In This Chapter:

Making sense of investment opportunities can seem like a full time job to many people. What is the best place for your retirement funds? What about a college fund? Saving for a new house? Stocks, bonds, mutual funds, pork bellies? It can all get pretty confusing. When you say, ‘I want a comprehensive investment plan and I want it to be socially responsible,’ things can really get complicated. Not everyone wants to manage their investments by themselves. You may not feel like you have the time, energy, or expertise to make consistent investing decisions. Perhaps you have accumulated a large sum in your retirement account and are now concerned about making a mistake that might jeopardize your nest-egg. The answer to your anxiety may be a qualified financial advisor.

Several varieties of financial advisors provide different levels of service under different compensation scenarios. Some are quite good at what they do and your money spent for their help will be a good investment in your financial security and peace of mind. Also some financial professionals are less than professional and their advice usually leads to your purchasing high-commission products you don’t need. Finding a financial professional that you can trust is not difficult if you stick with those certified by legitimate authorizing bodies. Finding a financial professional with experience in socially responsible investing may be just a bit more difficult.

The definition of financial advisors is somewhat blurry because some designations require licensing and certification, while others require nothing. Anyone can call themselves a financial planner as long as they are not trading or recommending trading registered securities (stocks, bonds, mutual funds, and so on). On the other hand, a person cannot buy or sell registered securities without being a licensed stockbroker working for a broker/dealer.

All kinds of levels of licensing and certifications sit in between these two extremes. As the industry has sought to blur the lines between different practitioners, consumers have become confused. This is unfortunate because financial products have become more numerous and abundant. Financial professionals can help investors sort through the marketing noise and make wise decisions about their money. The field of financial advice has grown along with expanded products and now a host of professionals offers their services. Investors must first decide on which type of financial professional they want to work with and then find one that is familiar with socially responsible investing—not always an easy combination.

Thanks to changes in the financial services industry, once familiar professional titles are morphing into a variety of different descriptions. A stockbroker may now be called a registered investment advisor, a financial planner, investment consultant, or others. Regardless of what is on the business card, if the person buys and sells stock, they must be a stockbroker licensed by the SEC. We’ll summarize and then evaluate three major financial professional functions, each of which have some advantages and disadvantages.

Before the securities industry began a deregulation program in the late 1970s and ’80s, a stockbroker was a person who discussed investment options with clients, recommended stocks, executed trades, and collected fat commissions. All brokerage firms were “full service,” meaning they offered their clients advice and buy or sell recommendations. Commissions were fixed and, by today’s standards, were very high. Thanks to deregulation, commissions were no longer fixed and the discount brokerage business exploded. Concurrent with these changes in the stockbrokerage industry, other financial providers began to enter new markets. Banks and life insurance companies, in particular, expanded their reach into investment products to complement their existing product base. Life insurance agents began selling mutual funds, while bank employees offered financial advice and products.

In this new deregulated environment, some brokerage houses reduced their commissions and trimmed the services offered in response to the discount brokers. Other firms began offering additional services as a way to generate more commissions and fee income. Financial planning was a natural way for some firms to move in offering additional value to clients. As stockbrokers became investment representatives or some other title that signified responsibilities beyond entering buy and sell orders the compensation structure changed.

A popular way for stockbrokers to distinguish themselves from other commission-charging brokers was to offer wrap accounts to their clients who had substantial assets (usually $50,000 or more) invested through the firm. A wrap account combined commissions and a management fee into one fee, which was a percentage of the assets under management. Firms often have a sliding scale for investors with larger amounts invested paying a smaller percentage. As with any investment product, customers should carefully consider whether wrap accounts make sense for them. You pay a fee, usually quarterly that can be a drain on profits from your investments. If you seldom buy or sell stocks, you are probably better off with a regular account that does not charge an ongoing fee, but does charge a commission when you do buy or sell stocks.

In another corner of the financial services industry, the financial planning industry was growing at a very rapid rate. It was not too hard to see why. The role of a financial planner is to step back and look at your total financial picture, not just your investments. A good financial planner will examine every financial aspect of your life, including insurance, taxes, whether you have an up-to-date will, retirement planning and more. The planner will listen to where you want to go with your finances (early retirement, elderly parents in need of assistance, child with disabilities, and so on) and help you design a savings and investment plan to get there. The plan will also point out areas of your financial life that need tidying up. The plan will have actionable steps in sequence of importance and in a logical order (take care of the real important stuff first—for example, make sure you have adequate insurance coverage).

As the financial planning industry was developing, it split into two camps. The two groups were split on the issue of compensation. One group charged a small fee to do a plan and then earned commissions on the products recommended in plan. They were licensed stockbrokers and life insurance agents, thus able to earn commissions on any products the client bought through them. The other group became fee-only financial planners. They did not sell any products recommended in their plans, but their fees were considerably higher.

