Getting Started in Finding a Financial Advisor E-Book

Charles A. Jaffe

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 501

Veröffentlichungsjahr: 2010

Beschreibung

An accessible guide that contains the tools needed to findtrustworthy financial assistance Given the events of the past two years-from bankruptcies tofinancial scams-it is more important than ever that investorsunderstand who they are hiring to handle their finances. Getting Started in Finding a Financial Advisor exploresthe important relationship between an investor and their financialadvisor and examines how you should go about finding potentialcandidates. Along the way, it shows you how to interview and checkthe credentials of six key types of advisor so that you can spotand avoid rogues, scam artists, and incompetents. You will alsolearn how to understand what can happen if the institution or theadvisor ends up in financial or legal difficulty. This insightfuland useful guide * Helps you determine the kind of advisor best-suited for yoursituation * Provides interview questions, discusses what credentials reallymean, and which are important * Explains in detail the issue of fiduciary responsibility offinancial advisors, so you can find helpers who are on yourside Most people who give advice about money are trusted withoutactually earning that trust. Getting Started in Finding aFinancial Advisor helps you set the highest standards, allowingyou to locate professionals who can be trusted to protect yourfinancial well-being and help you prosper.

Leseprobe

Table of Contents

Books in the Getting Started In Series

Title Page

Copyright Page

Dedication

Acknowledgements

Introduction

Part I - A Soup-to-Nuts Guide to Selecting Your Advisor

Chapter 1 - You Need Financial Help. Now What?

What Kind of Assistance Do I Need?

What’s It Going to Cost Me?

What Do I Get for My Money?

Can I Afford It?

Can I Do It Myself?

Chapter 2 - You Get What You Pay for, and Pay for What You Get

Avoiding Sins of Commission

How Advisors Are Paid

Chapter 3 - The Seven Big Mistakes People Make When Hiring Advisors

Big Mistake 1: Interviewing Just One Candidate

Big Mistake 2: No Background or Reference Check

Big Mistake 3: Focusing the Search on Cost or Payment Style

Big Mistake 4: Expecting Professional Credentials and Designations to Make an ...

Big Mistake 5: Setting Expectations and Viewing Results Based Entirely on Returns

Big Mistake 6: Letting the Advisor Control Everything

Big Mistake 7: Hiring Friends and Relatives

Chapter 4 - Why You May Be the Only One You Can Trust

Who Is on Your Side?

Know Where You Stand

Fiduciary Is No Guarantee

Chapter 5 - Swimming through Alphabet Soup

Credentials Are Misleading

Designations Don’t Make You “Professional”

What Credentials Mean for You

Ask These Four Questions about an Advisor’s Credentials

Part II - Selecting, Interviewing, and Getting Rid of Your Advisor

Chapter 6 - Your First Meeting with an Advisor

You Called the Meeting—You’re in Charge

Don’t End the Interview with “You’re Hired”

Prepare in Advance

Do Your Background Checks

Do Your Homework and Reveal Your Faults

Get “Samples,” but Don’t Expect Something for Nothing

If You Have Concerns, Spill Your Guts

Get References

Chapter 7 - Interviewing a Financial Planner

What Are You Looking For?

Finding Candidates for the Job

Checking Them Out

Interview Questions for Financial Planners

Building the Relationship

Future Considerations

Don’t Ignore Your Gut

Chapter 8 - Interviewing a Broker

What to Expect from a Broker

Defining “Suitability”

Do Name Brands Matter?

Checking out Candidates

The Price You’ll Pay, and How You’ll Pay It

Credentials Worth Looking For

Interview Questions for Brokers

Building the Relationship

What if My Broker Changes Firms?

Intuition Is Important; Greed Is Not

Chapter 9 - Interviewing a Money Manager

Finding Candidates for the Job

Madoff’s Gift to Investors

What Is a “Separate Account”?

Interview Questions for Money Managers

In the Event of Trouble, Contact Authorities

When in Doubt . . .

Chapter 10 - Interviewing an Insurance Agent

Agent or Broker? Independent or Captive?

Finding Candidates for the Job

Credentials to Consider

Sins of Commission

Checking Them Out

Interview Questions for Insurance Agents

Pursuing Complaints

Building the Relationship

Chapter 11 - Interviewing an Accountant/Tax Preparer

Finding Candidates for the Job

Interview Questions for Tax Preparers

Building the Relationship

Chapter 12 - Interviewing a Lawyer

Finding Candidates for the Job

Checking Them Out

Interview Questions to Ask a Lawyer

What’s Next?

Building the Relationship

Chapter 13 - Interviewing a Real Estate Agent

Can I Do This Myself?

It’s Different for Homebuyers

Working with a Buyer Broker

Full-Service, Discount, or “For Sale by Owner”?

Finding Candidates to Interview

How Agents Are Paid (and if It’s Negotiable)

Interview Questions for Real Estate Agents

Building the Relationship

Chapter 14 - Get What You Need from References and Referrals

Good Referrals Can Go Bad

Get Beyond a Simple Referral

Getting Blood from a Stone

Questions to Ask References

Chapter 15 - Breaking Up Is Hard to Do

Step 1: Talk to Your Advisor

Step 2: Redefine the Relationship

Step 3: Sharpen the Ax

Step 4: Drop the Ax

Step 5: Hire a Replacement

The Last Word

Index

Books in theGetting Started InSeries

Getting Started In Online Day Trading by Kassandra Bentley

Getting Started In Asset Allocation by Bill Bresnan and Eric P. Gelb

Getting Started In Online Investing by David L. Brown and Kassandra Bentley

Getting Started In Investment Clubs by Marsha Bertrand

Getting Started In Internet Auctions by Alan Elliott

Getting Started In Stocks by Alvin D. Hall

Getting Started In Mutual Funds by Alvin D. Hall

Getting Started In Estate Planning by Kerry Hannon

Getting Started In Online Personal Finance by Brad Hill

Getting Started In 401(k) Investing by Paul Katzeff

Getting Started In Internet Investing by Paul Katzeff

Getting Started In Security Analysis by Peter J. Klein

Getting Started In Global Investing by Robert P. Kreitler

Getting Started In Futures, Fifth Edition by Todd Lofton

Getting Started In Financial Information by Daniel Moreau and Tracey Longo

Getting Started In Emerging Markets by Christopher Poillon

Getting Started In Technical Analysis by Jack D. Schwager

Getting Started In Real Estate Investing by Michael C. Thomsett and Jean Freestone

