15. Do You Need a Financial Adviser?

Want to escape from all of this, turn your money over to an expert, and be done with it?

Go for it, if you really think you need help. But before you do, I have some bad news for you. Finding a reliable financial planner who will be right for you could be harder than following the investing steps I have laid out for you in this book.

Some financial advisers are superb, but a lot of them are not. If you blindly turn over your money to those who are ill trained or unscrupulous, it could cost you dearly.

Over the years, I have seen the remnants of awful advice. As a columnist, I get calls from people when they aren’t sure who else to consult. I have had widows call crying because the brokers their husbands turned over their life savings to decimated the nest eggs after their husbands died. The brokers put the money in inappropriate volatile stocks and churned from one investment to another, sometimes out of ignorance, often to wrack up commissions for themselves.

I have had a 22-year-old parking lot attendant ask me to explain the life insurance policy he had just been sold. This was a young man who was scraping by, intent on doing what would be right for his future. He relied on “a great guy” who parked his car at the lot and offered the parking attendant help on his finances. Shame on that life insurance salesman! The young parking attendant had no wife, or kids, or anyone counting on him. He didn’t need life insurance. He needed an IRA. But if the insurance salesman had helped him open an IRA and invest it in a low-cost mutual fund that would truly help this young man, the salesman would have foregone his own hefty commissions.

I could go on and on with these stories, including doctors who trusted brokers with hot tips on dubious medical company investments, or people who met financial advisers at church and so concluded that they had to be trustworthy. “The con men can do it because they appear more honest than the honest person,” retired Minneapolis financial planner Henry Montgomery once told me, as he urged me to tell people to investigate even highly recommended advisers.

Perhaps some of the wayward advisers never intended to hurt people. They may simply have been foolish rather than unethical. Typically, they are indoctrinated by companies that want them to sell their high-priced annuities, insurance, and mutual funds.

Here’s what you need to know before charging into a financial adviser’s office, proclaiming your ignorance, and dumping your finances blindly into someone else’s lap: The person you are turning to for expertise might be virtually as ignorant as you about financial matters.

This is shocking to people. But anyone can call himself or herself a financial planner. The person needs no education and is not required to take a competency test. In fact, in many states, hair cutters need to jump through more regulatory hoops than financial planners. So if the phrase “buyer beware” ever applied to anything, it applies to financial advisers.

The federal government’s approach to regulating the financial services business has been to require the people who serve you to disclose (tell you about) their background and what they plan to do for you. You are then supposed to know how to make an informed decision about them. The trouble is that the disclosures are full of lingo and legalese—more wacky words to understand. Also, some financial advisers think they will seem more valuable if they make investing complicated to you. Even those who have your best interests at heart sometimes forget to speak plain English.

When most people hear disclosures or investment explanations, they aren’t sure what they’ve heard. They have gone to a financial adviser in the first place because they feel insecure about their knowledge and, consequently, don’t want to ask what they fear might be “dumb” questions. Also, they are there with one objective: to make life easier on themselves. The last thing they want to do is devote time to checking out the person who will take their money headaches off their hands.

It’s ironic when you think about it. If that adviser ultimately is going to be responsible for turning your hard-earned pennies into a retirement fund of $500,000 or more, you’d think you would take a lot of care. We are talking about thousands of dollars, not a few hundred. But people spend more time scrutinizing the fabric in the clothing they buy or reading Consumer Reports about an electronic device, appliance, or car, all of which cost a lot less.

Here’s what you have to do if you are going to work with financial advisers—whether they call themselves brokers, financial planners, financial specialists, financial consultants, wealth managers, investment managers, investment advisers, “certified” whatever, or something else: Start by interviewing at least three people, perhaps getting recommendations from a trusted lawyer, accountant, or friend. You can also get referrals from three respected financial planning organizations: Contact www.fpanet.org (888-237-6275), www.garrettplanning.com (866-260-8400), or www.napfa.com (847-366-2732).

But don’t stop with the recommendation, even if it comes from a person you trust.

As you consider financial planners, be cautious of the titles they attach to their names. This industry has become competitive, and people who aren’t well versed in planning have attached flimsy certifications to their titles to make it look as though they are better trained than they are. Look for a certified financial planner. (The common shorthand designation is CFP.)

Unlike people who call themselves financial consultants, the certified financial planner designation actually means something: The person has had training and passed a test.

Even the CFP designation doesn’t guarantee skill or ethics, though. You need to dig deeper as you interview three potential financial planners. That first consultation should be free.

