Nicholas Johnson (NJ): Thank you. My question involves the charges that financial advisors have, particularly in light of the fact that apparently 80 percrent of them do worse than monkeys throwing darts at the stock page.

Some charge on a per-transaction basis, in which case they have a conflict of interest in what’s called "churn," in buying and selling lots of stock.

Others charge on the basis of what the total value of your investments are.

Now, I don’t know of any Iowa City business owner who pays the manager on the basis of the value of the inventory [ -- or the numbers of sales, as distinguished from the total value of sales]. They pay on the basis of, perhaps, a bonus for increased profits for a year.

Why is it that financial advisors and trusts and so forth refuse to be compensated on the basis of what they’re doing for their client?

Joe Brisben (JB): You bring up a good point, Nick. Although I am a certified financial planner I’m only paid through commissions, not for giving advice. I usually stay away from no-load mutual funds, because I don’t think there’s any such thing as a free lunch. Mutual funds all have expenses. I think it would probably be more prudent for certified financial planners to be paid for their performance rather than anything else.

NJ: Would you apply the same to trusts?

JB: Yeah, I would. Yeah, I really would.

NJ: And is it an anti-trust violation that they all seem to be in lock step with each other and absolutely refuse to do business on the basis of what good they do for the investor?

JB: It could be. The other thing is that some clients require more services than others do, and I think those people should be willing to pay for those services.

NJ: What’s your own sense of the point at which you would recommend selling or buying?

In other words, a lot of the advice — including the advice people are getting right now — is, “Oh, hang on to it. Yes it's gone up, but don’t sell it for a profit, because, wow, what would you have that would be a better investment?”

And then when it goes down, they say, “Oh, don’t sell it now because it’ll come back up.”

In other words, “I have no advice to give you except to hang on to what you have and ride it up and ride it down."

As Sam Walton said one day when he lost two billion dollars, “Well, it was just paper before and it’s still just paper.”

But I’m not sure all investors look at it that way.

JB: No, they don’t.

Most people are small investors and they’re dependant on that money to tide them over in their old age. Ordinarily when I suggest that someone sell a stock, it’s because if you take the average price-to-earnings ratio times whatever future earnings are out there two to three years, and if that price gets above a certain level then you’re really at risk and I recognize that people need to sell.

But in a market like this, where there’s such severe market risk, this is a tough call. A lot of those companies have value, and ordinarily in times of stress like that, people probably should be riding it out. But the problem is that this problem has been going on for so long, and people keep hearing the same thing. Like anybody else, they become impatient and they get tired of hearing it. Those people are clients, and they trust your judgment. But you have to read them, and if they can’t sleep at night then . . .

NJ: But some of these stocks have gone down 50 percent.

It’s kind of like the corporation that reports a four-billion dollar loss. Wouldn’t you sort of miss a half a billion dollars out of petty cash at the end of the first week?

If a stock goes down ten percent, well maybe you hang on to it. But isn’t there a point at which it looks like it it’s going to continue to slide and it makes sense to cut your losses rather than just ride it all the way to the bottom?

JB: Once again, you’ve got to look at those earnings projections and see. There is a system whereby you put a stop-loss underneath a stock, and if it touches on that and breaks through it, then sell out and stay in cash.

NJ: But the advisors I know aren’t saying that.

JB: I know.

NJ: They’re saying, “Hang on to it when it goes up.” They’re saying, “Hang on to it when it goes down.”

JB: Yeah.

NJ: “Give me my fee and don’t expect any advice from me that involves any action.”

JB: Yeah. That really is a quandary. That’s basically between you and your investment advisor.

It sounds like you’ve got a very keen, intelligent mind, and you should be asking your financial planners these questions. Have a good dialog with them, and come to some resolution that makes you feel comfortable.

NJ: Yeah, well, their advice is “My way or the highway.” I mean it's like trying to negotiate with the life insurance company over the terms in your life insurance policy.

JB: Nick, one lesson I learned a long time ago is never substitute obstinance and arrogance for intelligence. You ought to tell them that.

NJ: OK. Thanks, Joe.

AK: Thank you, Nick, for your call on Iowa Talks.