Getting Started In Tax-Savvy Investing by Andrew Westham and Don Korn

Getting Started In Annuities by Gordon M. Williamson

Getting Started In Bonds, Second Edition by Sharon Saltzgiver Wright

Getting Started In Retirement Planning by Ronald M. Yolles and Murray Yolles

Getting Started In Online Brokers by Kristine DeForge

Getting Started In Project Management by Paula Martin and Karen Tate

Getting Started In Six Sigma by Michael C. Thomsett

Getting Started In Rental Income by Michael C. Thomsett

Getting Started In REITs by Richard Imperiale

Getting Started In Property Flipping by Michael C. Thomsett

Getting Started In Fundamental Analysis by Michael C. Thomsett

Getting Started In Hedge Funds, Second Edition by Daniel A. Strachman

Getting Started In Chart Patterns by Thomas N. Bulkowski

Getting Started In ETFs by Todd K. Lofton

Getting Started In Swing Trading by Michael C. Thomsett

Getting Started In Options, Seventh Edition by Michael C. Thomsett

Getting Started In a Financially Secure Retirement by Henry Hebeler

Getting Started In Candlestick Charting by Tina Logan

Getting Started In Forex Trading Strategies by Michael D. Archer

Getting Started In Value Investing by Charles Mizrahi

Getting Started In Currency Trading, Second Edition by Michael D. Archer

Getting Started In Options, Eighth Edition by Michael C. Thomsett

Getting Started In Rebuilding Your 401(k) Account, Second Edition by Paul Katzeff

Getting Started In Finding a Financial Advisor by Chuck Jaffe

Copyright © 2010 by Chuck Jaffe. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Jaffe, Charles A.

Getting started in finding a financial advisor / Charles A. Jaffe. p. cm.—(Getting started in series)

Includes index.

eISBN : 978-0-470-62477-7

1. Financial planners. 2. Investment advisors. 3. Finance, Personal. 4. Financial planning industry. I. Title.

HG179.5.J338 2010

332.024—dc22

2009049439

For my girls—Susan, Thomson, and Whitney—who inspire me every day, and for my biggest fans, Herb and Evelyn Jaffe.

Acknowledgments

As in any project of this nature, there are people whom it could not have been done without. My list is a bit different from the people behind those other projects.

The people “responsible” for this book are the kind of folks I hope you never encounter in your own lives. On the big-picture level, crooks like Bernie Madoff and Robert Allen Stanford made it abundantly clear that sometimes people who invite a money manager into their lives are actually inviting trouble.

Before those recent headlines, there was Brad Bleidt, a financial advisor who actually owned the radio station I worked for in 2003-2004, who it turned out was running a Ponzi scheme for the better part of 15 years. His saga got me thinking that a book like this might be necessary.

Because I was working for Brad’s station—and refused to quote anyone affiliated with the station in my columns—I never did a background check on Brad and was as shocked as anyone when his horrible story came to light. In reporting on his downfall, it became clear to me that many of his customers might have known something was amiss if they had just been armed with a bit more protective information. You may never have heard of his investment fraud, but the people he stole from were every bit as devastated as the victims of a high-profile guy like Madoff.

Then there was Gregg Rennie, who was a major sponsor of the radio show I did in 2007-2008. Because I would periodically have him appear on-air with me, I did a complete background check on Gregg before ever working with him, looking into every form and figure I could find to make sure there was nothing amiss. He passed every test. A few months into the show, I knew that Gregg was facing some financial issues on some real estate investments; the stock and real estate markets were cratering and he mentioned his issues privately when telling me that he was going to scale back his involvement in the show.

What happened next, however, shocked me. The guy with the clean background and no signs of trouble—who talked the right talk and seemed to have his priorities in order—wound up facing Securities & Exchange Commission charges over selling fraudulent investments, stuff he allegedly just “made up.” He was caught before his actions ever had the chance to grow into a full-blown Ponzi scheme, but the few people he hurt were every bit as devastated as anyone else losing money.

That experience convinced me it was time to write this book. I know it can’t prevent someone from being in the wrong place when an advisor, like Gregg Rennie, goes bad, but it can help people sidestep most of the bad actors in the financial services industry.

I wish it hadn’t taken those bad actors to motivate me to make this book happen; I’m not really thanking them, but I have to acknowledge that if it weren’t for rogues, scoundrels, and idiots, I could have spent my time playing with my dog on the beach, rather than locked in my office trying to make my deadlines.

Speaking of deadlines, I need to thank Debra Englander and Kelly O’Connor at Wiley for being just a bit flexible with mine and for giving me the guidance necessary to get this done. Their focus and structure makes this book much more readable than anything I could have come up with on my own.

Years ago, I wrote my first book, also about choosing financial advisors. It was published by The MIT Press, and I need to acknowledge that those folks there helped to give me a good framework for this book, even while they were publishing a bad book themselves. I wish that book had been more focused and less fluffy. I probably should apologize to the people who read that book; this book—the structure, design, and content—is the book I really wished I had published first. I thank Wiley for knowing about the other effort, giving me a chance to get it right, and then helping me deliver up to my own expectations.