Which is the best choice? Both have good arguments. The fee, plus commission planners say that if they do not follow through by offering the products the client needs to complete the plan, many clients never execute the plan. They see no conflict because selling the client products for their own good. A good financial plan is not very useful if it isn’t executed. But a financial plan that is really a glossy justification for selling you high-commission financial products is a rip-off. Whether you get a good financial plan or a marketing rip-off depends, in large part, on who does the work for you. If you know and trust the planner or get a good recommendation from someone you trust, you are probably on safe ground—besides you don’t have to follow the buy recommendations if you don’t want to.

The fee-only financial planners suggest that since there is no incentive to sell any products to earn a fee, their advice is untainted by personal gain. Fee-only planners can put the client in touch with other trusted financial professionals to execute those parts of the plan that require the purchase of registered securities or insurance products. All fee-only financial planners will use some type of computer-aided program to prepare your financial plan. But you should expect a professional and personalized plan that addresses your specific needs. This only happens if the planner gathers an extensive amount of information on you, your family, and your finances. Be prepared to fill out an extensive questionnaire and answer even more questions from the planner or someone on the planner’s staff. Be very suspicious of a planner that spends a minimum amount of time gathering information and produces a plan with lots of color charts and graphics, but little in the way of specific information about your particular needs. How does it help you to know your household income is in the bottom half of the top 20 percent of all households in the United States?

A criticism of fee-only planners is their high expense. This can be the case, so you’ll want to know upfront what the planner charges for the initial plan and updates. The cost of a plan varies depending on how complicated your financial life is and what you want. But a competent financial planner should tell you upfront what to expect and what the fee covers—the plan, a meeting with the planner to discuss the action points, follow-up telephone support, and so on.

Your safest bet is to go with a financial planner that carries the designation of Certified Financial Planner. These professionals have completed a rigorous set of college-level courses, passed a series of examinations, and exhibited professionalism in the field.

Money managers are investment professionals who are hired to handle client’s money. Unlike most other financial professionals money managers usually have discretionary power over their client’s money. This means they can buy and sell securities without the client’s consent on each transaction. A discretionary account means the client has given the money manager written authority to do whatever she thinks is appropriate and necessary to manage the assets. Most money managers charge a fee that is a percentage of assets under management. The fee can range up to 1.25 percent annually. Most money manager’s clients must have a minimum of $250,000 in assets, although some may take clients with less.

Discretionary accounts are for the truly disinterested in their money or those so incredibly busy that they can’t possibly take the time to monitor or make investments. For most of us, they are not a good idea, especially if you are interested in SRI investing, which implies a more hands-on approach.

It is strange that some people wouldn’t think of using an unlicensed plumber, but will let someone with no credentials other than a business card make changes that will alter that personal finances in a significant way for years to come. Thank goodness we require plumbers to master a level of proficiency before we let them loose on the public (you don’t want me touching your plumbing).

Unfortunately, some financial advisors have very little in the way of qualifications for what they advertise. Even obtaining a license to sell stocks, bonds, and mutual funds or a license to sell life insurance doesn’t qualify you to be a financial advisor. These licenses primarily ensure that you know the rules and regulations governing the sale of the products—that’s not the same as being qualified to give good financial advice.

Before you hire or establish a relationship with a financial advisor, consider these five important steps:

For resources on finding financial advisors and advisors experienced in socially responsible investing, go to Appendix A.

There are many good reasons to use a financial advisor, if not on a regular basis, at least periodically. While financial advice can be expensive, it can also be the best money you spend. Financial advisors/planners can bring clarity to a confusing array of products and services. Their business is knowing what is current and the importance of how certain personal financial decisions fit in changing economic conditions. When you connect with a financial professional who is also knowledgeable in socially responsible investing, they can add that dimension to your financial planning process. Because SRI investments do not have the depth that other products cover, you may need a knowledgeable professional to help you understand where they best fit in your financial plan.

If you have substantial assets to manage, an ongoing relationship with a financial professional that you trust will pay for itself many times over. The financial advisor/planner will help you stay current with the changing market conditions and adjust your financial plan as your life circumstances change (children are born, go to college, retirement, and so on). Even those with means that are more modest will benefit from periodic consultations with a financial professional to help you stay on track for your goals. Your retirement planning in particular is worth spending some money for a good plan. As SRI investments can be used appropriately in that plan, you should have your advisor help you incorporate them.

A financial professional (one of the above) can help you plan a financial strategy and populate it with socially responsible investment products, whether they are mutual funds or individual stocks. Mutual funds would seem to be the easiest. But with new funds added on a regular basis and older funds changing management and focus, it is important to have a professional who is on top of the changes looking after your portfolio.

