sample AIAI quarter-end report is available upon request. We believe these reports are valuable in that the focus should be on the total return of the portfolio and not on the return of one or two individual stocks a client may have hit a home run on. While we send out quarterly reports, we want clients to focus on the long-term 3-, 5- and 10-year average annual returns.

 

Can you provide me with your resume, both parts of your form ADV, and at least three references?

Absolutely! AIAI is required to deliver the ADV Part 2A as part of the initial email or meeting. The ADV Part 1 and references are available upon request. As for my resume:

Mr. Bullock was born in 1970. He attended the University of Wisconsin-Eau Claire where, in 1993, he
graduated with a Bachelor of Business Administration degree in Finance and Accounting. After working at the Wisconsin Department of Revenue, Madison, Wisconsin, Mr. Bullock was employed
by Cargill, Inc., Minneapolis, Minnesota from October 1994 to December 1996. At Cargill, Mr. Bullock
worked within the Grain Division where he specialized in Accounts Receivable. In December of 1996, Mr. Bullock joined American Investment Advisors, Inc. as an Investment Adviser Representative. Since March 31, 1997, Mr. Bullock has held the position of Vice President of American Investment Advisors, Inc. and currently serves as President. He has successfully passed the NASAA Series 65 Uniform Investment Adviser Law Exam.

 

Follow-up from Jason Zweig

As you ask these questions, take written notes not just on how the advisor seems to respond to your queries but also on how the answers make you feel. Do you sense that this person is trustworthy? You should come away feeling that you would have no concerns about sharing a close secret with this person – because sooner or later, you probably will. If you have any doubts, find another advisor.

You, in turn, should be prepared to openly and honestly answer questions from financial advisors core:

• Why do you think you need a financial advisor?
• How knowledgeable are you about investing in financial matters, and how confident are you in your knowledge?
• What does money mean to you?
• What are your biggest fears? What are your fondest hopes?
• How much time and energy are you willing to invest in any financial plan we develop?
• What would it take for you to feel our working relationship is successful?
• When someone presents you with evidence that your opinions may be mistaken, how do you respond?
• How do you deal with conflicts or disputes?
• How did you handle your investments during the severe bear market that began in the fall of 2007? With perfect hindsight what would you have
done differently?
• How has your attitude toward risk changed?

Invest plenty of time in picking a good financial advisor. It will be one of the most important decisions you make and one of the most significant relationships you ever have.