My colleagues at MarketWatch are always instrumental in my success, if only because they give me the flexibility to do my work there and take on projects like this one at the same time. I am blessed every day to work with editors like Dave Callaway, Steve Kerch, and Jonathan Burton; I am sure they will be pleased with this book, not because it has their names in it here or because they love the content, but because I’m more likely to submit my columns on time now that it’s over with.

Over the months when this book was taking shape, my daughters Thomson and Whitney steadfastly refused my offers of money to come down into my office and just write random chapters or pieces of the book. Thomson said she’d only do it if she could write about unicorns—there is a reference to them somewhere in the book—and Whitney said she would only do it if she could mention playing lacrosse (there’s no mention of that). Ultimately, they reminded me with a smile that I needed to get this done, if only so I could go back to having more time with them; they proved wise beyond their years.

Finally, none of this happens without my wife Susan. For years now, whenever I have included her in one of my columns, I have introduced her as “my wife Susan, the most patient and understanding woman in America.” In fact, I do that in a few places in the book too. It’s not hyperbole. Anybody who can put up with me for more than a quarter century—and who can put up with me while I go through the personal misery and torture of writing a book on top of everything else I do—comes close to sainthood. I am truly blessed.

Introduction

The safest way to double your money is to fold it over once and put it in your pocket.

—Kin Hubbard

There has never been a time when people needed more help with their finances, nor a time when they were more scared about hiring an advisor.

As the stock market was reaching the depths of its biggest downturn in our lifetimes, Bernie Madoff’s $50 billion deception of rich, brilliant investors was coming to light. And while the world’s largest investment fraud scheme captured the big headlines and the big investors, there were dozens of smaller schemes perpetrated on average folks by rogue brokers and financial planners.

Chances are good that you never heard about Earl Blondeau, the Raleigh, North Carolina, investment advisor who used his job to gain access to funds being held in trust for the benefit of a client, or of Dallas advisor Cliff Robertson, who not only duped investors of their life savings and tapped their bank accounts, but stole his clients’ identities too. While the Madoff case caught the headlines, the smaller cases—and I picked those two at random from a file filled with hundreds of advisor arrests and guilty pleas from the last two years—were far more common and devastating.

Beyond the victims who were directly affected by these frauds, the damage included the public perception that hiring an advisor could, indeed, be asking for trouble more than finding a solution. While that kind of knee-jerk over-reaction is not rational, it’s hard to overcome, especially during financial times when the market makes many of the best advisors look like they are unable to help.

Moreover, fear actually makes many consumers more susceptible to the bad guys. Not knowing whom to trust, they wind up at a cocktail party or on the sidelines of the soccer field chatting with someone who happens to be an advisor and thinking, “Providence has brought me someone I can trust, at just the right time in my life.” Invariably, every bad guy was similarly trusted by people who let those personal connections override the standard due diligence necessary to separate the quality advisors from the boobs, idiots, frauds, and charlatans.

This book will walk you through that process, and no advisor deserves to be working for you if he or she can’t pass muster. It’s a self-help book for finding people who can help you.

It’s important to recognize two key facts when it comes to hiring financial advisors:

1. The vast majority of them are honest, scrupulous, trustworthy, hard-working folks with good intentions.

2. You can do almost all of these jobs yourself.

It’s equally important to recognize the corollaries to those facts:

1. It doesn’t help you that there are so many good advisors if you pick an incompetent, lazy, or crooked one.

2. You can butcher your finances as well or better than anyone else if you don’t know what you’re doing.

Think of financial advisors the same way you think of carpenters, plumbers, electricians, and auto mechanics. In each of those cases, you can do the job yourself—there are books and how-to articles, dedicated specialty magazines, and television shows dedicated to showing you the way—but you’re better off hiring a pro if you lack the time, ability, know-how, and willingness to finish the task properly and without incident.

Having picked up this book, you are on the verge of making one of the biggest financial decisions of your life, one that will have more impact on your financial well-being than simply picking a good stock or mutual fund. That’s precisely why it’s important to go through this process the right way.

You don’t need to read every page to find great advisors. Decide what you need from this book and use it to your advantage, whether you get the soup-to-nuts education on selecting advisors of every stripe, or use it as a guide for grilling the candidates, questioning their references, and doing background checks.

Either way, it should help quell your fears on both sides of the current fright-mare affecting consumers. It will help you decide if you need an advisor to get through these tough times and will then enable you to hire one who won’t be in tomorrow’s headlines.

Part I

A Soup-to-Nuts Guide to Selecting Your Advisor

Chapter 1

You Need Financial Help. Now What?

The only way not to think about money is to have a great deal of it.

—Edith Wharton

Most people know when they need help to solve one of life’s problems. Oh, they might pull out a plunger when the toilet backs up, or pop the hood and look at the engine when the car breaks down, or take a store-bought remedy or cook up chicken soup to try to heal themselves, but if they lack the skill to make a quick fix, they’re going to find someone to lend a hand.

And that makes sense with your plumbing or your car, because a bad repair job could damage or ruin one of your biggest assets. Likewise, your good health is irreplaceable.

Yet, when it comes to finances—which hopefully will be the biggest asset of your lifetime—people are skittish, scared, and reluctant to seek out help.

Talking about money is still one of the biggest taboos in modern society, so people learn their lessons from parents, friends, and co-workers, at the barber shop or on the sidelines of the kids’ soccer games. They’ll watch television shows or listen to radio hosts, read articles, and try to cook up a portfolio or an investment strategy with help from all of those sources. A 2009 study by Sun Life Financial showed that one third of Americans cited online or television news as a place where they turn for financial advice; that’s nearly the same percentage of people who cited financial advisors.