Don’t work with anyone before checking to see whether that person has been in trouble for ethical violations or even illegal practices. Your state has an office that oversees the securities industry, and you can check there. But nationally, go to www.brokercheck.finra.org to check out any adviser’s regulatory background. Then when you interview planners or money managers, ask to see their full ADV forms—you are entitled to see them. Part I explains any legal or regulatory problems the adviser or firm has had. Part II covers fees and strategies. Also consider the following questions.

Does the Financial Adviser Focus on People Like You?

People naturally try to search for a professional who has the reputation of being the “best” in the field. Unfortunately, in the financial advice arena, the very best often aren’t focused on people with a few thousand dollars to invest in a 401(k) plan or an IRA.

Most highly respected financial advisers desire clients with $250,000 or more to invest. And that means $250,000 outside a 401(k) plan. Often they make their money by charging the client a percentage of the money they manage. About 1 percent of assets is common. But think about it. If you want advice on your 401(k) plan, you have no money to turn over to the financial adviser. How can the adviser make money?

Here’s where the mischief too often begins. The adviser needs to put food on his or her own table. To make money, the adviser needs to sell you investments outside your 401(k) that charge high commissions. Annuities, such as variable annuities and equity indexed annuities, can give you even uglier results, and they are among products financial consultants often push to capture high commissions.

Although there’s nothing wrong with this person encouraging you to open an IRA, too often the funds he or she might sell will be mediocre and expensive. Of course, if you read Chapter 12, “How to Pick Mutual Funds: Bargain Shop,” you know what that means. Over a lifetime of saving, you could end up with a third less—or possibly even worse—in your retirement nest egg. Remember my $10,000 example, earning $264,000 in a low-cost fund and $116,000 in an expensive one. Variable annuities, a favorite product for advisers seeking high commissions, can give you even uglier results.

It’s tricky for people of modest means to find competent advice during their savings years. Often if they go to a well-regarded financial adviser, the top adviser hands off the small account to an underling. If you select a financial planner, ask who will be dealing with your account, check the person’s credentials, and make sure you will be valued as much as a client with millions.

Also, if you are getting attention from someone who works with retired millionaires, your needs might be very different as you struggle paycheck to paycheck and raise children. Find out whether the financial adviser works with other clients like you so that you can be assured that the adviser is cued in to the needs of people of your economic background. For example, financial advisers who work with wealthy people typically help them avoid estate taxes. Applying the same approaches to a middle-income family could destroy their opportunity to send their children to college with some financial aid help.

If the adviser is going to do a financial plan for you, ask to see three plans the adviser has done for other clients, including one for a person like you. If all the plans look alike, with similar investments, they are of dubious value.

You should know that many firms that promote themselves as financial planners aren’t really focused on planning at all. They are glorified salesmen who turn out mass-produced financial plans from their computers with brilliantly colored pie charts and graphs.

“The dirty little secret in my profession is that most planners don’t do financial planning,” Laura Tarbox once told me. She’s a California financial planner who has taught other financial planners at the University of California–Irvine. Instead, the mass-produced plans, which typically cost you around $500 or less, too often are used as a marketing mechanism, she said. The planners turn out a plan that appears to be customized for an individual, but it becomes the device used to sell high-commission mutual funds, annuities, life insurance, and other products.

A financial plan that is truly designed for you is an elaborate work and often costs about $3,000 or more.

Does the Financial Adviser Have a Conflict of Interest?

Whenever a financial planner gets paid on commissions, the potential for an inherent conflict of interest exists because he or she won’t make as much money by selling you less expensive funds—even when they might be better.

The U.S. Securities and Exchange Commission has been concerned about this and has provided warnings for consumers about widespread abuses in brokerage firms. Too often brokers, who may call themselves “financial consultants,” work for firms that induce them to sell mediocre expensive mutual funds by offering them bonuses, prizes, or even trips for a lot of sales. Those who don’t meet certain quotas can be punished and might lose their jobs.

To protect yourself, refer to the ADV form I mentioned; it explains how the adviser is paid. If the adviser is getting paid by commissions, you must be on guard—realize that the salesman might be trying to generate the highest commission for himself instead of the best results for you.

Also, the Securities and Exchange Commission recommends asking your broker or financial adviser whether he or his employer has a so-called preferred list, or a list of mutual funds from which he chooses. If he does, those funds might not be there because they are top quality. Instead, they might just pay him and his firm top price, and he might consequently neglect to tell you about a better mutual fund that will cost you less.

