CHAPTER
22

Working with Professional Financial Advisers

In This Chapter

• Finding someone to help you with your investments
• What to ask before hiring a financial adviser
• Knowing who to stay away from
• Monitoring your financial adviser’s actions

If you know nothing about your personal finances, probably the worst thing you can do is go out and hire a financial adviser, assuming she’ll take care of everything and you’ll never have to think about your finances again. On the surface, it sounds like a good idea: let somebody else worry about it, right?

The problem with hiring a financial adviser when you have no knowledge of your own finances is that you’re placing a lot of trust, and some of your most valuable assets, in the hands of a person you may know nothing about—or even someone who you do think you know something about. You’ve heard about the Bernie Madoff story, right? Or the adviser whose kids swam on the same team as her clients’ kids while she was ripping off their parents for a big part of their savings?

It also could be that the financial “expert” you hire is not an expert at all. Basically, just about anybody can claim to be a financial adviser. Finances, investments, taxation, and the like are all very complicated topics that take years of education to acquire the knowledge to do the job well. Not everyone can be an expert, and it’s imperative that you find someone who has the knowledge you’re looking for.

Millennials, many of whom endured the Great Recession and are fighting their way out of student debt, are not lining up at traditional financial advising firms the way members of previous generations did. Your generation likes to do things differently, and many are skeptical of capital markets and financial advisers. So while not denying that they need financial advice, many young adults are looking for it in some nonconventional ways … and some financial services providers are getting on board.

Know Thy Finances, Know Thy Adviser

All this gloom-and-doom financial adviser talk isn’t meant to scare you off from hiring someone to help you with your finances if you’ve gotten to the point where you need it. Nearly everybody can use some help sometimes. The point is, the more you know about your personal finances, the easier it will be for you to find a qualified, trustworthy financial adviser.

When you understand your finances, you’ll be able to ask intelligent questions of your potential advisers and understand their answers. You’ll know what they’re talking about when they throw out phrases like full-service broker or fee-only adviser. You won’t feel stupid asking questions about your own money because generally, you’ll know exactly what you’re talking about. Armed with prior knowledge, you’ll work together with the adviser to put your money to the best possible use.

A financial adviser is called an adviser because it’s her job to advise you on the best uses of your money. Ultimately, however, it’s your money, and you’re in charge of what happens to it.

Do I Need a Financial Adviser?

You might need a financial adviser for many reasons. Maybe you’re faced with a complicated financial situation regarding the sale or purchase of a property, or perhaps you want some advice about which stocks and bonds to buy. Maybe you’re setting up a college fund or getting really serious about your retirement fund. Or it could be that you earned a big bonus you’d like to maximize in some sort of investment.

The reason for, and point at which, you seek help with your finances is entirely up to you. Whether you’re leaving a job and deciding what to do with the $5,800 you have in your 401(k), or you’ve inherited $200,000 from your grandmother, you might feel that you need some financial advice from time to time.

Understanding Fiduciary Responsibility

Financial advisers are divided into two groups: those who have a fiduciary obligation to put you first (this includes most Registered Investment Advisers) and those who work for a brokerage firm and cannot be a fiduciary (this includes stockbrokers and sometimes insurance agents). The fiduciary relationship is a legal relationship between two or more persons in which the adviser …

• Provides the highest ethical advice.
• Acts at all times with a higher standard of care and legal manner for your sole benefit and interests.
• Advises you exactly what the charges will be and how they will be paid. This is known as full disclosure, which is different from just handing you a contract. With full disclosure, you know exactly what you are paying for the advice.

Fiduciary advisers, who unfortunately represent only 1 in 12 investment advisers, have a duty to avoid any situation in which their personal interests and fiduciary duty to their clients conflict and a duty not to profit from their fiduciary position without disclosure of the fees charged.

The Who’s Who of Financial Advisers

When discussing some of the different kinds of financial advisers, the issue can become a little bit complicated. A financial adviser by any other name may, or may not, be a financial adviser.

