11. Find an Advisor You Can Trust
Fraudsters like Bernie Madoff grab the headlines, but one of the biggest threats to many Americans’ finances isn’t a sociopathic Ponzi schemer. It’s advisors who don’t know what they’re doing or who care more about getting commissions than giving good advice.
Sometimes they’re reacting to the perverse incentives of the financial world, which often reward those who sell a lot of “product” instead of those who help people actually find solutions to their financial problems. Other times, the advisors don’t know what they don’t know. For some, financial education begins and ends with sales seminars.
Financial planning is complex enough—and important enough—that you should seek out people who are competent to give you advice. At a minimum, you should look for someone who has passed a vigorous course of training in comprehensive financial planning. Look for one of these credentials:
• CFP—Certified Financial Planner, the premier credential of the financial planning world
• CPA-PFS—Certified Public Accountant, Personal Financial Specialist, a planning designation available to CPAs
• ChFC—Chartered Financial Consultant, a financial planning designation typically earned by those in the insurance, securities, and banking worlds
As you’ve read in earlier chapters, I recommend that you seek out a fee-only (not a fee-based) financial planner. Fee-only planners are compensated solely by the fees you pay; they don’t accept commissions. This type of financial planning may cost more up front, but you won’t face hidden fees or undisclosed conflicts of interest that can mar other types of planner–client relationships. I typically recommend getting referrals from two organizations:
• The National Association of Personal Financial Advisors, www.napfa.org, represents fee-only planners who typically charge an “assets under management fee,” or a retainer. Many of these planners require that you have at least a certain level of wealth (often $250,000 and up).
• The Garrett Planning Network, www.garrettplanningnetwork.com, represents fee-only planners who typically charge by the hour. This approach is a good fit for middle-income people.
Variable Annuity for a Dying Woman? I Don’t Think So.
Q: We were recently advised by a financial advisor to put $500,000 into a variable annuity for my mother’s trust. Frankly, my mother is not expected to live past another year. The cost of the annuity is supposed to be 1% above our current fees, and there is a floor on our investment so that, no matter what happens in the market, if my mother dies, we would still get back the $500,000. If the market rises, we get the higher fund balance upon her death. Articles that I read online say that variable annuities cost more and generate large fees for the seller and the survivor has to pay taxes on the distribution as ordinary income, not as capital gains. They say variable annuities are not really good, and brokers can get $30,000 to $50,000 in fees on a $500,000 annuity. What is your opinion of a variable annuity?
A: Run this investment past a fee-only financial planner—one who is paid only by fees from you, not commissions on insurance products. You’ll get an earful about why this investment is probably a bad idea.
Your research has turned up most of the disadvantages. One you didn’t mention was surrender charges. If the money needs to be accessed in a hurry, you are likely to pay stiff fees for doing so.
Variable annuities are designed to be long-term retirement savings vehicles, not short-term repositories for cash. If you’re concerned about the safety of your mother’s investments, talk to the fee-only planner about your options, such as moving some or all of the money to an FDIC-insured bank account.
“You won’t get much return, but the money will be there in case they need it for Mom,” says financial planner Delia Fernandez of Los Alamitos. “And it will be liquid and available at her death to help settle final costs.”
“Unsuitable” Annuity Can Be Undone
Q: I recently purchased a variable annuity. I researched the investment only after the fact and discovered that my new advisor had not disclosed its pitfalls. I came to him with all my questions afterward, but he was defensive and unprofessional. I feel completely deceived! Do I have any recourse? I feel like I made a huge mistake.
A: The fat commissions that many annuities pay can tempt unethical or poorly educated advisors into painting an unrealistically rosy picture of these financial products. Variable annuities are complicated, combining investments with an insurance component. They often come with high fees and surrender charges. Another big disadvantage is that any growth in an annuity will be taxed at higher income tax rates when withdrawn instead of benefiting from the lower capital gains rates available to investments outside an annuity. All these disadvantages make annuities an unsuitable option for many investors.
Unsuitable is the word you need to remember when you report this sales-man’s behavior to the insurance company and to your state’s insurance commissioner. In the letters that you write to both entities, make it clear that you weren’t informed of the annuity’s drawbacks, and outline how the investment is not a suitable choice, given your needs. Ask that the annuity be “unwound” and your money returned. If you don’t get satisfaction from either the insurer or the commissioner, you may need an attorney’s help.
