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LOVE & LIGHT TO ALL: For those who gave their all, thank you. For families of those that gave their lives to make us free, thank you. Now that we've celebrated their contributions, on with waiting to complete another life line to the future. The future is freedom that was established long ago and slowly taken away. It's time to take back what was given to us with sacrifices gladly offered. Be in prayer and be prepared. UNTIL TOMORROW
It is better in prayer to have a heart without words than
words without a heart Mohandas K. Gandhi
DINAR TIDBITS: (Couldn't resist posting this one)
bluwolf] WARNING; I CAN SEE THAT THE MEDIA IS OPENING UP A
CAN OF SARDINES,THE POWERS THAT BE ARE PUSHING THIS ISSUE TO FLUCTUATE,IT HAS
TO BE OVER SOON IF THE 312,000,000 AMERICANS THAT HAVE NOT BOUGHT THE DINAR
FIND OUT ABOUT IT WE SHALL HAVE HAVOC IN THE LAND OF THE FREE, BE ADVISE..
BLUWOLF
[bluwolf] TY CNN HOPE ALL OTHER NEWS CASTS CAN COMPLY
[bluwolf] LIKE I SAID EARLIER DOES THAT WERE BUYING TIME WERE TOLD TIME IS UP, EITHER YOU GET IT DONE OR WE SURE WILL.
[bluwolf] TY CNN HOPE ALL OTHER NEWS CASTS CAN COMPLY
[bluwolf] LIKE I SAID EARLIER DOES THAT WERE BUYING TIME WERE TOLD TIME IS UP, EITHER YOU GET IT DONE OR WE SURE WILL.
Being asked time and time again for help with financial decisions, here is an article that may be of assistance in your decision making process. Yes, you might need to make a decision VERY SOON.
THE MOST IMPORTANT DECISION YOU WILL EVER MAKE.
From The Truth
About Money, Part
XIII – How to Choose a Financial Advisor.
Article 1 of 6
By now, you need no convincing that you must pay attention to your personal
finances. You need to eliminate debts, build cash reserves, buy and manage
investments, prepare your tax return, develop an estate plan, save for college
and retirement, make the best use of workplace benefit programs, and buy the
right types and amounts of insurance. Oh yes, let’s not forget the importance
of making the right decisions when buying homes, obtaining mortgages, arranging
automobile purchases, helping family members, and dealing with a multitude of other
financial issues.
For sure, I don’t have to convince you of your need to tend to all this.
Rather, there’s really only one question you must answer: Do you want to tackle
these issues yourself, or would you prefer to delegate these chores to a financial
professional?
You see, although Barron’s
named me the #1 independent financial advisor in the nation*, in some respects
I’m really just … Jiffy Lube.
Here’s what I mean. You know you need to change the oil in your car. You know
that if you don’t, the car’s engine will eventually seize. So, you can run to
the store to get some oil and then go home and do the work yourself, or you can
take your car to Jiffy Lube and let those friendly folks do the work for you.
Interestingly, Jiffy Lube doesn’t promise to put better oil in your car than
you could yourself. Instead, it promises that you won’t get your hands dirty.
Thus, Jiffy Lube simply provides a service, and you pay a fee to receive it. Is
the fee worth it?
Absolutely, if you don’t know how to change the oil, if you don’t know which
type of oil to buy, if you don’t have the time to change the oil, or if you
simply don’t want to do it yourself. In any of these cases, Jiffy Lube is well
worth the modest fee it charges.
In short, everyone needs to change the oil in their car, but not everyone needs
to hire Jiffy Lube. And by the same notion, everyone needs a financial plan,
but not everyone needs a financial planner.
This book is called The Truth
About Money, and the truth is that there are really only three
reasons you might need to hire a financial advisor:
1. You lack the knowledge to make the right
decisions.
2. You lack the time it takes to properly tend to your investments and personal
finances.
3. You lack the desire to spend your time on these chores; you’d much rather
spend your time elsewhere.
If any of this describes you, then you need
to hire a financial advisor. And
that decision — choosing your advisor — becomes the most important
financial decision you will ever make. So read on to learn how to make this
decision successfully.
Financial advisors can be found in banks,
brokerage firms, accounting firms, trust companies, insurance companies, and of
course, in financial planning firms. Although their titles and credentials
vary, they all have the same job: to help you identify and achieve your
financial goals. They do this by examining your situation and giving you advice
across the full spectrum of personal finance —the very topics we’ve explored
throughout this book.
As you know, the world of personal finance is broad and complex. Consequently,
so is the landscape of financial advice and those who provide it. Therefore,
this final part of the book will show you the different kinds of advisors that
exist, how the services they offer may differ, and explain how they are
licensed, regulated, and compensated. You’ll also learn how to select the
advisor who’s right for you and how to get the most value from your relationship
with him or her.
Understanding What
You’re Really Paying For
As I explain thoroughly in my book
Discover
the Wealth Within You, a properly constructed financial plan
begins with setting goals. You determine what you want to do, when you want to
do it, and how much it will cost. You then examine your income and assets,
comparing them to your expenses and debts, so that you can determine how much
you need to save and what kind of investments you need in order to reach those
goals. As Part XI showed you, a properly constructed financial plan also helps
you determine what kinds and amounts of insurance you need.
Some people skip the planning part and go straight to buying investments and
insurance. But either way, you’ll find yourself faced with the decision of
buying investment and insurance products.
Yes, products. Remember our conversation about the manufacturing process way
back in Chapter 5? In the end, the financial services industry is in the
product manufacturing and distribution business.
So the real question you must answer is rather simple: Do you want to pay for
advice (that tells you what you need to do) or do you want to pay for the
purchase of products?
This question is at the core of the entire discussion that follows, because, as
you’ll see, some advisors are paid to give advice, while others are paid to
sell products. Some are paid to do both. And just because your intent is to pay
for one doesn’t mean you won’t also pay for the other.
Sound confusing? If the federal and state laws and regulations that govern the
field seem complicated, well, they are only reflecting the field itself. But
hang in there — by the time you’re done reading this part, it’ll all make
sense. And you’ll be ready to interview potential advisors — or re-evaluate
your current one.
*Barron’s ranking "Top 100 Independent
Financial Advisors" (Aug. 28, 2010 / Aug. 31, 2009) based on the quality
of the advisors’ practices, including client retention and compliance record,
contribution to the firm’s profitability, and the volume of assets overseen by
the advisors and their teams.
=============================================================================
The Four Kinds of Practitioners You Can Hire
Article 2 of 7
Financial Advisor. Financial Planner. Financial Consultant. Account Executive.
Vice President, Investments.
The industry has conjured up a variety of titles. All are designed to impress,
some to obfuscate. But no matter what a person might call him- or herself,
there are really just four kinds of advisors.