We explain some of the common classes of financial advisers in the following sections. Just remember that the type of adviser you need depends on your circumstances, and you should never hire someone just because she has a title you think sounds impressive.

Financial Planners

The term financial planner often is used to describe anyone who offers financial advice or services. It also frequently is used interchangeably with financial adviser.

Financial planners, as the name implies, are people who design financial plans of action. They may design and carry out the plan, or their clients may choose to execute the plans they design.

Financial planner is a very broad categorization, so if you’re looking to hire one, be sure you know what credentials or other titles may come along with it. For starters, financial planners can be certified—or not.

Certified Financial Planners

A very large group of people in this country are called certified financial planners. They’ve all earned the Certified Financial Planning (CFP) credential, a national certification that requires certificants to have a fiduciary relationship with their advisees.

Earning the CFP credential involves working through a home-study program and passing a cumulative, 6-hour test. Designees must have 3 years of financial work experience and promise to adhere to a code of ethics. Work experience should include financial planning, investments, or banking. CFPs are also required to take 30 hours of continuing education courses every 2 years to stay current on industry happenings.

Financial Consultants

Another type of financial planner is the financial consultant. The financial consultant provides an overview of financial information and options so you can choose the products that make the most sense for you.

Financial consultants generally won’t produce a plan for your finances, only information and advice. The assumption is that the consultant is fee-only. (She won’t receive a commission on any products sold.) Be sure to ask your consultant how she will be paid.

Bank Customer Service Representatives

A bank customer service representative (CSR) is another type of financial planner, usually trained by the bank where she’s employed. The CSR’s job is to bring deposits into the bank, either as CDs, money market funds, trust accounts, or other types of accounts.

The CSR also is expected to direct clients’ money to a subsidiary company that sells mutual funds or annuities—one in which the bank receives either a commission or a percentage of the management fee. Because you will be guided to purchase a load fund—that is, one that charges a sales commission—you do indirectly pay a fee to these consultants. Always ask how much a CSR is paid per investment.

Certified Public Accountants/Personal Financial Specialists

More and more certified public accountants (CPAs) are becoming financial consultants. The American Institute of Certified Public Accountants now has a special designation, called a personal financial specialist (PFS), for CPAs who have 3 years of financial planning experience and pass a 6-hour test. Unless you purchase a product, CPAs usually are paid on an hourly basis.

Many people depend on their CPA for financial help, regardless of whether or not the CPA is designated a PFS.

Insurance Agents

You might not normally think of an insurance agent as a financial planner, but some agents specialize in financial planning. They usually have either a CLU (Chartered Life Underwriter) or ChFC (Charter Financial Consultant) designation, or both. These are designations by the American College in Bryn Mawr, Pennsylvania, given to persons who complete and pass an eight-course program. Often, the program of study can be designed in the agent’s area of expertise.

CLUs and ChFCs need continuing education. The designations, although not mandatory to do financial planning, show a level of expertise and experience.

Money Managers

Finally, a money manager is a financial adviser who, after reviewing your parameters, risk tolerance, and total financial picture, agrees to handle your funds, makes trades on your behalf, and buys and sells stocks and bonds for you. A money manager normally is employed by investors who have a substantial amount of money.

Money managers typically receive a percentage of the market value of their client’s account as compensation (approximately 1 percent of the value of the assets on an annual basis). As an example, a money manager who has $200,000 under management and charges an annual fee of 1 percent would earn $2,000 per year from your account. She probably would charge the fee quarterly, which is $500 per quarter or $166.67 per month.

Most money managers have a CFA (Certified Financial Analyst) designation. Look for this designation when you’re thinking about hiring a money manager.

Finding a Reputable Financial Adviser

If you’re like most millennials, you are tuned in and constantly in touch. You know what your friends are doing, what celebrities are doing, what’s hot, and what’s not. You share information and are transparent in your likes and dislikes. This connectedness can be extremely helpful when looking for help, whether you need a doctor, hair stylist, lawyer, plumber, or financial adviser.