But finances and money are not like food, where failure to follow a recipe or simply using bad ingredients can leave a bad taste in your mouth. You can throw out a bad dish and forget about it by the time your next meal arrives, but bad financial mistakes will be with you for years, possibly as long as the rest of your life.

In the end, there comes a point—typically when someone has amassed enough money that he can see the cost of mismanaging it—when most people acknowledge that they could use some help, the kind of insight that will make them comfortable that their biggest decisions will turn out right.

That’s when one of two things happens: They jump on board with the first possible helper they find, or they put off looking for help, believing that it’s easier to find a mythical creature like a unicorn than it is to find someone who is smart, savvy, and worth the cost of their advisory fees.

Either they believe that the easiest way to amass a small fortune is to start with a big one and let a financial planner, insurance agent, banker, or broker lose it down, or they don’t believe anyone could turn their meager holdings into that small fortune.

Both sides are wrong, because the expectations are wrong.

Go back to the basic need for help, the necessary fix to the plumbing or car. You want things fixed and running right, safe and protected, so that you can live your everyday life without worrying about a messy problem or a personal catastrophe. You don’t expect an auto mechanic to change your car from an American-made sedan into a Porsche or Lamborghini, you simply expect them to help you keep the car running properly so that you can reach your destination and make the journey to wherever you want to go.

That’s precisely why you should hire financial advisors, to help you make the journey from where you are to where you want to go.

At the very least, over the course of a lifetime, you will need to manage investments, amass college and retirement savings, secure and work out loans, buy or sell property, insure that home and your other possessions, protect your family and home against catastrophic losses, develop a plan to pass your life’s work to your heirs, and pay taxes on the whole thing.

Say hello to a broker or financial planner, banker, real estate agent, insurance agent, lawyer and/or estate planner, and a tax preparer or accountant.

Finding someone trustworthy who can do any or all of these jobs is not as hard as searching for a unicorn, but it’s also not as easy as handing your money to the next person you meet who purports to know something. That’s why you want to go about hiring financial advisors the right way, no matter which job they’ll do for you.

I’m always amazed that people spend more time researching a new flat-screen television or home computer than they spend checking into the background of the person who will determine a big chunk of their financial future. Presumably, no one fears offending the television by asking tough questions about it, whereas they are uncomfortable asking personal, prying questions to people they don’t know.

By reading this book, you are distinguishing yourself from that crowd and showing that you want to do the research and ask these types of questions. Good for you.

You’re about to learn that hiring good advisors is not an impossible task. You’ll be able to do a lot of research from home, on your computer, and the rest you can do by simply taking your time to get questions answered.

With that in mind, you should remember throughout the process of looking for advisors that you (and, hopefully your spouse or life partner) are the only person you trust implicitly to have your best interests at heart. Everyone else must earn your trust, starting from scratch; no one gets a pass, no matter how much you love or trust the person who gave you a recommendation. If they can’t live up to the rigorous selection process described here, you either can’t trust them or they don’t deserve to work with your hard-earned money.

Start your search for any type of financial advisor by asking yourself a few simple questions.

Smart Investor Tip

If they can’t live up to the rigorous selection process described here, you either can’t trust them or they don’t deserve to work with your hard-earned money.

What Kind of Assistance Do I Need?

Need is a critical factor in most of your other purchases, and it plays a direct role in your choice of advisors. If you just don’t want to deal with the hassle of filing your tax return, but you are a basic two-income family with a plain-vanilla earnings picture, you have a lot of choices, but if you are an entrepreneur with head-of-household status, supporting children and parents and wanting to make sure you take advantage of all available tax credits, you’ll need someone who has worked on cases like yours before.

The more advanced your needs, the more you will tilt your decision-making process to getting additional services and paying the full ticket price.

That’s why you start the process with a needs assessment, a self-examination of what you are trying to accomplish, what type of advisor is best suited to help, and what you want in an advisory relationship from that service provider.

This is particularly important in financial services, in which so many products are “sold,” rather than purchased based on the consumer’s knowledge. No one wakes up one morning and says, “Today, I need to go to the grocery store, fill the tank with gas, and buy a variable life insurance policy.” She might be thinking it’s time to increase her coverage safety net and, perhaps, save some more, but it’s the insurance advisor who pushes the policies. And because variable life policies are not right for everyone, it’s only years later when the person wakes up and starts second-guessing her decisions.

The process is not that dissimilar from when a consumer buys some new technological gadget or doodad, and is pushed into all sorts of features that he doesn’t really know about or need. You don’t want to “pay up” to get features and abilities you don’t need; that’s a waste of money that ultimately will play into how satisfied you are with the advisor.

Knowing your needs and being able to explain them to an advisor will go a long way toward ensuring that you hire people who can remain good advisors for the rest of your lifetime.

The Ideal Advisor-Client Relationship

There are some advisors you date, and others you marry.

If what you need is a quick fix—you want to write a simple will, you are looking for a one-time portfolio review, you are selling your house and moving away, or you need to answer an unexpected notice from the Internal Revenue Service—you may want to engage an advisor on a one-time gig, getting the job done without much regard for the future.

But if you need help and can see yourself requiring assistance and hand-holding again in the future, then you should look for an advisor you can have the “ideal relationship” with. The ideal relationship between client and advisor ends under one of two circumstances: You die or he or she retires.

Being a serial employer of advisors—where you move from one to the next—is asking for trouble; it gives you more chances to encounter a rogue, and each new counselor may try to prove his or her worth by changing up what you did before, and a constantly changing strategy is the same as having no strategy for reaching your goals.

So while you might be looking for help because of something that is happening “right now” in your life, try to view potential advisors as someone you’d like to call on whenever you need help for the rest of your life.

What’s It Going to Cost Me?