That might be surprising, considering the vast array of professional
designations that now exist in the industry. While conducting research for this
book, we found 95! They’re all displayed in Figure 13-1, but the important
point to note is that none of them are bestowed by federal or state regulators.
Practitioner
#1: Registered Representatives
You know who this is, even if you don’t realize it.
Registered Representatives are more commonly known as stockbrokers.
The Crash of 1929 and the Great Depression that followed were caused, in part,
by lack of federal rules and oversight. To solve the problem, Congress created
the Securities and Exchange Commission in 1934. Then, on the theory that
thousands of brokerage firms and hundreds of thousands of stockbrokers were far
too numerous for a single regulator to effectively supervise, the industry was
permitted to regulate itself.
I know this sounds silly — like asking the fox to guard other foxes — but the
idea has been in place for nearly 80 years. The Financial Industry Regulatory
Authority, which operates under the auspices of the Securities and Exchange
Commission, is called a self-regulatory
organization, and is responsible for licensing and supervising the
business activities of all brokerage firms and stockbrokers. No company may
engage in the business of underwriting securities or executing securities
transactions (meaning, it can’t buy or sell investments for consumers) unless
it is a FINRA member. To become licensed, your application must be sponsored by
a brokerage firm, and you must pass a FINRA-administered examination.
FINRA issues licenses covering every area of the securities industry, including
commodities futures, options, municipal securities, and supervisory licenses
for those who manage others (such people are known as “principals”).
The most common licenses held by those who work with consumers are:
FINRA
calls a person who holds these licenses a registered
representative because he or she is registered with FINRA and is a representative of the
brokerage firm with which he’s affiliated.
Pay particular attention to that last phrase. Stockbrokers legally represent
their brokerage firms. Brokers are considered by FINRA and the SEC to be
product salespeople whose job is to represent the best interests of their firms.
According to the regulators, brokers sell investment products in order to earn
commissions; they are not paid to give advice, and any advice they do give is
considered “incidental” to the sale of their products.
Don’t believe me? Then read this disclosure, which the SEC requires on the
monthly statements that are issued by brokerage firms:
Your
account is a brokerage account and not an advisory account. Our interests may
not always be the same as yours … [M]ake sure you understand … the extent of
our obligations to disclose conflicts of interest and to act in your best
interests … [O]ur salespersons’ compensation may vary by product and over time.
Indeed, registered representatives generate commissions for themselves and
their firms through the sale of investment products.
The most common investment product sold by brokers are mutual funds, so let’s
examine closely how brokers earn a living.
Mutual fund commissions are set by the fund companies themselves; neither
brokers nor brokerage firms can alter them. There are three basic ways you can
pay those commissions: when you buy shares, when you sell them, and annually.
Let’s
explore them.
Mutual Fund Sales Charge
#1: Front-End Load
Also known as Class A shares, or up-front load, you pay at the time you
invest. There is no fee for reinvesting dividends or capital gains, and you can
withdraw your money at any time without charge (at the then-current value,
which may be higher or lower than when you invested).
Although the legal maximum is 8.5%, virtually all stock funds charge 5.75% or
less, and almost all bond funds charge 4.75% or less.
Furthermore, front-load funds offer several discounts:
Five Common Broker
Tricks
Federal rules require all front-end load mutual funds to automatically
award the above discounts to investors. However, the higher the load, the
higher your broker’s commission — which can tempt some brokers into playing
tricks on you:
Trick #1: Splitting Registrations to Avoid Breakpoints
Instead of opening a joint account with husband and wife
for $250,000, the broker opens two accounts, one in each name, for $125,000
each. This avoids the $250,000 breakpoint, meaning you pay a higher load and
the broker gets a higher commission. It’s
illegal.
Trick #2: Failing to
Award Rights of Accumulation
An investor who already has a large account in a fund family opens a new,
small account for her children, but the broker fails to apply the discount to
the new account, which she’s entitled to by virtue of the existence of the
larger account. It’s illegal.
Trick #3: Failing to
Disclose Letter of Intent Availability
A broker allows a client to open an account with a small amount, knowing
that the client intends to add to the account within 13 months, but does not
execute the trade with the proper LOI discount. It’s illegal.
Trick #4:
Recommending an Investment Amount Slightly Below a Breakpoint Level
A broker tells a client to invest $95,000 into a fund, failing to disclose
that if the client were to invest just $5,000 more, the entire investment would
receive the $100,000 discount level. (Quite often, due to the discounts,
investing $100,000 can cost less than investing $95,000.) It’s illegal.
Trick #5: Churning
This occurs when a broker encourages a client to move money from one fund
family to another. A move within the family would not generate a commission,
but a move to a new family does. If there’s no economic justification to
support the recommendation, the generation of the new commission is called
churning. It’s illegal.
If you think any of these tricks have been played on you, inform your
broker of the error and your account will be quickly corrected. If your broker
is slow to cooperate, notify the branch manager or the fund directly. The law
is on your side, and you’ll have no problem getting it fixed. The last thing
your broker wants is for you to contact the federal regulators, for any of the
above violations could cost your broker his license.
Mutual Fund Sales Charge
#2: Back-End Load
Also known as rear-load, reverse load, or Class B shares, this share class
is usually available only when investing $50,000 or less. (Because of
breakpoints offered on Class A shares, regulators regard Class A shares as more
cost effective when investing larger amounts.) Class B funds don’t charge you
when you invest. Instead, reverse loads assess a withdrawal fee, also called a
surrender fee. The amount is typically 5% or 6% in the first year, declining 1%
per year until it vanishes after the 6th or 7th year. Each deposit receives its
own “clock.”
Technically called a Contingent
Deferred Sales Charge, reverse load funds offer several features to
minimize the surrender fee. For example:
For liquidations beyond
these amounts, the fund assumes you are withdrawing the oldest shares first,
thus paying the lowest fee possible.
Mutual Fund Sales Charge
#3: Level-Load
Known as Class C shares, these also do not charge a front-end load.
Instead, the back-end load is usually 1% on amounts you withdraw during the
first 12 months. Regulators have also made it clear that they believe Class C
shares are best suited when investing money for relatively short periods of
time.
Do Brokers Suffer from a
Conflict of Interest?
You can see the potential problem here: Do commission-based brokers suffer from
a conflict of interest? After all, they make money only when you buy products
from them. Those products often pay high commissions, some higher than others.
So when a broker recommends a certain product to you, is that recommendation
for your benefit or for the benefit of himself and his firm?
This same question arises when dealing with the next kind of practitioner.
Practitioner #2:
Licensed Insurance Agents
Insurance is regulated by each of the 50 states and the District of
Columbia; there is no federal regulation or oversight.