It’s easy to find information on services, fees, expertise, skill, reliability, and other traits. Websites can help you find a financial adviser, and it’s always a good idea to seek advice from colleagues, friends, and family members who have worked with advisers. If you have a lawyer, he may be able to recommend a good financial planner as well.

You should be aware that an increasing number of financial advisers are not accepting clients who do not have significant wealth. Some will only agree to work with you if you have a certain amount of money—sometimes $100,000 or more. Certainly other advisers cater to clients with less money, and some smart advisers are catering to younger adults with the intention of forging long-term relationships as their clients’ wealth increases.

The Garrett Planning Network’s website (garrettplanningnetwork.com) offers a map showing advisers who don’t require their clients to have a ton of money. Online service LearnVest (learnvest.com) offers a one-time set-up fee and low monthly cost that gives you unlimited email access to a certified financial planner.

Meeting with Potential Advisers

It’s important to find somebody who understands and shares your views and philosophies on investments and financial planning, so don’t hire someone without first having a meeting to get to know that person. Remember, you should have some good financial information and understanding under your belt before the meeting because you’ve been doing your homework and reading about investments and other financial matters that may affect you.

When you’re with your prospective adviser, you need to ask some questions. But let’s get one thing very clear before we start: don’t forget, even for a minute, that you are the person who will be hiring the financial adviser, and you will be paying her fees. It’s not the other way around. Many people are intimidated by professionals because they feel stupid or uninformed around them. News flash! That’s why you’re meeting with the adviser in the first place. It’s understood that she has more expertise in the finance area than you do, and hopefully you can benefit from her knowledge. That’s the point, right? You don’t need to impress the financial adviser; she needs to impress you.

Here are some questions you should ask the financial advisers you consider:

How long have you been in this business? As with most professions, experience is important. You want to find someone who fully understands the financial industry and all its nuances and who has lived through the ups and downs of the market. You also should look for someone who understands you, your generation, and your financial goals.

How have you prepared for this job? You’ll want to know about your potential adviser’s education and previous job experience.

What was your job before you became a financial adviser? Look for a logical progression, such as moving into a financial adviser position from a banking job. If the progression doesn’t seem logical, ask for an explanation.

Can you put me in touch with some other clients whose financial situations are similar to mine? References are very important. If you talk to other clients and don’t get all the information you’re looking for, don’t be afraid to ask the candidate for more names.

In addition to these questions, ask to see their Uniform Application for Investment Adviser Registration, or as it’s more commonly known, their Form ADV, Part II A and B. This provides a financial planner’s background and tells whether they or their firm have been in any trouble in the past with the law or with investment regulatory offices. If an adviser refuses to make this form available, it should set off warning bells.

With robo-advisers, each client’s portfolio is structured to achieve optimal returns at every level of risk. A key investing approach robo platforms use is to invest in low-cost ETFs that minimize embedded investment costs. Because they utilize technology rather than active management by a human financial adviser, robo-advisers charge significantly lower fees than what most financial advisers typically charge.

Many young people like robo-advisers, partly due to the lower costs and also because of their affinity for and trust in technology. Plus, robo-advisers are available to investors who are just starting out with limited funds and tend to not be particularly attractive clients to financial firms.

If you’re going to employ an online adviser, either the human variety or a robo-adviser, do your homework and compare both services offered and fees charged. Here are some things to look for:

• Quality trade executions
• Online newsletters and reports to keep you informed about what’s happening in the financial world
• 24-hour telephone service
• Personal access to representatives in case you need face-to-face service
• Customized stock alerts to let you know when something is happening that might affect your account

Also, be sure to find out the various ways in which you can access your accounts. Is an interactive voice response phone system or online chat feature available? In addition, look for apps that enable you to access your accounts from your phone or tablet.