Price is always a key consideration. No one, no matter how wealthy, has the ability to say “cost is no object” when it comes to his or her financial affairs; that is how large fortunes unravel in lurid tales of greed, fraud, or ineptitude.

Just as you eyeball grocery prices before making a selection or get an estimate before hiring a contractor to do some home repairs, you need to ask financial counselors how they bill for their services. You may worry that they will burst into an “If you have to ask me, you can’t afford me!” rage, but that hot-headed reaction would actually be a good thing, because it would let you know you’re talking to the wrong advisor.

Smart financial advisors of all stripes are happy to explain their charges and justify the reasons behind their rates; it is up to you to decide if you want to pay the freight.

A price check also is important because fees and payment structures can vary tremendously from one advisor to the next. I have seen two financial planners in the same town, both providing similar sample plans and advice, charge rates that varied by hundreds of dollars per hour. The higher charges could go to pay for the fancier office, the years of experience, and the professional designations earned, or it might just be that one provider believes he can get away with charging more.

Smart Investor Tip

Smart financial advisors of all stripes are happy to explain their charges and justify the reasons behind their rates; it is up to you to decide if you want to pay the freight.

We’d all love to get free advice, but you may be hiring a planner or broker because the free “counsel” you have gotten from friends and loved ones has been worth every penny you have paid for it, and now you want a better grade of assistance. That said, seek out a price point and pricing structure that you feel good about, because that will encourage you to use the advisor’s services regularly and build the relationship.

What Do I Get for My Money?

If you haven’t worked with an advisor before, you don’t truly know what to expect. Sure, you’ve seen financial planners and brokers on television shows, but you’re doing your own reality program here. Even if you think you know what to expect from an advisor, learn about everything available.

One key place where consumers make a mistake is that they focus entirely on the bottom line, without recognizing that what matters with an advisor is the journey to reach that end point. Consumers focus in on “How much money have you made other clients by picking mutual funds?” rather than on “How do you determine what mutual funds are right for me?”

What most people want from a financial advisor—particularly financial planners and people who manage money—is “emotional discipline,” the ability to put together a sensible plan and then stick with that program through thick and thin. The advisor doesn’t just determine the strategy or pick the investments, she provides the hand-holding necessary to see the plan through tough economic and market times.

Smart Investor Tip

Your needs and desires must be a match for what the advisor is offering, or you’ll never be satisfied.

Just as you would want a refrigerator salesman to explain the different ways the removable shelves can improve your life and allow you to decide whether it is worth paying for a second “crisper,” so can you talk to a prospective financial advisor about what the relationship is going to be like and what you can expect. Will it be regular phone calls and the ability to chat without receiving a bill every time you need a consultation because you anticipate a major event in your life? Will the broker accept your calls whenever the market makes you nervous? Does the accountant or financial advisor offer a regular newsletter to customers, and is that publication merely a pass-along from a national office or does it reflect the advisor’s feelings about the market, economy, law changes, investment strategies, and more? How much of your contact with the advisor will be person-to-person, and how much will be you getting blast-mail tweets because your counselor uses Twitter to soothe clients?

Your needs and desires must be a match for what the advisor is offering, or you’ll never be satisfied.

Can One Size Fit All?

Bankers can sell you investments, many insurance agents do financial and estate planning, accountants and tax preparers offer investment advice, stockbrokers now offer planning services, and financial planners offer just about everything.

These hazy definitions and boundaries make it so that advisors frequently cross the line from one specialty to the next, hoping to sell you another product or to capture more of your assets under their management.

It’s tempting to let an advisor cross the line into a different arena, because you already enjoy working with him, he understands your situation and has earned your trust. One-stop shopping is a convenience many people desire.

But a good accountant isn’t necessarily an outstanding financial planner, or vice versa. Advanced credentials are no guarantee; the fact that a counselor studied for a certificate in another specialty does not make him good at that job, especially if it is no more than a sideline business. While it may be common practice for an advisor to wear two hats, it is malpractice if he can’t do each job equally well.

Over your lifetime, you are building a team of financial advisors, and you don’t want a team of “utility infielders,” players who are qualified to fill many vacant positions, but not good enough to star at any one job.

Each job an advisor is going to do for you requires starting your search from scratch, asking new questions and determining whether you can be as happy with her counsel in the second area as you are in the job you first hired her for. You don’t want to be her guinea pig. Without the same expert credentials as a full-time practitioner, you should stick to one advisor for each need.

And while consumers value convenience, think of the potential inconvenience, too. If the advisor fails in his second job on your team, you actually lose counsel in two areas, as your primary relationship is likely to be impaired when you fire him from his secondary role. Financial services is not a one-size-fits-all business; if an advisor’s play to get a bigger role feels forced or the least bit uncomfortable, don’t let it happen.

Can I Afford It?

You’ve already looked at the cost, but affordability is a different issue. Some of the priciest financial planners in the world charge thousands of dollars for the same services that their clients could get for 90 percent less.

There is financial assistance at virtually every price point, from ultra-discount to through-the-nose chic. On the low end, it might be free advice offered by a public agency such as the Internal Revenue Service or a consultation with your own mutual fund company or using their discounted advisory services; the upper end of the scale includes top planners, who charge hundreds of dollars just for an initial interview—regardless of whether you hire them to work for you—and money managers who take a big slice of the assets they run for you each year.

A lot of people who could not actually afford to work with upper-crust private money managers snuck and chiseled their way into becoming clients of convicted fraud Bernie Madoff. They were stretching their finances for something they could not afford—and lowering their defenses at the same time, because they could never get a personal consultation or meeting with Madoff—all because they assumed that a rich, wealthy advisor with a long record just had to be terrific and safe and worth the risk of putting all of their eggs in one basket. They might have been right, had they not selected a crook.