The reason: Unlike securities, which are identical (all the shares of IBM
stock, for example, are the same no matter who buys them or how many you buy),
an insurance policy is custom-designed for each purchaser. Consequently, you’re
not buying a security when you purchase life insurance. Instead, you are
entering into a legal agreement with an insurance company. The agreement is
executed by a contract — and all contracts are governed by state law, not
federal law.
That’s why insurance is regulated by the states and not by the federal government.
Every insurance agent
must hold a state insurance license. An agent must hold a license based not on
his state of residency, but based on the residency of his clients. Thus, if a
New Jersey agent has clients who live in Delaware, he must hold a Delaware
license. There are four main types of licenses:
Like stockbrokers, insurance agents’ licenses are held with one or more
insurance companies. And, like stockbrokers, agents legally represent the
insurers, not their customers. And, like stockbrokers, agents earn commissions
from the sale of products; they do not give or earn fees for rendering advice.
The most common “investment” product that insurance agents sell is annuities.
Annuity commissions range from 1% to 15% of the amount you invest. Sometimes,
the agent will earn more in commissions than you’ll earn in interest!
You may not realize this, though, because the product’s commission structure is
similar to that of Class B mutual funds.
Consequently, the conflict of interest that can afflict stockbrokers can also
afflict insurance agents. As a result, consumers in ever-greater numbers are
turning to the next type of practitioner.
Practitioner #3: Investment Advisor
Representatives
As we’ve seen, stockbrokers and insurance agents legally serve
the best interests of their firms. And they earn commissions when selling
products.
Today’s investor wants something more, something better. If you’re like most,
you want to work with a true advisor who is not burdened by such conflicts of
interest, one who indeed works for you
and who is not beholden to some insurance company or Wall Street firm.
You want an Investment Advisor
Representative.
Such a person is
affiliated (often as an employee) with a Registered Investment Advisor — an
advisory firm that is registered with the Securities and Exchange Commission or
a state regulatory agency. (Note: Attorneys and accountants are exempt from
registration.)
Registered Investment Advisors and their Investment Advisor Representatives are
legally obligated to serve your best interests. That obligation is referred to
as a fiduciary duty,
and it stands in sharp contrast to stockbrokers and insurance agents.
An Investment Advisor
Representative must hold one of the following FINRA licenses:
Perhaps you’ve noticed that the SEC regulates Registered Investment Advisors
and their representatives. Why, then, you might be wondering, does FINRA issue
their licenses?
I have no idea.
But I will tell you this: Many Investment
Advisor Representatives also hold brokerage licenses and insurance licenses! If
you find all this confusing, you’re not alone.
There are two reasons why so many advisors
are dually licensed (as it’s called):
First, the complexity of personal finance is a relatively new phenomenon. As
recently as 1980, most Americans spent their entire careers working for one
employer. Most homeowners only owned one home. Their employers managed the
investments in their pension or 401(k) plans, and nobody had an IRA account
(which was not invented until 1974). Money market funds were only 10 years old
in 1980, discount brokers didn’t exist until 1975, and the Federal Housing
Administration wouldn’t insure adjustable rate mortgages until 1989.
Small wonder, then, that virtually all
practitioners were either stockbrokers or insurance agents. (The CFP Board of
Standards wasn’t formed until 1985.) In 1980, there were only 564 mutual funds
holding a mere $134.8 billion in assets— meaning that stockbrokers were
literally brokering stocks (today, they are far more likely to sell mutual
funds and annuities, which are easier to sell and pay far higher commissions).
Likewise, insurance agents once sold only life insurance; today, many agents
never sell insurance and instead earn a living selling annuities and mutual
funds.
As the world of personal finance grew more complex, many brokers and insurance
agents began to realize that selling investment and insurance products lacked
context. Without considering the customer’s tax rate, risk tolerance, or need
for income, it was difficult to say that a given product really was in a given
client’s best interests.
For that reason, many brokers and agents migrated to an advisory practice. They
continue(d) to recommend products, but now within the framework of a holistic
financial planning environment.
If you come upon an Investment Advisor Representative who has been in the field
since the 1980s or earlier, chances are good that that person started his or
her career as a stockbroker or insurance agent. And, chances are, he or she
still holds his old licenses. (Those new to the field are much more likely to
have begun their careers as an advisor; the first college degree in the
financial planning field [from Purdue University] wasn’t offered until 1986.)
The second reason many Investment Advisors Representatives also hold brokerage
and insurance licenses is because they need to in order to serve their clients.
Even though they are technically serving in an advisory capacity, the vast
majority of Investment Advisor Representatives help their clients implement
their recommendations. To facilitate the purchase of investments and insurance,
the advisor must hold the appropriate FINRA and insurance licenses.
For both these reasons, many practitioners are dually registered. They hold
brokerage licenses with a brokerage firm, insurance licenses with one or more
insurance companies, and their advisory registrations with a Registered
Investment Advisor.
So if the practitioner you’ve hired holds all
three types of licenses, in which capacity is he serving you?
There’s an easy way to find out: Just ask him or her.
If your practitioner is acting as a Registered Investment Advisor, he or she
must give you a copy of Form ADV. This document is the registration statement
that all Registered Investment Advisors are required to file with the SEC (or
state regulator). The ADV explains the services provided by the advisory firm
and the fee schedule, as well as the representative’s background. Importantly,
the document will state the conditions under which the representative is
serving as an advisor vs. a salesperson.
If your financial professional cannot provide
you with Form ADV, then he or she is not an Investment Advisor Representative.
Period. Never let anyone claim to be serving your best interests unless they
can produce that document. You can also check with the SEC at www.adviserinfo.sec.gov.
Click “Investment Advisor Search.”
The law requires all those who charge fees for investment advice to register
with the SEC or a state agency. Therefore, never work with anyone who has not
done so.
Unlike brokers and agents who earn
commissions for selling products, an Investment Advisor Representative is paid
a fee to give advice. The fee is typically based on time or account value, or a
combination of the two. A fee based on time might be set at an hourly rate or a
flat rate based on an annual retainer. A fee based on account value is called
an asset management
fee; the rate is typically based on the size of the account (usually, the
larger the account, the smaller the rate).
Understanding the
Difference Between What They Charge and What You Pay
When interviewing prospective advisors, as read in Chapter 83 of The Truth About Money, you
should always ask how they are compensated. Unfortunately, if that’s all you
ask, you might not be told the whole story. That’s because there’s often a big
difference between what they earn and what you pay. Therefore, instead of
asking, “What is your compensation?” you should ask, “What are the total costs
I will incur by working with you?”
You see, when your financial advisor provides you with a portfolio of funds,
you’ll incur not one cost, but three. So it’s vital that you receive full
disclosure — otherwise, you might end up paying far more than you should, and
far more than you realize.
