How do I choose a Financial Advisor?

The selection of an investment advisor that fits you and your family best should be a multi-level process. First, get to know a potential advisor from the public documents associated with their firm – most importantly the firm’s Form ADV which should be assessable from their company website. If not, you should be able to find the Form ADV at adviserinfo.sec.gov. The Form ADV details a firm’s investment philosophy, key personnel, and most importantly their fee structure and how they are paid.

If the firm and the advisor appear to be acceptable, then a personal visit (which you should not be charged for) would be appropriate. Come prepared with a list of questions to ask the advisor about their investment process, the variety of securities they use, and their fee structure. Some potential questions may be do you try to beat or time the market? How often do you trade? What is your opinion on interest rates/the economy/inflation? How would they define a successful relationship? Discuss your current situations and investment needs to determine if you feel the advisor’s investment philosophy and approach fits your needs.

If the investment strategy, working principals and fee structure described by the advisor appeals to your risk tolerance and long term objectives, only then should you take into account personality and how likeable or trustworthy the advisor is. In the end, the relationship between a client and their advisor can be a very personal one so you need to be able to trust the person you work with. Many advisor relationships are created by referrals. If you know someone who is complementary of their advisor ask that friend or trusted acquaintance for specific details as you search for what type of advisor may work best for you. Most of Copper Harbor Investment Advisor’s, LLC new client relationships come from referrals from existing clients.

How do I determine the right asset allocation for my investments?

With changes in asset allocation and investment vehicles comes changes in both investment returns and market volatility. The appropriate asset allocation is unique to every investor, and is a combination of many factors including your investment fund’s purpose (will you need the monies for retirement, college or emergency expenses and what is your fund’s time horizon); other cash sources available to you, and your overall risk tolerance to list a few.

Here is where a qualified investment advisor can be of help in discussing the pros and cons of different asset combinations and allocations, and based upon their insight what overall mix of stocks, bonds and cash will best achieve an investor’s short and long term goals.

Should I only invest using Index Funds?

In the current investment climate, Index funds (see our definitions page for a description) are a popular vehicle due to their broad market exposure and their low internal cost structure. Index funds are passively managed, meaning they only mirror a specific market index. There is no fund manager making decisions on what stocks or bonds to buy or sell-changes are only made when the indexes make a change to their basket of holdings, which occurs only infrequently.

Thus index funds are very good tools by giving broad market exposure with more tax efficiency (due to lower turnover within the fund) and lower expense ratios than managed mutual funds.

Drawbacks do exist however. For example, indexing alone does not help allocate funds among index investments or monitor your overall allocation to stocks, bonds and other investments as you age and your investment risk tolerance changes. There is no active manager making buy/sell decisions in an index fund which at times can add value to the fund’s overall rate of return. By being able to buy and sell different industries, sectors and individual companies an active fund manager can react to market trends and make investments based upon research and modeling. The management fee for these actively managed funds is higher than index funds, but over a market cycle an active management style may outperform over the longer term especially in more volatile areas of the market. If you chose active managers over an index fund be sure these managers provide a commensurate return over time to compensate for their fees.

How do I know how my account is doing?

A money manager should report the portfolio’s rate of return to the investor on a regular basis, no less than annually. This rate of return should be total – meaning not only interest and dividends collected by the investments but also the growth or loss in overall market value in the account over a given time period.

A net rate of return is reporting the portfolio’s performance after all management and advising fees have been deducted - giving the investor an “in your pocket” rate of return. This “after all expenses” rate of return is the preferred way investors should ask to see performance calculations for their portfolios.

A good investment advisor will provide a benchmark to which to judge your portfolio’s rate of return against - for if you have no comparison, you have no way to know if the rate of return given to you is competitive. The best benchmark comparisons are “blended”, meaning it is a combination of stock, bond and cash indexes that reflect the asset allocation of your portfolio. With a blended benchmark you have the best opportunity for an “apples to apples” way to compare your portfolio’s performance.

We at Copper Harbor provide each client with a blended benchmark to which to compare their net rate of return performance.