Ask the adviser the following questions:

• How does a fund get on the preferred list, and how often do you recommend funds that aren’t on the list?

• Are you and other brokers in your firm involved in contests or rewards programs for selling certain funds, annuities, or other products? Do you or your firm get any type of payment for selling funds or other products on your preferred list?

• What percent of funds on your preferred list don’t make any payments to you or your firm?

• How do you scrutinize the funds you will sell me?

A good answer focuses on keeping your expenses below the 0.80 percent average paid by investors and selecting only funds that consistently perform as well as or better than an index such as the Standard & Poor’s 500. Of course, you also should hear that the adviser never ties mutual fund choices to a prescribed recommended list.

If the adviser gets commissions, don’t expect a recommendation for a low-priced index fund. You will have loads, which will erode your performance. You have no reason to pay a load on an index fund—it defies the idea of buying a low-priced fund.

Instead of suggesting index funds, an adviser who depends on commissions is likely to tell you that the more expensive fund will be better. Ask to see a Morningstar report on the fund so that you can determine whether that’s true. Morningstar studies mutual funds, and you will want to see whether the recommended fund is at least in the top half of similar funds for 5- and 10-year periods and still employs the manager who had excellent performance. If the adviser won’t show you this information, or if the fund has been in the bottom half of its fund category for three years or more, I would have doubts about the quality of the advice.

If you are overwhelmed with evaluating fees and commissions, you can also ask your broker to tally all of them and show you in dollars and cents what that will do to your investment over 20 years. Don’t expect the broker to be eager to do this. But you deserve the information. Make sure you ask for all “fees, front-end loads, back-end loads, operating costs,” and any other fees that make up the “expense ratio” so that nothing is glossed over. You can also use the fee information and calculate it yourself with the calculator I mentioned in Chapter 12. Find one at www.sec.gov and another at www.dinkytown.com.

After you see this information, you might want to reevaluate what you need.

Get Limited Advice

I have always respected the advice of Paula Kennedy, a New York financial planner who no longer works with individuals. She realizes that sometimes people want some hand-holding instead of having to handle their 401(k) and IRAs alone. They need the extra confidence of working with a financial adviser to get the job done.

Instead of procrastinating and putting your future on hold by not getting started, Kennedy suggests going to a certified financial planner once a year for advice. That might mean one or two hours, at a fee of perhaps $150 to $300 an hour, depending on where you live. Clarify the time involved and the fee up front so that fees don’t get out of hand later. Then bring your 401(k), IRA, and any other investments to the planner and ask whether you have the right mixture of funds.

With that information, you should have the confidence to go another year, simply feeding new money, paycheck after paycheck, into your 401(k), IRA, or other accounts.

Finding an Adviser

To make sure you get solid advice, work with a certified financial planner who will work for you only on an hourly fee basis, not by charging you commissions. When you assure yourself that there are no commissions, you can be confident that the planner will evaluate your funds on their merits. To find a financial planner, contact www.fpanet.org, www.napfa.com, or www.garrettplanning.com, and specifically request one who will accept an hourly fee.

When you reach the point in life when your decisions are more complex than simply saving and investing money in a 401(k) or IRA, you might want to engage a planner. It’s a good idea when you are about 5 to 10 years from retirement or when something unique, such as a major inheritance, falls in your lap.

If you select what’s called a certified financial planner, you will assure yourself that the person has training in a broad range of planning disciplines. However, this still does not assure you of the person’s ethics, so make the call to FINRA’s “broker check” at 800-289-9999. Also, although training prepares a planner to select mutual funds, significantly more education is desirable for selecting individual stocks.

When finding financial advice, be aware that many people are competing for your business by creating titles that sound impressive. Many titles mean nothing. For example, brokers increasingly are calling themselves “financial consultants” but are paid to be salesmen. You will also see many designations that start with the word certified, yet they might mean little more than that a person received a few hours of training.

Finally, keep in mind that talented and honorable people in one discipline are not necessarily equipped for another. For example, all doctors are highly trained, but you wouldn’t go to a knee surgeon for a hearing problem. The same applies to financial advice. This list will help you select the right person for your needs.