Financial professionals can tap into many resources that make sorting through hundreds of mutual funds and thousands of individual stocks more manageable. Most of these tools are not available to individual investors, either because they are too expensive or because you must be a licensed financial professional to access the data. This is where the financial professional will match your values with those products and investments that align most closely. It would take you a very long time to do this and you could not cover the number of possible opportunities your financial professional can scan with the tools at his disposal.

You should consider focusing on several of the most important of your values to drive your SRI investing. You should share those values and your SRI concerns with the financial professional as part of the planning and evaluating process. The financial professional has access to some powerful tools that will help her zero in on mutual funds and/or individual stocks that meet the values you expressed.

It is important to have clarity in your values and here’s one place it will pay off. With a set of clear values and your financial needs and wants, the financial planner can build a plan that makes everyone comfortable. Software tools available to financial planners let them scan mutual funds or individual stocks to pick out the stocks and/or mutual funds that best meet your individual needs. Some software tools can analyze your existing holdings to determine how close they are to your goal.

How your financial professional develops a recommended selection of investments will vary somewhat among individual practitioners. But many use a process that begins with constructing a model portfolio based on your financial and investment needs. This model considers your income, age, family circumstances (children, spouse, other dependents, and so on), current assets, financial goals, and so on. All of this information comes from the in-depth fact gathering process.

The model also considers your socially responsible values (environmental concerns, war profits, and so on). With this model portfolio, the financial professional can begin the process of screening potential investments to fit your financial needs. For example, if you need more exposure in large cap growth stocks, the professional may recommend a SRI fund that matches your values in this area or a small selection of individual stocks that also fit your requirements.

Unless you turn your money over to a money manager and give him full discretion to manage your money, you will always have the final say in how your money is invested. You may be more comfortable with mutual funds than individual stocks or want the more direct contact owning individual stocks.

If you have $50,000 or more in assets to manage, you may want to consider some of the options available for accounts of this size and larger. As noted above, many firms will handle your account on a fee basis—that is as percentage of assets under management. The array of services for larger accounts grows as account sizes grow.

For very large accounts, firms offer highly personalized plans and services. Surprisingly, a large amount of money is invested in socially responsible products through these services. A study of SRI investments in 2005 found that while mutual funds accounted for $179 billion of invested assets, separate accounts managed for individuals totaled $17 billion or almost 10 percent as much as all mutual fund investments. This means a group of individuals had invested a total that equaled almost 10 percent of all mutual fund investments. Of course, like traditional investments, the big institutional investors had the most invested at $1.5 trillion.

Investors with assets of $50,000 to $150,000 (there is nothing magic about these numbers, I am using them for illustration) can find financial advisors willing to help them using a number of different arrangements. Any of the three basic financial professionals listed earlier in the chapter—stockbroker, financial planner, money manager—can work with accounts this size to help design an investment strategy that fits financial and SRI goals.

Depending on how often you plan to trade, assuming you don’t use a money manager, you may want to consider a wrap account that charges an annual fee and may, or may not, charge commissions for trades. Expect to pay 1.25 percent annually, billed quarterly in advance. There may be other fees to cover trading expenses. These fees are examples only and will vary depending on the company.

Investors with very large account balances can look for highly personalized treatment in the services they receive and in what they pay. When assets under management pass seven figures, investors can expect and should receive a high degree of individual attention and personalized service. A common charge, although not universal, is 1.25 percent annually. It is often billed quarterly and in advance. Much larger accounts—$250,000 and more—may be charged a lower fee by some firms.

Separate accounts for larger SRI investors may give you more flexibility if you can locate a good financial advisor who is knowledgeable about socially responsible investing. Most firms that offer separate accounts require a minimum balance that can be as high as $100,000, but no rules cover the amount. In many cases, separate accounts are for investors with significant assets to invest. One popular service offered through separate accounts is building a private mutual fund.

One criticism of mutual funds is the ongoing expense investors must pay to cover the administration costs. These expenses drain profits (if any) and worsen loses. A financial firm can offer significant investors the option of building a portfolio of stocks that the financial advisor manages like a mutual fund. Of course, you still pay the annual wrap fee, but it is usually lower than most expense ratios and you directly own the stocks. You avoid the under performance that often comes with an actively managed mutual fund, unless you choose to actively trade your stocks (not a good idea). For buy and hold investors, this personal mutual fund offers all the benefits of investing in a traditional mutual fund with lower fees and a greater chance for superior performance. Using a financial advisor plugged into the SRI network will assure you that your investments are as socially responsible—and perhaps more so —than those found in many SRI mutual funds.