First, of course, is the advisor’s fee. Known
as an asset-management fee, it is generally expressed as a percentage of
assets. At some firms, the asset management fee is as high as 3% per year. To
learn the fees charged by other firms and how those fees are collected, you
should ask advisors you are considering hiring for a copy of their Form ADV
(Part II & Schedule F), a federal disclosure document that each advisor is
required to provide to you.
But the asset-management fee is not the only cost you’ll incur. In addition to
paying for your advisor, you must also pay for the funds your advisor has
recommended, and this is where you’ll find two other costs: fixed expenses and
variable expenses.
Fixed expenses are included in something called the Annual Expense Ratio. Every
mutual fund and exchange-traded fund charges this fee — even so-called
“no-load” funds. (“No-load” means there are no commissions when you buy or sell
shares; it does not mean “no fee.”) The expense ratio pays for the fund’s
recurring operating costs, from the manager’s salary to the toll-free phone
number investors call to talk to customer service representatives. As of
December 31, 2009, according to Morningstar, the average expense ratio for all
mutual funds is 1.19% per year, although many are more than 2%. The highest in
the industry, according to Morningstar as of December 31, 2009, is a staggering
18.4%! Although the expense ratio is expressed as an annual figure, it’s
actually debited on a daily basis. But the charge does not appear on monthly
statements, making it hard for investors to notice it. To find it, you must
look in the fund’s prospectus, where the expense ratio is expressed as a percentage.
Many
investors — and, astonishingly, even many investment advisors — think the
annual expense ratio covers all fund expenses. But it doesn’t. The expense
ratio covers only perennial fixed costs — salaries, marketing, overhead, and
the like. But there are many variable costs to operating a fund, and these are
in addition to the expense ratio.
The biggest variable costs are brokerage commissions and trading expenses.
When fund managers buy or sell a security, they pay brokerage commissions —
just like you would, if you were to buy or sell a stock or bond. Of course,
funds pay lower commission rates than you would pay, thanks to their volume.
Even so, considering that funds trade millions of shares representing billions
of dollars, their trading costs are huge — and the more the fund trades, the
more it spends on brokerage commissions. Typically, funds spend tens of
millions of dollars in trading costs per year, and these expenses are not
included in the Annual Expense Ratio or even disclosed in the prospectus. To
find these and other expenses, you must look in the fund’s Statement of
Additional Information.
Unlike prospectuses, advisors are not required to provide SAIs to you. As a
result, many investors have never even heard of it, let alone ever seen or read
one. In fact, after training financial advisors nationwide for years, I can
tell you that some advisors have never heard of it either. Yet, according to
Morningstar, the fees described in an SAI can equal or even exceed the Annual
Expense Ratio. Until recently, you had to ask fund companies to mail you their
SAIs. But thanks to the Internet, you can now find these documents at most fund
company websites.
Trading expenses are difficult to determine, but in 2007, an analysis by
researchers at Virginia Tech, the University of Virginia, and Boston College
found the average fund, based on a sample of 1,706 U.S. equity funds from 1995
to 2005, incurred annual trading expenses of 1.44% per year during that period.
This is in addition to the 1.19% that is the average Annual Expense Ratio
according to Morningstar as of December 31, 2009, based on all the mutual funds
it tracks.
These two figures put the total cost of the average mutual fund at 2.63% per
year. (This calculation is based on historical data; current figures could
vary.)
By adding this to a 0.90% advisor’s fee, you can see how ordinary investors can
incur a total annual cost of more than 3% per year.
So be careful when asking an advisor what he charges. If the answer is, “My fee
is one percent,” he might be omitting the Annual Expense Ratio and trading
expenses that you’ll also incur. When you are interviewing potential advisors,
make sure they tell you the total costs you’ll pay to work with them.
Practitioner #4: Money
Managers
It has long been my contention that I don’t manage money. That might seem
to be a strange thing to say, considering that my firm has, at this writing, $5
billion in assets under management. Still, my view is that, rather than
managing money, I manage clients.
My colleagues and I at Edelman Financial realized long ago that the key to
helping our clients achieve financial success lies not in helping them pick the
right investments for their portfolio, but in getting them to invest in that
portfolio after we’ve designed it for them. People often have the best
intentions, but distractions, emotions — or downright procrastination (read
Chapter 1) — can interfere with our (and their) genuine desire to do what they
need to do at the time they need to do it.
This is why my colleagues and I (and pretty much every real advisor in the
country) create custom-designed plans and investment programs for each client,
and then we focus all our energies on helping the client implement them.
A money manager, by contrast, has no such relationship with clients. His only
relationship is with the client’s money.
The most common example is found in mutual funds. Each fund is controlled by a
money manager, whose job is to invest the money in accordance with the fund’s
objectives. Every person who invests money will be treated identically. If a
manager decides to sell a stock, he or she will sell that stock out of every
client’s portfolio, and if he or she buys a stock, every client will own it —
and they will all own that stock in the same proportionate amounts. Thus, every
client’s holdings in a mutual fund is identical and their results will be
identical. The only differences in results between two investors would be
caused by the fact that one might invest or withdraw money on different dates
than the other.
Consequently, it is not only possible but quite common for stockbrokers,
insurance agents, and Investment Advisor Representatives to recommend that
their clients invest with money managers — often via mutual funds,
exchange-traded funds, annuities, or wrap accounts.
Put simply, the money manager manages the fund while the investment advisor
manages the client’s personal finances.
The material regarding mutual funds is
general and is intended solely for informational and educational purposes.Specific
details are contained in each fund’s prospectus, which can be obtained from the
investment company or your investment advisor.
=============================================================================
18 Questions to Ask Prospective Advisors —
and Three Points to Ponder Before You Do
Article 3 of 7
Point to Ponder #1: Do you really need to
meet prospective advisors in person?
In the old days — meaning before the Internet
— all business was local. People always went to the bank and to the offices of
their lawyers, accountants, and financial advisors.
Them’s the old days. And them days is going away fast.
Today, millions of people work with the financial industry without ever meeting
face-to-face the people who serve them. Internet banks are fast replacing
brick-and-mortar branches, and your friendly neighborhood tax preparer may well
be shipping your papers (via the Internet) to India, where a very inexpensive
recent college graduate fills in the blanks on your 1040.
And so it’s no surprise that millions of people now get their financial advice
solely via the telephone or Internet. Think about it: Have you ever visited
your mutual fund company? (We’ve even experienced this in our firm. Although we
have dozens of offices around the country, we have thousands of clients whom
we’ve never actually met face-to-face, because we don’t happen to have an
office where they live. In fact, I still vividly recall the first time an
out-of-town caller inquired about hiring us. Although we were a little nervous
about it at first, we’ve found that distance is not a problem at all, and we’re
able to get to know our clients and provide them with effective advice and
service just as easily over the telephone and through email as we can
face-to-face.)