Why should I pay someone to help me invest?

Some investors are comfortable with today’s online tools and do-it-yourself websites. Others know that the key to successful investing is not so much an individual stock or mutual fund – but that they have the right allocation of stocks, bonds and cash to achieve (given long-term historical averages) their long-term investment goals. Another key to successful long-term market performance is to refrain from acting on basic human emotion – when the markets go down, it takes a lot of fortitude to not diverge from your long-term objective and stay invested. We feel some clients who do not enjoy researching investment options or fully understand investment alternatives may be best served by an advisor. Those who have both the time and investment sophistication may enjoy investing for themselves and keeping a close watch on each of their investment choices.

Many people choose to hire an investment advisor because they do not want to spend time researching possible investments and prefer to have someone help to not only determine what an appropriate long-term asset allocation should be given an investor’s risk tolerance, but also to adjust that objective based upon changing client needs. A good advisor will review existing portfolio choices and guide you in recommending adjustments should there be change in the client’s personal circumstances or due to fundamental modifications happening within the investments themselves including investment manager changes, style shifts, and possibly performance issues.

What is the difference between a Municipal Bond, a Corporate Bond or a US Treasury?

Municipal bonds are debt instruments offered by states and/or their local municipalities to raise capital for a variety of projects such as road construction or to build a new school. The majority of municipal bonds have the advantage of paying interest to its investors federally tax free. The interest paid on these bonds normally does not have to be declared as income on the bond owner’s annual 1040 income tax return. Because of this tax advantage, municipal bonds tend to offer slightly lower interest rates that other “taxable” bonds but not so low that it does not provide benefits to high income tax payors. Investors that are in lower tax brackets many times are better off purchasing taxable/corporate bonds rather than municipal bonds. In Wisconsin (and many other states) just because a municipal security is federally tax-free does not automatically mean it is state tax-free. Most Wisconsin-based municipal bonds are subject to Wisconsin income tax, but not Federal tax.

Corporate bonds are debt instruments offered by a business or corporation to raise capital to further advance company expansion or fund research and development costs. Interest earned on these bonds tend to be slightly higher than municipal bonds as you do not get the federal tax free treatment for the income you are paid nor do you have the taxing authority of the state or municipality to ensure the repayment of your investment once the bond comes due. For this added investment risk, you typically are paid slightly higher interest amounts on your corporate bond investment.

U.S. Treasury issues are debt instruments issued by the U.S. Government to pay for government programs and infrastructure. These bonds pay interest that tend to be lower than corporate bonds as U.S. Treasuries are backed by the full faith of the federal government. These bonds are generally considered to be one of the safest investments you can own. Because of this lower investment risk, Treasuries tend to pay lower interest amounts than other taxable bonds. State income tax advantages are also available to holders of U.S. Treasury securities.

Why do some companies pay dividends on their common stock and others do not?

There are usually two rate of return components to stock investments. First, growth in the price of the investment due to the performance of the underlying entity and second the dividends (a regular payment stream) that is paid to the investor while they own the stock.

For companies issuing common stock, dividends can be paid to their shareholders as a distribution of profits to the company’s owners – the stock holders. For some older, well established companies these dividends can be large (as a percentage of their share price) and paid on a consistent basis year after year. If companies have more income than new investment ideas, they return the money to the stock holders as dividends. These stocks tend to be further along in their growth cycle, so the ability for the underlying share price to grow dramatically is sometimes more limited than a newer faster growing company. For younger, high-growth companies, dividends can be small or even nonexistent if the earnings of the company are needed within the company to reinvest in new projects to fuel growth and enhance the stock price. These companies typically have higher growth rates for their underlying stock price as the company expands and gains market share.

Why would an investor want to own bonds rather than stocks?

As mentioned earlier, the appropriate asset allocation (mix of stocks, bonds and cash within an investor’s portfolio) is unique to every investor. By their very nature, stocks are volatile investments with the risk of loss of principal at any given time. While stocks can also provide historically much greater returns than bonds, the risk associated with these investments is very real.