Smart Investor Tip

The Madoff case is proof that it is not enough to simply look at what you are being charged; you must see how it fits into your budget.

The Madoff case is proof that it is not enough to simply look at what you are being charged, you must see how it fits into your budget. If you want ongoing financial planning services but cannot afford a $300-an-hour planner, then you will have two shopping choices: Change your expectations about how often you actually work with this advisor or set your sights on a lower-priced advisor who can meet your quality expectations and still deliver the service you need.

The Right Time to Hire an Advisor

If you knew trouble was coming, you’d get out of the way or fix the problems long before they get out of hand. With your finances, it is best to assume that there is trouble ahead and to go for assistance that will help you avoid it.

If you wait until you have trouble before hiring an advisor, the process becomes much harder to do properly. You’ll go with a gut feeling or forego background checks or simply lower your standards to get out of the pinch.

But there’s a big difference between “waiting too long” and having real trouble. If the IRS is beating down your door demanding money, you need help right now. If you just inherited $1 million and want to put it to work securing your future, you can set it aside in an interest-bearing account and take your time finding the right advisor.

No one ever got to retirement age and said, “Shoot, I can’t quit now because I missed a day [or week or month] in the market.” Plenty of people have rushed into bad financial advisory relationships and arrived at retirement age years later to wonder where their money had gone.

It’s best to hire advisors when you don’t need them. If you can’t do that, at least understand that most financial concerns are not so pressing that you should settle for an advisor without putting him or her through a full and thorough review.

Can I Do It Myself?

Financial planners like to compare what they do to doctors, as if managing money is somehow akin to brain surgery.

It’s not.

For years, advisors have hated me for comparing them to plumbers and auto mechanics, but that’s a much better comparison than a doctor. While you might be able to diagnose your own physical condition, you could not operate on yourself, no matter how many books and articles you read or courses you sit through.

But you can learn how to do auto repairs, fix plumbing, or make home improvements by reading books, watching television, and taking classes.

You can also learn how to manage your money and buy financial products on your own. You can even use software products or websites to help with your legal needs, your taxes, and more.

But this is a case where you need to “go strong or don’t go at all.” Being partially competent to help yourself means you are mostly incompetent; you will not get away without financial help forever, you will just put it off to a point where your own shortcomings become such a problem that you can’t overlook them anymore. The problem for most people is that, by the time they reach that point, they have already hurt their finances and have probably done a lot more damage than could have been done by a mediocre advisor with complete training.

Just because you can do these things yourself doesn’t mean you should. So if you need someone to fix your financial plumbing or to put a new engine into your investment portfolio to improve its get-up-and-go, take control of the process by finding the right person for the job and by recognizing that the right person might not be you.

Key Points

• If the issues that are pushing you to seek out assistance can’t be fixed quickly by some single action, then you are looking for solutions that can last as long as your lifetime. If that’s the case, you should be looking for an advisor you can trust for the rest of your life.

• Every job and every task done by every financial advisor of every stripe can be done on your own, without help. But “go strong or go get help.” Admit that you know what you are doing, or that you haven’t got a clue. The last thing you want is a half-hearted or half-baked effort, especially from yourself.

• The right time to start your search for an advisor is the minute you are certain you need help; the right time to hire an advisor is when you are certain he or she is the best person available to help you.

Chapter 2

You Get What You Pay for, and Pay for What You Get

So far, I haven’t heard of anybody who wants to stop living on account of the cost.

—Kin Hubbard

Nobody likes paying for something he believes he can do himself. Nobody likes paying for something if she can never be sure if she is getting her money’s worth.

Nobody likes paying for something when he can’t see exactly what the provider has done to earn so much.

And, thus, nobody likes paying for financial advice.

But unless you are sufficiently qualified and dedicated to do this yourself, you will have to pay someone to assist you in reaching your financial goals. I’ve heard plenty of people brag about how much money they save doing key financial chores on their own—and I am all in favor of getting things cheaply and paying no more than is necessary—but I have seldom heard those same people boast about the results.

Indeed, for most consumers, the ideal financial plan (or insurance, tax, or estate plan) has three qualities: It is cheap, easy, and successful. You can get all of those things in your financial relationships, but almost never more than two of them at any one time. And make no mistake about it, costs matter; investment returns are never guaranteed, but your laying out money to pay for help—no matter what return you actually get—is a foregone conclusion.

That being the case, costs—and the ways you pay—will always be a central issue in your relationship with an advisor.

There’s nothing inherently wrong with paying for financial help—advisors of all stripes need to eat too—so long as you know what you are getting, how you are paying, and can be confident that those charges are reasonable for the services you are receiving.

If you are hoping I’d give you a dollar amount, forget it; it’s just not that easy. Some advice is too costly, at any price. Somewhere between managing money on the cheap and paying through the nose lies the ideal payment structure for the average consumer. Moreover, the range of costs can be huge, depending on everything from an advisor’s experience and credentials to the region where you live.

Smart Investor Tip

There’s nothing inherently wrong with paying for financial help so long as you know what you are getting, how you are paying, and can be confident that those charges are reasonable for the service you are receiving.

There are several ways to pay for financial help. Bankers typically are not paid directly for their efforts but have their pay built into loans and other basic services. Bank advisors, however, may work on a commission basis if they are dispensing more sophisticated advice. Tax preparers, by comparison, work almost entirely on a fee-for-service basis, getting paid either for time spent preparing a return or by the form, by which each completed piece of paperwork is worth a set price.

Most real estate agents work entirely on commission, while brokers, financial planners, and insurance agents can be paid in several ways, from commissions to a fee based on a percentage of the money they manage for you, to a flat hourly fee. Some hybrid payment structures, such as “fee offset,” combine flat payments with commissions.