Think about it: Do you really need to hire a local advisor? If you insist on
that, you’ll be limiting your search to the local talent pool, possibly denying
yourself great advisors who don’t happen to live in your neighborhood.
How important is it, really? Think about how often you meet with your current
advisor — I bet it’s no more than once a year, and it may even be less.
Instead, you’re probably talking often via phone or email. Does it really
matter what city the advisor is calling from?
If it does, what will you do if you decide to relocate? If you move to another
state, will you fire your advisor because he’s no longer local? That would make
little sense — which explains why my firm now has clients in all 50 states:
Many relocated for a new job or moved in retirement so they could be closer to
their grandchildren. But we’re able to serve them equally well regardless of
their (or our) zip code.
So, think carefully before you decide that you must only select from a list of
local advisors.
Point
to Ponder #2: Do you understand what he’s saying?
Sadly, some advisors try to impress (or intimidate)
clients by talking too fast or using technical jargon ordinary consumers can’t
comprehend. No matter what anyone tells you, the field of personal finance is
not all that complicated. If you don’t understand it, don’t do it.
Best test: Try to tell others what the advisor said. If you can’t, don’t
proceed with that advisor.
Point to Ponder #3: Don’t bother asking for
references. And beware advisors who offer them.
When you were looking for a job, your resume probably said, “References
available upon request.” Did you ever submit to the Human Resources Department
the name of that guy who hates you?
Every advisor has at least one client who hates him. Think you’ll ever get that
name as a reference? That explains why asking for references is a waste of
time. All you’ll be doing is contacting the advisor’s fan club — hardly the
basis for making a sound hiring decision.
And never hire any advisor who mentions the names of other clients. Not only is
it a violation of client privacy (will he pass your name around to others one
day, too?), testimonials are generally prohibited by the SEC. That’s because
there’s no guarantee you’ll have the same experience as other clients.
It’s a great idea to ask for references when hiring a plumber or dentist. Both
are in control of their work, and one of them is going to spend unmonitored
time in your home. But advisors work in a field where the results of their
recommendations are beyond their control — and that makes client references of
questionable value.
If you think failing to ask for a reference constitutes a glaring omission,
relax. Soon, you’ll see how to glean the information you want in a more
effective way. With these three points in mind, here are the 18 questions to
ask when interviewing prospective advisors:
Interview Question #1:
Are you licensed as a stockbroker, insurance agent, or investment advisor?
Asking this question serves two very useful purposes: First, and most
importantly, it cuts through all the marketing hype and bamboozlement. No
matter what title a practitioner gives himself or what designations he’s
obtained, asking how he’s licensed will tell you how he earns a living — and
what kind of product recommendations you are likely to get from him.
No matter what he might claim to the contrary, a practitioner who’s solely
licensed as a broker or insurance agent makes a living selling investment or
insurance products. His need to earn a living will inevitably affect his
recommendations.
The second benefit of asking this question is that you’ll be making it clear to
the candidate that you’re knowledgeable — dramatically reducing the risk that
he might try to bamboozle you.
Interview Question #2:
How are you compensated?
As you’ve seen, many practitioners hold multiple licenses. Therefore, you
need to get a clear understanding of exactly how he or she earns a living. In
addition to learning whether you’ll pay fees, commissions, or both, ask if the
practitioner earns any compensation from third parties. Many do. As I told you
in Chapter 26, sometimes money managers, insurance companies, wrap account
sponsors, mutual fund companies, and others pay brokers and agents extra
commissions for hawking their products. In some cases, brokers and agents who
sell lots of a certain product are rewarded with trips to exotic locations,
expensive jewelry or watches, fancy dinners, or trips to sporting events and
concerts.
In other cases, practitioners receive free computers or software to help them
operate their practices. Although this is more benign than tickets to the Super
Bowl, it’s still an incentive for practitioners to recommend something that’s
in their best interests instead of the best interests of their clients or
customers.
Such payments are called “soft dollar” or “third-party” compensation, and your
advisor should disclose it.
Interview Question #3:
What costs will I incur in addition to your compensation?
As we’ve seen, there can be a huge difference between what your advisor
charges you and how much you actually pay. If you open an IRA account, for
example, will you have to pay a set-up fee? Will you pay a termination fee when
you close the account or transfer money to a different account? Some brokerage
firms and insurance companies charge annual maintenance fees or other charges.
You won’t know in advance what these costs are unless you ask. So make sure you
receive complete disclosure about the total costs you will pay to implement the
recommendations that your advisor will give you. And make sure you receive this
disclosure in writing, before you agree to retain the advisor’s services or
invest any money.
Interview Question #4:
What are your services?
Before you walk into a doctor’s office, you already know where it hurts.
Likewise, you know what you need from your advisor. Does he provide those
services? The typical services needed include financial planning (including
college and retirement planning), insurance analysis, tax advice and
preparation, investment management, and estate planning. But many advisors only
handle one or two of these areas, leaving the rest to other practitioners you
have to hire.
Make sure your advisor’s expertise and services match your needs, and if you
need additional services, ask if the advisor will assist you in coordinating
all those services or whether you must do so on your own. A related question
pertains to documentation. Will the advisor handle all record-keeping chores
for you and provide you with all the information you’ll need for tax
preparation? How often will you receive statements and can you check the status
of your accounts at any time online?
If the advisor issues performance reports, make sure they conform to the Global
Investment Performance Standards, which dictate how firms calculate and report
investment results.
Interview Question #5:
What is your investment methodology?
Ask if the advisor has a fundamental philosophy that guides his investment
approach, and if so, ask him to describe it fully. Many don’t have a formal
approach to investment management; instead they merely sell a variety of
investment or insurance products without any established methodology or
approach.
If there is a formal approach in place, find out what that is and how the
advisor came to develop it. Did he create it alone, or is there a formal
Investment Committee operating under specific policies and protocols? Find out
how long the current approach has been in place — which leads to the next
Interview Question.
Interview Question #6:
Describe what your practice was like before, during, and after the 2008 credit
crisis.
Learn what kinds of advice and investments he was typically recommending in
2005–2007 and whether he is still giving that type of advice today. Ask how
many clients he had in 2007, and how many of them are still with him today — if
he’s experienced significant turnover in clients, you’ve just obtained
information that’s far more valuable than you’d ever get from calling a
reference or two.
If many of his clients left him, it could be because the investments he had
recommended didn’t perform well, or he hadn’t clearly explained the risks of
those investments, or he hadn’t remained in close contact with those clients
during the market meltdown and proved unsuccessful in meeting their needs. Any
of this must make you wonder if you will be happy with him over time.
Interview Question #7:
Do all the advisors in your firm manage investments the same way as you?
The nation’s big brokerage firms, banks, and insurance companies employ
hundreds of thousands of brokers and insurance agents — and each is free to
sell whatever products he or she wants. Within a single firm, for example, one
advisor might be telling a client to sell a stock that another advisor in the
firm is telling clients to buy. One could be trading options while others pitch
muni bonds or annuities. In short, there is no consistency regarding the advice
and recommendations offered by salespeople who work at big firms.