Is a Money Manager Worth the Cost?
Q: My husband and I are nearing 60. The company where we both have worked for more than 30 years recently merged with another firm. The money in our retirement accounts, which totals several hundred thousand dollars, will be distributed to us, and we need to figure out how to manage it.
We took your advice to interview several fee-only financial planners, and all of them are pushing for wealth management. They would manage the money in exchange for a percentage of the assets. How do we find an unbiased opinion of whether it is worth spending more than $10,000 a year for this service instead of putting that money toward our retirement?
I doubt that any of the planners can earn a return that would be worth at least $10,000 a year. We’re with Vanguard’s Target Fund 2020, which we currently use for retirement funds we have gathered outside of work.
A: You’re right that a financial planner—or any money manager, for that matter—is unlikely to offer returns substantially above what you would get in passive investments that seek to match the market rather than beat it. Study after study shows that few investors, professional or amateur, can consistently outperform the stock market averages.
What wealth management should provide is a suite of services to help you in all areas of your financial life. You should get a comprehensive financial plan, as well as assistance with your taxes, insurance needs, and estate planning.
Your investments should be targeted to your specific needs, time horizon, and risk tolerance. Your planner should advise you about sustainable withdrawal rates after you retire so that you minimize the risk of running out of money.
Your planner should be willing to act as your fiduciary—meaning that your needs come first—so you don’t have to worry about the conflicts of interest that may arise when an advisor is recommending products that pay him or her commissions. In short, the best wealth managers provide a one-stop shop that alleviates the need for you to try to coordinate all these services yourself.
If you don’t feel that you need this level of service, however, seek out a fee-only planner who works by the hour. You can find referrals to this type of fee-only planner from the Garrett Planning Network, at www.garrettplanningnetwork.com.
How to Find an Advisor You Can Trust
Q: I’m 56 and have never had a clue about money matters, although I have money. Over time, from your column, I have gleaned that one should go to a fee-based financial planner, but I have a hard time trusting people. I’ve had more of these professionals contact me than there are stars in the sky. I’m pretty scared and in “ostrich mode.” I would truly appreciate it if you could give me a nudge toward the right man or woman to chart my path.
A: Ultimately, you’ll be charting your own path, but it can help to have a trusted advisor point the way.
Trusted is the key word, obviously. Many people prefer fee-only (not fee-based) arrangements because the planner is compensated only by the fees you pay, not by commissions he or she might earn on investment products. A fee-only planner doesn’t accept commissions, whereas a fee-based planner typically does.
Something else you’ll want to determine is whether the planner is willing to state in writing that he or she agrees act as a fiduciary. That means the planner is willing to put your interests ahead of his or her own. This is a much higher standard than most advisors must adhere to by law. Typically, advisors have to recommend only “suitable” investments and strategies rather than the ones that may best serve your needs.
Many of the professionals contacting you likely are not fee-only financial planners, but are instead investment salespeople of some kind. If you want a good financial planner, you typically have to seek one out.
Since you have money, you can start by asking for referrals from the National Association of Personal Financial Advisors, at www.napfa.org. NAPFA holds its members to high educational, experience, and ethics requirements. Many of its members specialize in financial planning for high-net-worth individuals and typically charge a percentage of your assets or a retainer fee. You also can get referrals from the Garrett Planning Network, at www.garrettplanningnetwork.com, if you want to pay for advice by the hour. Both organizations’ Web sites have additional tips on choosing a planner.
Your Broker Is Not a Retirement Expert
Q: We’re in our mid-60s and have $1.4 million in a brokerage account totally invested in stocks. Our broker maintains that we have plenty of money for retirement. Is he right?
A: Unless your broker is a comprehensive financial planner—which is highly unlikely, given that you’re 100% invested in stocks, when you almost certainly should be taking less risk—he shouldn’t be offering advice.