Bonds can also have negative returns (especially in times of sharply rising interest rates), but the range of volatility experienced historically by fixed income investments is much smaller than with stock investments. Bonds have a place in almost every portfolio where diversification and stability is sought. Bonds provide an anchor to the portfolio that pays a steady stream of income to the investor.

When interest rates are low, many investors are not attracted to bonds due to their small interest yields. However, during a stock market downturn fixed income instruments are much better at holding their value and provide a steady stable of assets that can be sold with little volatility to provide needed cash if stock prices remain low for an extended period.

We at Copper Harbor look to all investment classes when creating a client’s asset allocation. We recognize that asset diversification allows for more portfolio stability. No asset class excels or lags indefinitely and diversification can help smooth returns.

What is a Mid Cap Stock or Stock Fund?

Similar to large cap stocks, a “mid cap” stock is one whose total market capitalization is in the range of $5 - $15 billion. Once again, this is the value we at Copper Harbor Investment Advisors puts on a “mid cap” stock.

“Mid Cap” stock mutual funds tend to be more prone to market risk than large cap stock funds due to the smaller size of the companies in this category.

What is a Small Cap Stock?

A “small cap” stock to us at Copper Harbor Investment Advisors is one which has a total market capitalization of less than $5 billion. Many of the stocks in this category are not well known outside of the state/region in which they operate and are thus the most risky category of domestic stock investments.

What is a Blue Chip Stock?

A “blue chip” stock is one that would be categorized as a “large cap” due to its size as well as a long history that makes the company well known to investors. “Blue chips” also often pay a consistent dividend that provides the investor a steady cash flow. “Blue chip” stocks tend to be those that are viewed by investors as the least risky of all equity investments. Lower risk, however, does not mean that these stocks cannot lose value-nor does it mean that they have substantial growth potential like other equity investments.

Why should I own multiple funds when I can just put all my money into one high performing fund?

With over 5,000 different mutual funds available to investors, the odds that you will be able to pick the one fund that will outperform all others for an extended period of time is slim. Even if you use a broad index fund, you will always have some kind of market risk-the risk that your investment will not be in the best performing asset class for a period of time.

We at Copper Harbor Investment Advisors always suggest that an investment portfolio have a mix of investments that gives the investor exposure to different areas of the market that when combined fit their risk tolerance and long term investment goals. This diversification allows the investor to participate regardless of what market sector is in favor as long as the risk profile for a particular sector is within the investor’s risk tolerance.

What sort of professional designations should I look for in a professional advisor?

There are a number of different designations that a professional investment advisor may have as part of their educational background. For some of the more common designations please see our definitions page for descriptions of Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Certified Trust & Financial Advisor (CTFA) and Certified Wealth Strategist (CWS) to name a few.

The primary benefit to having an advisor that has a professional designation is knowing that the advisor has taken additional personal time and effort to gain farther knowledge in their given field or area of expertise. Just having a professional designation does not guarantee that your advisor will be more knowledgeable or more honorable than one without, but most designations do have annual educational or reporting requirements that help to keep the advisor current and up to date with investment trends or law changes.

How often should I meet with my advisor?

How often you meet with your advisor to review your portfolio is purely client driven. Some clients like to be updated as frequently as quarterly, while others maybe once a year. Any time period more frequent than quarterly would not be as productive as minimal changes are likely on a monthly basis. However, you should, at a minimum, meet at least annually so that you are comfortable that the portfolio is staying within the given investment objective guidelines and that you fully understand any changes that have been made since your last review. Additionally, larger changes in lifestyle such as retirement updates, job changes, inheritances should cause frequent communicates with advisors between meeting. These life changes may cause investment changes to reflect current circumstances. Additionally, investment advisors should communicate with clients if significant investment changes may be required due to changes at sub-advisors’ business, management changes, etc.

We at Copper Harbor have clients that meet as frequently as quarterly to those that meet as needed. The timeframe we use is normally set by the client to accomplish their investment goals and comfort level.
Frequently Asked Questions: FAQ's

How do I choose a Financial Advisor?