It is often the same at smaller advisory firms. When dealing with organizations
that operate this way — where each advisor has full discretion to handle each
client however he wants, with no regard for how others in the firm handle their
clients — you must choose your advisor very, very carefully. After all, you can
go to the best hospital in the world, but if your surgeon is a klutz, you’ll die
anyway.
That’s why you want to know if your advisor works collaboratively with the
other advisors in the firm. If he does, you have a higher degree of confidence
that the advice you’re receiving is the product of many people — and two (or
fifty) heads are better than one. You also get the benefit of knowing that
there’s more than one person you can turn to for information or help when
needed (see the next Interview Question below).
Conversely, if your advisor is a solo practitioner or works independently at a
larger firm, you have to hope that you’re selecting the best advisor in the
firm.
Unless you interview them all, you can’t be sure — and since every advisor in
the firm has clients, it’s obvious that someone has made the wrong choice.
Knowing that your advisor works with his colleagues rather than acting on his
own regardless of what they think can help you get better advice.
After all, no matter how good, experienced, or smart an advisor is, you really
don’t want your life’s future financial security to be dependent on the actions
or advice of just one person.
Interview Question #8:
If something happens to you, what happens to me?
I’m not talking here about your advisor getting hit by a bus or running
screaming from the office never to return (although I’ll get to those scenarios
in a moment). No, I’m just wondering what happens if you need help while your
advisor is out sick or on vacation.
Sure, cell phones and email help a lot in ensuring that your advisor is never
far away. But what if he’s on an airplane or hiking down some canyon out of
cell range?
Ask the candidate how he handles occasions when he’s out of the office. This
can be a real problem if your advisor is a solo practitioner who works
part-time (as many insurance agents do) or without any assistants (common for
many brokers and agents).
It’s common for advisors in larger firms to buddy up, covering for each other
when one is away. Find out if the advisor you’re interviewing has such an
arrangement, but don’t stop there. It’s one thing to know that someone else
will answer the phone or respond to an email, they need to be able to do more
than merely say, “Harvey will be back on Thursday.”
You want to verify that Harvey’s buddy is able to actually help you. That means
he has the ability — and authority — to handle transactions (especially
liquidations, because if you need cash quick, you want to know that you can get
it, even if Harvey is away). And if you need advice — say you have to make a
financial decision and there’s a deadline that can’t wait — is that buddy
familiar with your financial situation, or is he just some broker or insurance
agent in the office who was forced into taking other’s phone calls? Ideally,
you want to know that if your advisor is away, there are others in the firm who
are very familiar with the investments and insurance you own, and who can talk
with you knowledgeably and offer advice just like your advisor could.
I’m talking here about depth of talent, and it’s of tremendous importance when
hiring an advisor. Don’t let your financial future be dependent on the advice —
or sheer availability — of just one person.
Of course, the above describes the inconvenience of having an advisor away on
vacation or out sick. But what happens to you and your account if your advisor
quits, retires, or dies?
I’m talking about a succession plan. Does your advisor have one? Most don’t,
despite the fact that one of those events is eventually going to occur. So ask
the candidate how long he plans to continue in this field and what will happen
to your account if he sells his practice, quits the firm, or leaves due to
death or disability. Are there others in the firm who can take over with
minimal disruption to you? Sure, you’ll have to get to know the successor, but
you’d have to do that anyway if your advisor’s departure forced you to find
another advisor. And if you are forced to start over, you may find yourself
having to transfer accounts, sell assets, and buy new ones, resulting in fees
or taxes.
Talented advisors realize they have an obligation to ensure that their clients
will be cared for after they are gone and they have succession plans in place
to assure continuity of services.
Make sure your advisor has a plan in place. And learn its details. Don’t
merely let a prospective advisor say, “Yes, I have a plan.” Make him describe
it, so you can decide if it’s well thought out and realistic. What is the
name of the person who he expects will take over? What will be the transition
process? Make sure you are comfortable with these answers. And if you’re not,
make sure you’re comfortable with the idea of having to find a new advisor if
this one dies, quits, or retires.
Interview Question #9:
Do you personally own the same investment and insurance products you’ll be
recommending to me?
I’ve learned over the years that a great many brokers, agents, and advisors
never personally invest in the products they tell their clients to buy. It’s
reasonable to assume there might be some differences in what your advisor buys
for his own account compared to what he recommends for you — his personal
situation might be quite different from yours, after all — but if he’s telling
you to invest your life’s savings in annuities and he doesn’t own any of them
himself, or if he’s recommending a third-party manager but he hasn’t placed his
own money with that manager, well, you just have to ask yourself a question: If
he doesn’t buy what he’s selling to you, are you sure you want to buy it? Put
another way, would you dine at a restaurant whose chef refused to eat there?
Interview Question #10:
What kind of people do you usually work with?
Do not tell the candidates about yourself right away. Instead, ask them to
describe their typical clients. If they describe you, it could be a good match.
If they describe someone quite different, you could be out of place. As part of
this question, ask how much money their typical clients invest. If you have
$50,000 to invest, you don’t want an advisor who works primarily with
millionaires, or you’ll probably be ignored. Likewise, if you have $1 million
and the advisor works mostly with assets of fifty grand, the advisor may not
have the expertise you require.
Ideally, you want an advisor who has extensive experience working with people
just like you. Never be a surgeon’s first patient. And never let a podiatrist
operate on your spleen.
Interview Question #11:
How long have you been in this business?
Don’t assume that age translates to experience. A great many stockbrokers,
insurance agents, and investment advisors are career-changers, and their gray
hair belies the fact that they’ve been in the field only a year or two.
Interview Question #12:
What is your ratio of support staff to professional staff?
If the advisor works alone or has only limited access to support staff, then
you’re paying for your advisor to lick envelopes. You want an advisor who
operates in a professional environment, not a solo practitioner who must do
everything himself.
An effective office operation will have no less than one support staff member
for every professional.
Interview Question #13:
Do you conduct background checks of your staff?
It’s obvious that your advisor will be in possession of your date of birth,
Social Security Number, and detailed information about your bank accounts,
investments, and insurance policies. (That’s why I’ve shown you how to check
your advisor’s regulatory history.)
But your advisor’s staff will also have access to this information as well. Are
they trustworthy? Your advisor should never hire anyone without checking their
criminal record and credit report. After all, people with checkered pasts or
who are under financial pressure are more likely to engage in improper behavior
than those who enjoy more stable lives. Ask your advisor if he conducts background
checks of all job applicants — and be concerned if he does not.
