My Key Takeaways From Chapter 10 and Commentary 10 of the Intelligent Investor. Part 11/16. To Be Continued.

Chapter 10 The Investor and His Advisors

Businessmen seek professional advice on various elements of their business, but they do not expect to be told how to make a profit.

Advice on investments may be obtained from a variety of sources. These include: (1) a relative or friend, presumably knowledgeable in securities; (2) a local (commercial) banker; (3) a brokerage firm or investment banking house; (4) a financial service or periodical; and (5) an investment counsellor. The miscellaneous character of this list suggests that no logical or systematic approach in this matter has crystallized, as yet, in the minds of investors.

Our basic thesis is this: If the investor is to rely chiefly on the advice of others in handling his funds, then either he must limit himself and his advisors strictly to standard, conservative, and even unimaginative forms of investment, or he must have an unusually intimate and favorable knowledge of the person who is going to direct his funds into other channels. But if the ordinary business or professional relationship exists between the investor and his advisors, he can be receptive to less conventional suggestions only to the extent that he himself has grown in knowledge and experience and has therefore become competent to pass independent judgment on the recommendations of others.

Commentary on Chapter 10

If the advisor is a stockbroker or insurance agent, contact the office of your state’s securities commissioner (a convenient directory of online links is at www.nasaa.org) to ask whether any disciplinary actions or customer complaints have been filed against the advisor. If you’re considering an accountant who also functions as a financial adviser, your state’s accounting regulators (whom you can find through the National Association of State Boards of Accountancy at www.nasba.org) will tell you whether his or her record is clean.
Financial planners (or their firms) must register with either the U.S. Securities and Exchange Commission or securities regulators in the state where their practice is based. As part of that registration, the advisor must file a 2-part document called Form ADV. You should be able to view and download it at www.advisorinfo.sec.gov, www.iard.com, or the website of your state securities regulator. Pay special attention to the Disclosure Reporting Pages, where the advisor must disclose any disciplinary actions by regulators. (Because unscrupulous advisors have been known to remove those pages before handing an ADV to a prospective client, you should independently obtain your own complete copy.) It’s a good idea to cross-check a financial planner’s record at www.cfp-board.org, since some planners who have been disciplined outside their home state can fall through the regulatory cracks.