The selection of an investment advisor that fits you and your family best should be a multi-level process. First, get to know a potential advisor from the public documents associated with their firm – most importantly the firm’s Form ADV which should be assessable from their company website. If not, you should be able to find the Form ADV at adviserinfo.sec.gov. The Form ADV details a firm’s investment philosophy, key personnel, and most importantly their fee structure and how they are paid.

If the firm and the advisor appear to be acceptable, then a personal visit (which you should not be charged for) would be appropriate. Come prepared with a list of questions to ask the advisor about their investment process, the variety of securities they use, and their fee structure. Some potential questions may be do you try to beat or time the market? How often do you trade? What is your opinion on interest rates/the economy/inflation? How would they define a successful relationship? Discuss your current situations and investment needs to determine if you feel the advisor’s investment philosophy and approach fits your needs.

If the investment strategy, working principals and fee structure described by the advisor appeals to your risk tolerance and long term objectives, only then should you take into account personality and how likeable or trustworthy the advisor is. In the end, the relationship between a client and their advisor can be a very personal one so you need to be able to trust the person you work with. Many advisor relationships are created by referrals. If you know someone who is complementary of their advisor ask that friend or trusted acquaintance for specific details as you search for what type of advisor may work best for you. Most of Copper Harbor Investment Advisor’s, LLC new client relationships come from referrals from existing clients.

How do I determine the right asset allocation for my investments?

With changes in asset allocation and investment vehicles comes changes in both investment returns and market volatility. The appropriate asset allocation is unique to every investor, and is a combination of many factors including your investment fund’s purpose (will you need the monies for retirement, college or emergency expenses and what is your fund’s time horizon); other cash sources available to you, and your overall risk tolerance to list a few.

Here is where a qualified investment advisor can be of help in discussing the pros and cons of different asset combinations and allocations, and based upon their insight what overall mix of stocks, bonds and cash will best achieve an investor’s short and long term goals.

Should I only invest using Index Funds?

In the current investment climate, Index funds (see our definitions page for a description) are a popular vehicle due to their broad market exposure and their low internal cost structure. Index funds are passively managed, meaning they only mirror a specific market index. There is no fund manager making decisions on what stocks or bonds to buy or sell-changes are only made when the indexes make a change to their basket of holdings, which occurs only infrequently.

Thus index funds are very good tools by giving broad market exposure with more tax efficiency (due to lower turnover within the fund) and lower expense ratios than managed mutual funds.

Drawbacks do exist however. For example, indexing alone does not help allocate funds among index investments or monitor your overall allocation to stocks, bonds and other investments as you age and your investment risk tolerance changes. There is no active manager making buy/sell decisions in an index fund which at times can add value to the fund’s overall rate of return. By being able to buy and sell different industries, sectors and individual companies an active fund manager can react to market trends and make investments based upon research and modeling. The management fee for these actively managed funds is higher than index funds, but over a market cycle an active management style may outperform over the longer term especially in more volatile areas of the market. If you chose active managers over an index fund be sure these managers provide a commensurate return over time to compensate for their fees.

How do I know how my account is doing?

A money manager should report the portfolio’s rate of return to the investor on a regular basis, no less than annually. This rate of return should be total – meaning not only interest and dividends collected by the investments but also the growth or loss in overall market value in the account over a given time period.

A net rate of return is reporting the portfolio’s performance after all management and advising fees have been deducted - giving the investor an “in your pocket” rate of return. This “after all expenses” rate of return is the preferred way investors should ask to see performance calculations for their portfolios.

A good investment advisor will provide a benchmark to which to judge your portfolio’s rate of return against - for if you have no comparison, you have no way to know if the rate of return given to you is competitive. The best benchmark comparisons are “blended”, meaning it is a combination of stock, bond and cash indexes that reflect the asset allocation of your portfolio. With a blended benchmark you have the best opportunity for an “apples to apples” way to compare your portfolio’s performance.