Also make sure that your advisor periodically re-checks his staff ’s
background. After all, many people’s lives drastically changed during the
latter part of the ’00s. Millions were laid off, suffered massive investment
losses, or lost their homes to foreclosure. Did any of this happen to the
advisor’s staff (or their spouses)? If so, an employee might be experiencing
severe financial difficulty, and temptation could place your money or identity
at risk.
You should not trust your financial future to an advisor or firm who does not
take basic steps to protect you.
Interview Question #14:
What is the advisor’s reputation, both in the field and in the local community?
Those who have roots and solid reputations to protect tend to be more
careful than someone with neither.
Interview Question #15:
Do you have a clean regulatory record?
Don’t be afraid to ask this question and, if you like, follow it up by
contacting the regulatory authorities. Every legitimate practitioner holds at
least one FINRA or insurance license, so it’s easy to find out if there have
been any complaints. To check with the SEC directly, go to
www.adviserinfo.sec.gov and click on “Investment Advisor Search.” To check with
FINRA, go to www.finra.org/brokercheck.
Interview Question #16:
Do I have to sign a contract?
Most Registered Investment Advisors require clients to sign contracts;
brokers and insurance agents never do. What does the contract require you
to do? What limits does it place on you? What abilities does it grant the
advisor?
For example, some advisors don’t allow clients to terminate the relationship or
make withdrawals without 90 days’ notice. Others allow the advisor to make all
investment decisions without your prior consent. Some require you to pay in
advance. Read the contract carefully, and make sure you’re comfortable with
everything it says.
And our final two questions …
Interview Question #17: Why
did you choose this work?
Aside from giving an occasional stupid answer (“I needed a job”), advisors
who are asked this question tend to give a response that falls into one of two
categories: They either talk about their fascination with investments, economics,
financial planning, and other numbers-oriented topics, or they talk about their
fascination with people and how the dynamics of family relationships, emotions,
attitudes, and desires interact with effective financial decision-making.
You have to decide if you prefer to work with an advisor who is more interested
in the markets, or more interested in how you will interact with the markets.
Interview Question #18:
Why should I choose you?
This is a fair question, and the answer will reflect the advisor’s
experience and depth of character. The answer should be a reflection of the
advisor’s skills and abilities, with an emphasis on how he can help you. Beware
any candidate who treats this question as an opportunity to disparage others.
True professionals do not need to diminish the competition in order to make
themselves shine.
When you’re done with the interview, you should be able to ask one final
question — of yourself: Do you like this person? Don’t hire someone you
dislike.
=============================================================================
10 Taboos Between You and Your Advisor
From The Truth
About Money, Part
XIII – How to Choose a Financial Advisor.
Article 4 of 7
Here are 10 things you should never do with a
financial advisor:
Taboo #1: Never write a check made payable to
your advisor, other than for his fee.
When investing money, your checks should be made payable
only to mutual funds, ETFs, brokerage firms, or insurance companies. No
legitimate advisor would ever allow a client to write a check for investments
or insurance payable to him personally or to his firm.
Taboo #2: Never allow your advisor to list
himself as a joint owner, beneficiary, or trustee on your accounts.
Your money is yours, not your advisor’s. Keep it that way. The only place your
advisor’s name should appear on documents is a citation as “advisor of record.”
Taboo #3: Never lend money to your advisor.
Period.
Taboo #4: Never let your advisor sign your
name to any document.
Many transactions require your signature — particularly those involving the
disbursement of funds from your account. If you’re in urgent need of cash, you
might be tempted to urge your advisor to bend the rules. Don’t. Forgery is a
felony.
Taboo #5: Never let your advisor allow you to
sign a blank form or contract.
It’s a violation of FINRA rules and a pretty dumb thing
to do. Cross out sections that do not apply.
Note: For privacy considerations, it is common
for your advisor to send you documents that omit account numbers and other
identifying information. It’s okay to sign such forms; your advisor will fill
in the missing data after you return the forms. This step is designed to reduce
the risk of identity theft.
Taboo #6: Never let your advisor list his
firm’s address instead of yours on account statements.
You should receive monthly or quarterly statements
directly from the mutual fund, brokerage firm, or insurance company. Never let
your advisor arrange for the statements to go to his office instead of to you.
Taboo #7: Never let your broker or advisor
sell you an investment that isn’t available from others.
Some advisors sell in-house or proprietary investment
products. There’s only one reason they do that: because they earn compensation
for doing so. If an investment product is not available elsewhere, it is
probably high in risk and low in liquidity — meaning you could find it very
difficult to sell for as much as you invested. Like a box of cereal, all the
investments and insurance products your advisor recommends should be available
from any number of sources, not just him.
Taboo #8: Never let your advisor receive a
share of your profits.
I’d never let an advisor share in my profits unless he
was also willing to reimburse me for my losses — and while you might find an
advisor offering the former, no one would ever agree to the latter.
It’s your money, so you get to keep all of
the profits.
Taboo #9: Never let your advisor assign any
agreement with you to another advisor.
One day, your advisor may retire or sell his practice. If so, you are
immediately relieved of any and all contractual obligations you may have had
with him or her. Never let an advisor — or his successor — make you think you
are obligated to work with the successor. Assignment is an SEC violation.
Taboo #10: Never let your advisor invest your
money in something you don’t understand.
If you don’t understand an investment or strategy, don’t
invest in it. Bernie Madoff’s clients used to joke that he put their money into
a “black box.” They aren’t laughing anymore.
=============================================================================
Four Warning Signs You Could Be Dealing With a Ponzi Scheme or Other
Investment Fraud
From The Truth About Money,
Part XIII – How to Choose a
Financial Advisor.
Article 5
of 7
In 2008,
it was revealed that investors had lost nearly $50 billion in the largest Ponzi
scheme ever. Perpetrated by Bernie Madoff and shocking in its size, the scam
victimized thousands of investors. Some lost their life's savings.
If you're wondering how you can help ensure that you are investing with a
legitimate advisor, keep an eye out for the following four warning signs:
Warning Sign #1: Beware any advisor who
prominently touts his ethics, honesty, and trustworthiness.
Honesty can be assumed; there's no reason for an advisor to brag that he's
honest. By the same notion, some financial advisors invoke God as a marketing
ploy by calling themselves "Christian (or Jewish or Muslim or whatever)
financial advisors." Such individuals promote themselves at church groups,
which can lead to a practice federal regulators call "affinity fraud."
In that scam, crooks ingratiate themselves within a religious organization,
group, or community in order to steal money from the congregation and its
members by selling investments that purport to offer high returns and little to
no risk. Madoff did this routinely, making connections with wealthy members of
the Jewish community.
Warning Sign #2: Beware any advisor who
offers unusually high or steady rates of return.
Every investor dreams of earning consistently high returns — which are too good
to be true. Madoff 's investors received a monthly return of 1% for 18 years.