Here are some popular online brokers, all of which offer some robo services:

• TD Ameritrade (tdameritrade.com)
• Vanguard Online (vanguard.com)
• Charles Schwab (schwab.com)
• Fidelity Investments (fidelity.com)

Emerging robo-advisers include the following:

• Wealthfront (wealthfront.com)
• WiseBanyan (wisebanyan.com)
• Personal Capital (personalcapital.com)

Go with Your Gut

There’s one more important factor to consider when you’re choosing a financial adviser: your gut. Some people click, and others don’t. Although you should never hire somebody just because you like him, you probably shouldn’t hire somebody you just don’t like either.

The investing goals of today’s young adults vary from those of their parents, and it’s important to find an adviser who understands your goals and knows what’s important to you. If you love to travel and are adamant that you don’t want to wait until you’re retired to see the world, find an adviser who will help you achieve your travel goals while still ensuring your retirement account is healthy.

If you like somebody, and you feel confident she’s a good and competent professional, you might have a match. You need someone who will take the time to talk with you, teach you, answer any and all of your questions, and be there for you. If you don’t like someone, it probably will be very hard to work together effectively, even if she’s considered the best financial adviser in the business.

Ultimately, the decision is up to you. Consider all the factors, throw in your gut feeling, and go for it.

Financial Adviser Red Flags

We don’t need to tell you that if you see a “financial adviser” operating out of their car, it’s not a good plan for you to get involved with him. But other, subtler things should set off warning bells, too:

• Exorbitant fees
• Conflict of interest concerning products and services
• Less-than-notable track records

Let’s review each in more detail so you know what to look for—and avoid.

Find out whether the adviser is fee-only or if she gets a commission for the financial products she sells. If you can, stick with someone who doesn’t sell on commission (more on that in the next section). Then, find out what her hourly fee is. Rates vary greatly, so shop around. You don’t want to sign up with somebody and find out later that her rate is $500 an hour.

If the hourly fee seems too high (expect to pay between $150 and $300 an hour), call some other advisers in your area and compare rates. Remember that fee-only financial planners charge you every time you ask for advice or information. That’s how they make their living. If you choose a fee-only adviser, be sure you’re billed regularly. That will let you know exactly what you’re paying for and help you decide whether the advice is worth the money.

If your financial adviser works on commission and receives a fee from the annuity company from which she gets the products she sells, you won’t know how much she’s earning on your investment unless you ask. Do ask. She must tell you the commission she received, if you inquire. If she doesn’t, find another adviser. Even if you aren’t actually paying the fee, you should know how much the adviser is making for the advice or help you receive.

The following table compares a standard brokerage fee schedule and an online brokerage.

Conflicts of Interest

If a financial adviser stands to make big money on commissions from selling certain types of financial products, watch out. You might be pressured to buy products that are more beneficial to your adviser than they are to you. An adviser who does this is more salesperson than financial adviser, and that’s not what you need. Some of the best financial consultants available are commissioned salespeople; you just need to understand how they’re paid and ask if there’s a product available with a smaller commission.

When you first meet with someone you think you might hire, ask whether or not she gets a commission from products she sells. If she says she doesn’t but you’re getting a bad feeling, you can check her out.

All advisers are required to register with the Securities and Exchange Commission (SEC) in Washington or their state SEC, and they all must fill out the Uniform Application for Investment Adviser Registration, or Form ADV, Part II A and B. Ask the adviser for a copy of that form. If she says she doesn’t have one, you can call the SEC to be sure she’s registered.

Every adviser also must be registered with her state SEC, and you should be able to get a copy of your adviser’s registration form from that agency.

You also can check out the status of any certified financial planner by using the verification function on the website of the Certified Financial Planner Board of Standards at cfp.net/utility/verify-an-individual-s-cfp-certification-and-background.

Past Bad Behavior

Form ADV contains information about whether an adviser has had problems in the past, such as being sanctioned, named in a lawsuit, had complaints filed against her, or had her license suspended. If you want to check your adviser’s track record, check on her with the SEC, both in Washington and in your state office. They can tell you if they’ve received any complaints about this adviser.