We at Copper Harbor provide each client with a blended benchmark to which to compare their net rate of return performance.

Why should I pay someone to help me invest?

Some investors are comfortable with today’s online tools and do-it-yourself websites. Others know that the key to successful investing is not so much an individual stock or mutual fund – but that they have the right allocation of stocks, bonds and cash to achieve (given long-term historical averages) their long-term investment goals. Another key to successful long-term market performance is to refrain from acting on basic human emotion – when the markets go down, it takes a lot of fortitude to not diverge from your long-term objective and stay invested. We feel some clients who do not enjoy researching investment options or fully understand investment alternatives may be best served by an advisor. Those who have both the time and investment sophistication may enjoy investing for themselves and keeping a close watch on each of their investment choices.

Many people choose to hire an investment advisor because they do not want to spend time researching possible investments and prefer to have someone help to not only determine what an appropriate long-term asset allocation should be given an investor’s risk tolerance, but also to adjust that objective based upon changing client needs. A good advisor will review existing portfolio choices and guide you in recommending adjustments should there be change in the client’s personal circumstances or due to fundamental modifications happening within the investments themselves including investment manager changes, style shifts, and possibly performance issues.

What is the difference between a Municipal Bond, a Corporate Bond or a US Treasury?

Municipal bonds are debt instruments offered by states and/or their local municipalities to raise capital for a variety of projects such as road construction or to build a new school. The majority of municipal bonds have the advantage of paying interest to its investors federally tax free. The interest paid on these bonds normally does not have to be declared as income on the bond owner’s annual 1040 income tax return. Because of this tax advantage, municipal bonds tend to offer slightly lower interest rates that other “taxable” bonds but not so low that it does not provide benefits to high income tax payors. Investors that are in lower tax brackets many times are better off purchasing taxable/corporate bonds rather than municipal bonds. In Wisconsin (and many other states) just because a municipal security is federally tax-free does not automatically mean it is state tax-free. Most Wisconsin-based municipal bonds are subject to Wisconsin income tax, but not Federal tax.

Corporate bonds are debt instruments offered by a business or corporation to raise capital to further advance company expansion or fund research and development costs. Interest earned on these bonds tend to be slightly higher than municipal bonds as you do not get the federal tax free treatment for the income you are paid nor do you have the taxing authority of the state or municipality to ensure the repayment of your investment once the bond comes due. For this added investment risk, you typically are paid slightly higher interest amounts on your corporate bond investment.

U.S. Treasury issues are debt instruments issued by the U.S. Government to pay for government programs and infrastructure. These bonds pay interest that tend to be lower than corporate bonds as U.S. Treasuries are backed by the full faith of the federal government. These bonds are generally considered to be one of the safest investments you can own. Because of this lower investment risk, Treasuries tend to pay lower interest amounts than other taxable bonds. State income tax advantages are also available to holders of U.S. Treasury securities.

Why do some companies pay dividends on their common stock and others do not?

There are usually two rate of return components to stock investments. First, growth in the price of the investment due to the performance of the underlying entity and second the dividends (a regular payment stream) that is paid to the investor while they own the stock.

For companies issuing common stock, dividends can be paid to their shareholders as a distribution of profits to the company’s owners – the stock holders. For some older, well established companies these dividends can be large (as a percentage of their share price) and paid on a consistent basis year after year. If companies have more income than new investment ideas, they return the money to the stock holders as dividends. These stocks tend to be further along in their growth cycle, so the ability for the underlying share price to grow dramatically is sometimes more limited than a newer faster growing company. For younger, high-growth companies, dividends can be small or even nonexistent if the earnings of the company are needed within the company to reinvest in new projects to fuel growth and enhance the stock price. These companies typically have higher growth rates for their underlying stock price as the company expands and gains market share.

Why would an investor want to own bonds rather than stocks?

As mentioned earlier, the appropriate asset allocation (mix of stocks, bonds and cash within an investor’s portfolio) is unique to every investor. By their very nature, stocks are volatile investments with the risk of loss of principal at any given time. While stocks can also provide historically much greater returns than bonds, the risk associated with these investments is very real.