He even reported a 5.6% profit for the first 11 months of 2008 — despite the
fact that the stock market lost more than 40% during that time. Claims of
consistently good and unusually steady returns over a long period should be
viewed with great suspicion.
Warning Sign #3: Beware any advisor who uses
a questionable auditor.
An independent auditor should regularly examine the advisor's books and records
to ensure that clients' money is being handled properly. Madoff hired a small
auditing firm that reportedly operated out of a single 13x18 square-foot office
in Poughkeepsie, N.Y., even though he was handling billions of dollars in
assets.
Warning Sign #4: Beware any advisor who touts
testimonials.
Past performance does not guarantee future results, which is why the SEC
restricts the use of testimonials. But Madoff built his entire business by word
of mouth, currying favor on the social circuit at high-end country clubs.
=============================================================================
How to Work with an Advisor
From The Truth
About Money, Part
XIII – How to Choose a Financial Advisor.
Article 6 of 7
Working with a financial advisor should be an enjoyable experience. It should
not be adversarial or uncomfortable. You should look forward to talking to your
advisor. Upcoming contact should not be anticipated with dread.
If you choose your advisor well, he or she should become an important part of
your life, and you should be together for a lifetime. After all, financial
planning is a lifelong activity, and a good advisor can help make the process
both fun and profitable for you.
How Often Should You
Talk with Your Advisor?
It
might sound obvious (and I hope it does): You should email, talk, or meet with
your advisor as often as necessary. For some people, that could mean weekly.
For others, a once-a-year phone call is sufficient. As with physicians, the sicker
the patient, the more frequent the contact.
You should always contact your financial advisor before you make any financial decision.
Whether it's buying a house or car, selecting a college, or choosing employee
benefits at work, you should talk to your advisor about the issue at hand. The
worst question to ask an advisor is, "Did I do the right thing?"
Remember, you might be experiencing a situation for the first time, but your
advisor has seen it hundreds of times.
Six Reasons to Talk to Your Advisor
Reason #1: You or a member of your family has
experienced a major change in health.
Health changes might affect your income, expenses, and
insurance, as well as your long-term retirement and estate plans. Find out the
options available to you.
Reason #2: You're
thinking of buying or selling a home or refinancing your current mortgage.
This calls for a complete review of your entire debt structure. The
transactions must be viewed with the rest of your personal finances in mind.
Reason #3: You've lost
your job, or think you might lose it soon.
Your advisor can help you determine the best way to pay your expenses while
your career is in transition. Health and life insurance issues and retirement
account rollovers also need to be addressed.
Reason #4: You're
thinking about retiring soon.
If you've decided that retirement is not far away, it's time to pay
attention to your investment portfolio, long-term care insurance, the income
and expense needs of your lifestyle, Social Security, health insurance coverage,
and much more.
Reason #5: Children or
grandchildren are on the way.
It's time to review beneficiary designations, along with updates to your
insurance, college, and estate plans.
Reason #6: Your marital
status might soon change.
Whether you're about to become single or married, this momentous event affects
how you title investments; choose beneficiaries to IRAs, annuities, retirement
accounts, and life insurance; wills and trusts; tax strategies; and a myriad of
other issues.
Your advisor's job is to apply his or her experience and knowledge to your
entire financial situation so that each part of your financial life is
operating at its best. Because each decision affects other aspects of your
finances, it's important to maintain a holistic approach. Yet, sometimes, what
might seem (to you) to be a simple matter could have major consequences.
Always talk to your advisor before you act and as soon as you believe a
financial or lifestyle change or decision is about to occur.
=============================================================================
Evaluating Your Advisor's Performance
From The Truth About Money, Part XIII – How to Choose a Financial
Advisor.
Article 7 of 7
Too
often, consumers hire an advisor without giving any consideration to the
quality of their selection. Even when you carefully choose an advisor,
complacency (or merely inertia) can set in. As a result, many consumers fail to
evaluate their advisor.
Here are the eight categories you should consider when evaluating your advisor:
Category #1: Your
relationship.
Do you feel comfortable talking with your advisor? Do you look forward to
conversations, and when done, are you happy to have had the conversation?
Category #2: Services
provided.
Is your advisor delivering services that are of value to you? Think of all the
services you get, and ask if you'd be unhappy if any of them ceased. If you
wouldn't miss them, they aren't of value.
Also think of services you'd like to receive but aren't currently receiving.
Have you asked your advisor to provide them?
Category #3: Investment
performance.
Are your returns competitive, based on your goals, risk tolerance, and
personal situation? You should have a benchmark relevant to your situation for
comparison purposes; your advisor can provide one for you.
Category #4: Investment
risks.
Has your account fluctuated in value beyond your comfort level? If so, have
you discussed this with your advisor, and are you satisfied with the results of
that conversation (i.e. your investments were changed to better reflect your
comfort level, or your advisor's explanation made you more comfortable with the
level of volatility you're experiencing)?
Category #5: Outlook.
In times of economic volatility, is your advisor still equipped to effectively
advise you? Has your advisor kept you up-to-date on his thoughts and
perspective? Is your portfolio still properly positioned?
If your advisor has been making or suggesting major changes in your
investments, he may have lost confidence in his prior advice — rendering
suspect the confidence you can place in his current advice. Even worse would be
an advisor who does not seem able to articulate an effective, cohesive strategy
going forward. And worst of all would be an advisor who has been and continues
to be completely silent — no calls, no emails, no letters, no contact, and no
responses to yours.
Category #6: Team-based
or solo?
There is a lot of value in team practices vs. solo advisors. Don't assume
your advisor is part of a team just because he works at a national bank,
insurance company, or brokerage firm. In most firms, each advisor works
independently, with little to no regard for the advice, services, or strategies
provided by others in the firm. Clients working with solo advisors are thus
more dependent on the actions and decisions of that advisor than those who work
as part of a team. Teams also provide greater depth and experience.
Category #7: Costs.
Are the total costs you're paying competitive? It is foolish to try to seek
the lowest costs possible, but it's equally foolish to be paying costs that are
significantly higher than those available elsewhere. Your advisor can benchmark
costs for you, and a quick Internet search or a few calls to other firms can
give you an idea of what others charge.
Remember that there's always a trade-off between costs and services/quality,
and those you contact will try hard to convince you to switch firms. Therefore,
it's important when exploring costs that you examine all costs — not just the
advisor's fee, but also the costs of the investments that the advisor has
recommended for you.
Category #8: Regulatory
compliance.
Maybe you checked with FINRA, the SEC, and state regulators before hiring your
advisor to make sure he had a clean record. But how do you know that there
haven't been complaints, violations, or fines issued in the years since you've
been a client?
Checking your advisor's background every 3–5 years is a good idea.
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Worry does not empty tomorrow of its sorrow; it empties today of its strength.
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