You also can check out a potential adviser at the Investment Adviser Public Disclosure’s website at adviserinfo.sec.gov.

Or call the Better Business Bureau or even the insurance commissioner in your state.

More Financial Adviser Don’ts

After you’ve found and hired a financial adviser, she might do some things you don’t like, such as take off every Friday afternoon to head for the beach or recommend you put money in an investment that ends up in the tank.

But there are some things your financial adviser should never, ever do. If she does, you need to find yourself a new adviser, and you might want to consider taking legal action.

Misrepresentation

If your adviser tells you the mutual fund you’re buying carries no commission for her, but you find out later (in the prospectus mailed to you by the brokerage firm) that she made big bucks by selling it to you, that’s misrepresentation. It’s also misrepresentation if the adviser tells you to go ahead and put your money in a particular investment because you’re guaranteed to make 20 percent and you end up losing most of your principal.

If she would have said, “I think this might be a good investment for you. Why don’t we try it?” you couldn’t charge that you’d been a victim of misrepresentation. But an adviser should never tell you something is guaranteed unless she can provide a guarantee in writing. Your adviser should always give you the pros and cons of an investment and tell you exactly how the risk relates to your objectives. If she doesn’t, consider it a sign she may be conducting less-than-ethical business.

Another kind of misrepresentation is personal misrepresentation. If you find out your adviser has told you she’s something or someone she’s not, you should ask her about it, check out her most recent ADV, and, if you still feel uncomfortable, find someone new.

Who Has Custody of Your Money?

Regardless of what type of adviser you have, she should never have custody—or personal access—to your money. Having custody means the adviser would be able to move your money into her business account, after which who knows what might happen to it.

You don’t want your money in your adviser’s account (known as commingling), even if only for a few days. Always make investment checks payable to the brokerage house, insurance company, or whatever, but never to your adviser.

She may try to advise you not to put your money in that particular fund, and if you trust her, you’d do well to listen. Still, if you insist, she must place your money where you tell her. It is, after all, your money.

If you find out your adviser has been buying and selling your investments without your approval, you have a legitimate complaint. Terminate your relationship immediately. A money manager or broker has two types of investment relationships: discretionary and nondiscretionary. If your relationship is nondiscretionary, an investment should never be made without your agreement. If your adviser has discretion, you should have a formal agreement, and you should fully understand the discretionary relationship and what it costs.

If your financial adviser always has an excuse to get out of a meeting with you or doesn’t keep you informed about what’s going on, you need to ask why. Your adviser should meet with you either on a regular basis or certainly upon your request.

If you feel that your financial adviser has cheated you or has done something unethical, you can look for help by contacting a securities lawyer. Or you can seek arbitration. You can do this either by hiring an attorney to represent you in arbitration, or by representing yourself in arbitration.

Before you hire an attorney, contact the Financial Industry Regulatory Authority (FINRA) at 301-590-6500 or finra.org. FINRA’s website lets you file a complaint online.

If you’re thinking of representing yourself, contact the American Arbitration Association. It will send you the materials you’ll need to prepare your own case, if that’s the route you choose. Call 212-716-5800 to request the package, or log on to adr.org.

If you go into arbitration, you and your adviser will each present your side of the matter to an arbitration panel. A three-member panel will hear the case and then decide on a solution. Its solution is final and can’t be appealed.

The Least You Need to Know

• Although you might be able to handle most aspects of your personal finances on your own, at times you might need some help.
• You need to know what types of financial advisers are available and where to find someone you can trust before you can choose one.
• Don’t be afraid to ask your potential adviser specific questions about her experience, qualifications, and references.
• Avoid advisers who overcharge, look for big commissions at your expense, have poor track records, or embody the “sleaze factor.”
• Keep an eye out for the things your financial adviser should never do.
• If you feel you’ve been cheated by your financial adviser, you may have some recourse.