Bonds can also have negative returns (especially in times of sharply rising interest rates), but the range of volatility experienced historically by fixed income investments is much smaller than with stock investments. Bonds have a place in almost every portfolio where diversification and stability is sought. Bonds provide an anchor to the portfolio that pays a steady stream of income to the investor.

When interest rates are low, many investors are not attracted to bonds due to their small interest yields. However, during a stock market downturn fixed income instruments are much better at holding their value and provide a steady stable of assets that can be sold with little volatility to provide needed cash if stock prices remain low for an extended period.

We at Copper Harbor look to all investment classes when creating a client’s asset allocation. We recognize that asset diversification allows for more portfolio stability. No asset class excels or lags indefinitely and diversification can help smooth returns.

What is a Mid Cap Stock or Stock Fund?

Similar to large cap stocks, a “mid cap” stock is one whose total market capitalization is in the range of $5 - $15 billion. Once again, this is the value we at Copper Harbor Investment Advisors puts on a “mid cap” stock.

“Mid Cap” stock mutual funds tend to be more prone to market risk than large cap stock funds due to the smaller size of the companies in this category.

What is a Small Cap Stock?

A “small cap” stock to us at Copper Harbor Investment Advisors is one which has a total market capitalization of less than $5 billion. Many of the stocks in this category are not well known outside of the state/region in which they operate and are thus the most risky category of domestic stock investments.

What is a Blue Chip Stock?

A “blue chip” stock is one that would be categorized as a “large cap” due to its size as well as a long history that makes the company well known to investors. “Blue chips” also often pay a consistent dividend that provides the investor a steady cash flow. “Blue chip” stocks tend to be those that are viewed by investors as the least risky of all equity investments. Lower risk, however, does not mean that these stocks cannot lose value-nor does it mean that they have substantial growth potential like other equity investments.

Why should I own multiple funds when I can just put all my money into one high performing fund?

With over 5,000 different mutual funds available to investors, the odds that you will be able to pick the one fund that will outperform all others for an extended period of time is slim. Even if you use a broad index fund, you will always have some kind of market risk-the risk that your investment will not be in the best performing asset class for a period of time.

We at Copper Harbor Investment Advisors always suggest that an investment portfolio have a mix of investments that gives the investor exposure to different areas of the market that when combined fit their risk tolerance and long term investment goals. This diversification allows the investor to participate regardless of what market sector is in favor as long as the risk profile for a particular sector is within the investor’s risk tolerance.

What sort of professional designations should I look for in a professional advisor?

There are a number of different designations that a professional investment advisor may have as part of their educational background. For some of the more common designations please see our definitions page for descriptions of Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Certified Trust & Financial Advisor (CTFA) and Certified Wealth Strategist (CWS) to name a few.

The primary benefit to having an advisor that has a professional designation is knowing that the advisor has taken additional personal time and effort to gain farther knowledge in their given field or area of expertise. Just having a professional designation does not guarantee that your advisor will be more knowledgeable or more honorable than one without, but most designations do have annual educational or reporting requirements that help to keep the advisor current and up to date with investment trends or law changes.

How often should I meet with my advisor?

How often you meet with your advisor to review your portfolio is purely client driven. Some clients like to be updated as frequently as quarterly, while others maybe once a year. Any time period more frequent than quarterly would not be as productive as minimal changes are likely on a monthly basis. However, you should, at a minimum, meet at least annually so that you are comfortable that the portfolio is staying within the given investment objective guidelines and that you fully understand any changes that have been made since your last review. Additionally, larger changes in lifestyle such as retirement updates, job changes, inheritances should cause frequent communicates with advisors between meeting. These life changes may cause investment changes to reflect current circumstances. Additionally, investment advisors should communicate with clients if significant investment changes may be required due to changes at sub-advisors’ business, management changes, etc.

We at Copper Harbor have clients that meet as frequently as quarterly to those that meet as needed. The timeframe we use is normally set by the client to accomplish their investment goals and comfort level.