Certified financial planners, or CFPs, are trained in overall financial planning, ranging from asset allocation to taxes and estate planning. They have passed a two-day test and have a college education, although not necessarily a business or finance degree. They are qualified to select an appropriate mixture of mutual funds for you and help you aim at fulfilling financial goals, such as saving enough for retirement. They will be familiar with some tax issues but are not generally trained as well as a certified public accountant in taxes. And they should refer clients to lawyers for help with legal matters like wills and trusts. Their typical training does not equip them to pick stocks.

Chartered financial analysts, or CFAs, are the elite, highly trained stock and bond pickers of the financial professionals. They have had extensive education in analyzing investments (ranging from futures and options to stocks and bonds) and have passed a three-day test that is so rigorous that many fail. Having this background is important for a money manager who will be selecting individual stocks and bonds for you. CFAs also have familiarity with some tax issues, but that’s not their primary focus. Nor are they experts on debt management and some financial planning matters, such as picking college savings plans.

Certified public accountants, or CPAs, are experienced and trained with accounting and taxes. They typically have at least a bachelor’s degree in accounting, have passed a demanding test in that area of expertise, and are licensed by a state. They are equipped to scrutinize (or audit) corporate financial records and are most skilled at advising individuals about strategies to keep tax bills low. But they might not be well prepared to do financial planning or pick stocks, bonds, or mutual funds. CPAs who have earned the “personal financial specialist” designation are prepared to do financial planning.

Chartered financial consultant (ChFC) and chartered life underwriter (CLU) designations primarily focus on insurance—everything from health insurance to life insurance, but not investing. If you sought investment advice from these consultants, they might be inclined to suggest insurance products such as variable annuities when low-cost mutual funds might be a better choice.

Financial consultants, or stockbrokers, sell stocks, bonds, and mutual funds. They are hired to be salespeople, and most don’t have financial planning training. Most also haven’t been educated about analyzing stocks. They might have sales quotas to meet.

Credit counselors focus on people with excessive debt. They might have little training, and some firms enhance financial troubles instead of helping clients escape them. To find a reputable firm, call the National Foundation for Consumer Credit (800-388-2227). Avoid firms that advertise.

Advice at Your Workplace

Increasingly, employers are bringing financial advisers into the workplace to help employees handle 401(k)s. I encourage you to go to any one-on-one session you are offered and to listen to any presentations on selecting 401(k) funds. Also call any telephone adviser your employer offers you. This help will be particularly valuable if you feel paralyzed or merely want to double-check your own investment decisions.

Also, once a year, it’s important to make sure that the previous year’s strongest fund hasn’t started to dominate your mixture and throw off your asset allocation plan. An adviser can help you with the process, called rebalancing, or moving a little money from your strongest funds into areas that the latest cycle has not favored.

Still, although I encourage you to avail yourself of the help offered at work, I must provide a warning: Skill levels and ethics vary greatly among the advisers who are providing 401(k) help in workplaces. So take the help offered, but also be cautious. Over the years, I have seen consultants who use 401(k) presentations to build their credibility. Then when an individual seeks their advice, the adviser suggests that they plan a meeting outside the workplace. The adviser then tries to sell expensive high-commission mutual funds, insurance, or annuities that the individual shouldn’t have.

To guard against this, evaluate the adviser in your workplace based on the criteria I have outlined in this chapter. The adviser might simply be a glorified salesman. Don’t forget to examine fees. And be skeptical if the adviser tries to talk you into taking your money out of the company 401(k) and investing it instead in an IRA or another product outside the workplace fund. I’ve heard horror stories about this from individuals who had perfectly good 401(k) plans and no need to “roll over” their money into an IRA.

The Bottom Line

Go to the right adviser with the right types of questions. To get the most from the adviser’s help, be somewhat well informed yourself.

People do need financial advisers at certain points in their life, especially for a little advice just before retirement. You also might need a financial planner if you are too afraid of making a mistake and, consequently, are procrastinating, squandering the years that will make a difference to your future.

Yet I want you to know that following the step-by-step actions in this book will make you successful. No matter what your age, you will make yourself wealthier than you ever imagined if you start now, open a Roth IRA every year, feed your 401(k) to the max if you have one, and mix and match mutual funds using the easy investing strategies and models in this book.

If you are lucky enough to be in your 20s, just investing $20 to $25 a week will put you on course to being a millionaire. If you are older, you can still accumulate plenty without living like a pauper. If you vow now to correct the investing mistakes that have destroyed your hard-earned savings in the past, your money will be kind to you in the future.

You now have all the tools you need to invest with skill. Just start. Procrastination is your worst enemy. And if you have any questions, you can find me at www.gailmarksjarvis.com.