And some fee structures are hidden, making it feel like you are getting the services of the advisor for free when, in fact, you are paying for his or her services through higher ongoing investment expenses, such as the heightened costs from owning C-class shares of a mutual fund or the insurance premiums that go largely to an advisor during the first few years of some policy contracts.

One way or the other, you are paying the freight here; that being the case, you must know how and what you are being charged. Many financial services customers are afraid to ask up front, because they fear the “If you have to ask, you can’t afford me” attitude.

To heck with that: If the advisor isn’t willing to discuss his compensation with you up front, the relationship is doomed before it starts, so fire away with your questions and listen closely to the answers. Remember, cost concerns are one of the key reasons why customers wind up disappointed by their advisor, so making sure it won’t be a problem for you is critical to having a successful advisory relationship.

Don’t Be Fooled by an Advisor’s Minimum

One of the biggest misconceptions in the advisory world is that the counselors who work with big-money clients must be good. I can’t tell you the number of people who have used an advisor’s minimum asset requirements as a selling point, as in “He only works with clients who have a million dollars, so he must be good.”

Ironically, these same people often feel honored that the advisor has waived the minimum for them, which actually proves that the advisor does not limit the practice only to top-dollar clients.

Account minimums—the smallest amount of assets a consumer needs to work with an advisor—are not so much a badge of honor or some type of accomplishment as they are a way of valuing time. There’s not a great advisor alive today who started with a million-dollar minimum. In fact, top advisors will regale you with stories of hustling for clients and scraping along trying to get almost anyone interested, and how they have customers who joined them at the beginning of their practice who—like their practice itself—have grown from no assets to be wealthy over time.

Account minimums are actually about the advisor’s available time. Say a good advisor can service 250 clients and truly provide the kind of service she thinks will benefit her customers. It takes nearly as much time to service a client with $50,000 or $100,000 as someone with $1 million, but they are making one-tenth or one-twentieth the asset-management fees or commissions.

Thus, there comes a point where it is only worth the advisor’s time if his next client can be expected to deliver a certain minimum amount in fees. If he charges 1 percent of assets under management and he has a $250,000 account minimum, he is saying that he does not want to take on clients who will fail to generate at least $2,500 in revenues for the practice. The more successful the advisor becomes, the more valuable his or her time, the more the minimum rises.

High minimums are a misdirection play, getting you to take your eye off the ball, which is the advisor’s ability to help you reach their financial goals. There are plenty of advisors with million-dollar or $5 million account requirements simply because they have been around for a long time, not because they are great stock pickers, money managers, or investment strategists.

What’s more, if you are the smallest client of a big advisor, how can you expect to get the best that the counselor has to offer? It’s a fair question; if you had a client whose business brings in $10,000 minimum per year (1 percent of a $1 million under management) and another who brings in $2,500, who do you think would command more attention?

That’s why you shouldn’t be impressed by an advisor’s high-net-worth customers, nor should you feel blessed that someone is letting you into her exclusive club, even if you don’t really have the assets to belong; that kind of thinking is precisely what swayed many people to let their guard down and give money to Bernie Madoff.

Remember, the next great advisor is out there looking for a client like you, and she will treasure your money and not treat it like an afterthought to her thriving practice.

Avoiding Sins of Commission

Many people go into their search for financial help convinced that the one thing they know for sure is that they do not ever want to pay commissions, where the advisor gets a cut of the action, because that encourages the broker (typically) to make moves that generate fees. As a result of that public backlash at commissions, the financial services industry has moved toward flat fees, which it pitches as a safe, conflict-free way to do business.

Wrong.

The most important thing to remember about paying for advice is: No matter the fee structure, there are potential conflicts of interest in virtually every type of advisory relationship.

While there is no question that commissions encourage an advisor to be a pushy salesman, the issue is right out in the open, easy for you to recognize and understand. If your advisor buys you a portfolio of mutual funds and earns a commission on the purchases, but comes to you a month later saying it’s time for a change, selling one fund to buy a new one—a transaction that generates a fresh commission—your guard goes right up. After all, if the fund was worth buying a month ago, and you weren’t timing the market, something strange or bad must have happened to justify the change so quickly. If you sense that the problem is less about the mutual funds and more that the guy has a car payment coming due, you’ll quickly take steps to stop the problem.

Smart Investor Tip

No matter the fee structure, there are potential conflicts of interest in virtually every type of advisory relationship.

Investors worry about “churning,” trades made more to generate commissions than for real strategic reasons, but the attention paid to the issue and the step-ups in disclosure requirements over the years have made churning a much less significant concern.

According to the latest statistics from the National Association of Securities Dealers, churning is a problem in roughly 2 percent of the complaints filed against advisors. By comparison, breach of fiduciary duty—where an advisor fails to put your best interests ahead of his own—is involved in roughly one of every four complaints. That problem can arise no matter how you pay an advisor (there’s much more on fiduciary responsibility in Chapter 4).

How Advisors Are Paid

Let’s examine the most common ways you will pay an advisor, and the plusses and minuses to each method of payment.

Method: Fee-Only Advice/Service

How it works: Your annual fee is a flat percentage of the money that the advisor is responsible for, typically somewhere between 0.75 and 1.25 percent. Many advisors use a sliding scale, so that the percentage drops as your assets grow, or the amount charged declines after certain breakpoints. The advisor is paid only by you; there are no commissions, either from you or from a third-party, for providing you with counsel. Plusses: The advisor’s interests are aligned with yours; if you get great results, so does she, because your success means a great pool of assets to charge that fee on. No sales charges; all of your money goes to work and the fee is earned over time.

Minuses: If you don’t have much money to work with, you’ll have a hard time finding fee-only advisors who want to take you on as a client. Most advisors want to get all of your available resources under management—which may entail selling investments you have now—rather than only handling some of your money. And critics say that a fee-only advisor can become disinterested over time, because he gets paid regardless of whether you act upon his advice.

