Several weeks ago, my doctor, knowing that I have a Financial Services Background, showed me a couple of Sample Portfolios that a Financial Advisor, with a major firm, had suggested he consider investing in. Right away, I realized that this was a standard approach that all firms seem to take in providing Investment Advice.

The two portfolios–one Growth and one Growth and Income–had some similarities. Basically, in my opinion, they included too many stocks–30 and 29, respectively. Generally, eight-to-twelve different stocks, within different industries, should provide sufficient diversification–especially with smaller portfolios.  Wouldn’t it make more sense to focus on those stocks that have the most potential–and invest more heavily in them–and reduce the total number of stocks?

As usual, they were a miss-mash of companies that ranged among various degrees of quality, according to the S & P “STARS Reports” that I consulted. Some had good Price-to-Earnings Ratios, while others did not. Likewise, they were trading all over their respective Price Ranges for the last 52 weeks.

I also advised him that, in essence, the FA would be turning his portfolio over to some analysts, perhaps at the firm’s headquarters, to manage. The account would be priced, generally on a quarterly basis, and it would be managed for a hypothetical client–not him specifically.

Also, every time there was a change in the portfolio, a portion of each account would automatically be sold and something else purchased. That could involve a good deal of trades–and paperwork–especially when you consider that, on average, only a small portion of each account would be invested in any one stock.

A key problem, to me, would also be that there may be too many stocks for the individual investors to follow–and actually know what they have. Also, if the FA is basically turning the management over to the analytical team to manage, how much time would they need to devote to keeping track of the stocks–to assist their clients?

Securities Firms prefer to emphasize the use of such portfolios on “Auto-Pilot”, so the FA can get on to the next sale. Now, I’m sure that some FAs do the research to keep their clients properly informed; however, how would the client really know?

NOTE: There will be a related Post shortly, “Kicking the Tires on Your Portfolio”.



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