Determining how much money is “enough” to retire is a tricky question to answer. It depends on a number of factors, including these:
• How much you spend
• Your risk tolerance
• Your health
• Your expected longevity
• Any upcoming purchases or lifestyle changes
• Any legacies you want to leave
What happens in the markets the first five years after you retire can have a profound impact on your ability to spend. A bear market during those years can dramatically increase the chances you’ll run out of money. Bad markets shrink your nest egg, and the money you withdraw during those years isn’t available to participate in the rebound. Yet you can’t know in advance whether markets will soar or swoon after you retire. That’s why most advisors recommend a fairly conservative initial rate of withdrawal—usually no more than 3% to 4% of your savings in the first year of retirement, adjusted after that by inflation.
Another huge issue is long-term care. Medicare—the government program that pays most health care expenses for people 65 and over—typically doesn’t cover the costs of nursing homes or home health care if you need help with activities of daily living, such as cooking or bathing. If you don’t have long-term health care insurance, you may need to reserve a sizeable portion of your wealth to cover these expenses.
You need to consult a fee-only financial planner who can review your entire situation and give you personalized, knowledgeable advice about this crucial area of planning.
How to Invest an Inheritance
Q: I’m writing to get some help on what to do with $300,000 that I recently inherited. My husband and I are in our early 50s. We owe $180,000 on our home at 5% interest, with seven years left on our 15-year loan, and we have no other debt. We have a combined $225,000 in retirement accounts and about $15,000 in a regular savings account. Does it make sense to pay off or pay down our mortgage with the inheritance or just keep it in savings?
A: You need to take a small chunk of that money and invest it in a session or two with a fee-only financial planner who can review your entire situation and give you personalized advice.
In all likelihood, the advice won’t be to pay off the mortgage. You’re on track to have your home loan paid off before retirement age, and most people have better things to do with their money than pay off a low-rate, often tax-deductible debt.
Letting your inheritance languish in a savings account, however, doesn’t make much sense when you’re likely to need more money for retirement. A planner can help you come up with an investment allocation that takes somewhat more risk but should bring you greater returns.
Finding Trustworthy Advisors
Q: It looks like my mother is going to win a lawsuit that could bring her more than $2 million. Can you advise us what steps to take after she receives her money? She wants me to play a major part in her finances because she is not a native English speaker, but I don’t know much about finance, either. I can probably look for a financial advisor, but how do I know we’re not going to bump into another Bernie Madoff?
A: Your mom needs at least three advisors to handle such a big windfall: a CPA, an estate planning attorney, and a financial planner.
The first two professionals are, by law, fiduciaries. That means they are legally obligated to put their clients’ interests ahead of their own. Financial planners are under no such legal compulsion. And since anyone can call himor herself a financial planner—no education or experience required—it pays to be extra careful when choosing one.
Professionals who belong to the National Association of Personal Financial Advisors (www.napfa.org), an organization that represents fee-only planners, are willing to be held to a fiduciary standard. So are many who belong to the Garrett Planning Network (www.garrettplanningnetwork.com).
You can help your mom by interviewing at least three prospects about their education, ethical commitment, and experience advising people who acquire sudden wealth. Check out their backgrounds using the BrokerCheck feature at the Financial Industry Regulatory Authority Web site (at FINRA.org).
Garrett advisors typically charge by the hour and often don’t manage assets; the client makes the actual investments. NAPFA advisors usually do offer asset management and may charge a percentage of assets.
One way to reduce the chances of becoming a Ponzi scheme victim is to make sure your money is held by an independent financial institution, such as a bank, brokerage, or mutual fund, and that your statements come from that institution. You also should find out who audits your advisor and do a background check on that company as well.
What to Do Now with Your Extra Cash
Q: My husband and I make good money. We have a low-rate mortgage and a good amount in savings, and our retirement fund is well on its way, despite recent losses. We still have 25 years until retirement. What’s the best thing to do with our extra money? We have been putting it into projects to spruce up the house, but otherwise we just throw it into savings.
A: How about investing some of it in a session with a fee-only financial planner? That’s the best way to know whether you really are on track for retirement, you have enough emergency savings, and you’re adequately insured.
If your finances are indeed as rosy as they seem, you may want to consider enjoying your money a little more. Research shows us that experiences make us happier than possessions, so consider a special vacation or travel to see family and friends.
You also might consider boosting your charitable donations, to share your good fortune in these increasingly hard times.