Possible conflicts: The advisor’s focus will be on getting assets in the door, and their advice may skew in that direction. Say you receive an inheritance and want to know if you should pay down the mortgage or invest the proceeds; the advisor’s pay goes up if you invest the money and stays flat if you pay off the debt. There may also be times when the advisor makes moves not because he believes the portfolio needs to be changed, but because he knows it’s frustrating to pay a fee to an advisor who is not “doing something.”

A Conflict over “Nothing”

While paying a fee for assets under management does diminish conflicts of interest, it creates an interesting problem, where an advisor may sometimes make moves in order to justify his or her ongoing worth.

Say the advisor puts together a portfolio. It gives you roughly the return you expect, you go in for your annual review and the advisor says “change nothing.” She collects her fee, and the next year the market is not so kind to your portfolio. Nothing horrible, mind you, but you’re getting nervous come annual review time, when the advisor again tells you, “Don’t change a thing.” The third year, the advisor knows you are not particularly happy with the results; the market has been tough, and the portfolio has been in line with expectations, but you’re frustrated.

Fearing that you may want to pull the plug on the whole thing if you hear another “Don’t change a thing,” the advisor advocates changes, not because they are the best long-term moves—in fact, studies show that changing a portfolio for the sake of making a change tends to do worse than going the buy-and-hold route—but because she needs to justify the fee.

It won’t result in more fees for the advisor, but it’s hard to say the advisor has your best interests at heart. Situations like this are why there is no such thing as conflict-free financial planning.

Method: Commission or Fee-Based Commission

How it works: You pay a fee—or your advisor gets a fee from a third party—on every move you make. In some cases, as with some mutual funds, you might only pay something that’s labeled a “sales charge” when you buy or if you sell after a short holding period, but a payment to the advisor from the fund company is built into the investment structure, and you could be buying an investment that is more expensive for life in order to pay that fee. Likewise, with insurance agents, commissions frequently are buried in initial premium payments, so that it’s not quite as clear as “make this investment, pay the advisor X percent off the top.” Make no mistake about it, however, whether it is a front-end load, a back-end sales charge, surrender fees, or 12b-1 fees for mutual funds, it’s a “commission” if you are paying extra, and the advisor gets that money, either directly from you or from the company managing the investment. Plusses: Commission sales typically are available to all consumers, no matter how little money you have to work with. If what you want or need is someone to process your transactions, you can focus on paying the fee—possibly even negotiating it down—and getting the investment. Minuses: Because the advisor only gets paid when you act on his advice, you may be getting a salesman more than a long-term advisor. The brokerage firms, for example, are filled with young bucks anxious to make their bones, but the rate at which these newbies wash out of the business is high. Even if the advisor sticks around, he only has an incentive to work with you when he senses a sale coming on. You may talk to an advisor today, come up with a decision on an investment or a portfolio to buy, and then may not be able to get much ongoing counsel if the seller doesn’t sense that he can make another sale and capture another commission.

12b-1 Fee

Named for the regulation that allows it, a 12b-1 fee is a “sales and marketing fee” paid on top of the management fee of a mutual fund. In most cases, at least some of this fee acts like a “trailing commission,” paying the advisor who sells the fund for his or her continuing efforts to keep your account open and in place. These fees add 0.25 to 1.0 percent to the cost of a fund and tend to be highest in cases where the fund is set up to avoid front- or back-end sales charges and make it feel like the customer is not paying for advice.

Possible conflicts: The basic problem here is that the advisor’s best interest is served only when selling you something or getting you to make a move. The bulk of your financial life, you are holding and building, not buying. Moreover, many commissions are buried inside of financial products like insurance policies; the advisor will talk about the benefits to you of buying a certain financial product, without necessarily disclosing properly the way or the amount she gets paid. Finally, a commission salesperson may get an incentive or a heightened commission to sell products from specific companies, like the house mutual funds or issues that simply carry a bigger front-end sales charge; those higher payouts may unduly influence the advisor’s thinking.

The Costs of Alphabet Soup for Mutual Funds

In mutual funds, share classes represent different ways of paying a financial advisor.

For Class A shares, think “all at once,” because this is the traditional, up-front sales load. These days, that sales charge will take anywhere from 3 to 5.75 percent off the top of your investment.

For Class B shares, think “back-end costs,” because the front-end load is gone, but you will pay a back-end fee if you sell the fund during the first few years. During the period when the surrender charge is in place—typically four to six years—you’ll pay higher expenses than in an A share, with the difference basically being the compensation for your advisor. Once the back-end load phases out—it typically starts at 4 to 6 percent and drops by roughly one point per year—B shares typically convert into lower-cost A shares.

With Class C shares, think “costs, costs, and more costs.” There is no load on the front or back end of your purchases, but the ongoing costs of holding the fund are higher forever. This is a good way to hold a fund for a short time, but it tends to be the most expensive over time. Sadly, many consumers miss that and are attracted to C shares—and pushed toward them by advisors—because it “feels” like there are no sales charges attached whatsoever.

While no one likes paying up-front sales charges, Class A shares are typically cheapest for a long-term shareholder and are the only ones with “breakpoints,” discounts in the sales charge for investing more money. As you pass breakpoints—which can start at anywhere from $25,000 to $100,000 depending on the firm and the fund—an advisor who keeps selling you B shares is artificially inflating their payout.

Some fund firms have other share classes, often for retirement-plan investors or for their own payment plan with broker-dealers. Be sure you understand how it works and what it costs you.

Finally, many advisors put their clients in no-load funds, meaning shares with no sales charge whatsoever. Don’t be fooled into thinking those advisors do not get their cut; they may not get paid directly from the fund company, but they’re paid a percentage of the assets they manage for you.