In this part . . .
I help you sift through the morass of financial resources competing for your attention and dollars. Many people who call themselves financial
planners claim to be able to make you rich, but I show you how you may end up poorer if you don’t choose an advisor wisely. I also cover software and Internet resources and name the best of the bunch and the pitfalls of financial websites. Finally, I discuss how to benefit from the financial coverage in print and on the air, as well as how to sidestep the sometimes-problematic advice in these media.
Chapter 18
Working with Financial Planners
In This Chapter
Checking out your choices for managing your finances
Determining whether you need help from a financial planner Searching for a stellar financial advisor
Interviewing financial planners before you hire them
Hiring a competent and ethical financial planner or advisor to help you make and implement financial decisions can be money well spent. But if you pick a poor advisor or someone who really isn’t a financial planner but a salesperson in disguise, your financial situation can get worse instead of better. So before I talk about the different types of help for hire, I discuss the options you have for directing the management of your personal finances.
Surveying Your Financial Management Options
Everyone has three basic choices for managing money: You can do nothing, you can do it yourself, or you can hire someone to help you. This section lays out these three options in more detail.
Doing nothing
The do-nothing approach has a large following (and you thought you were alone!). People who fall into this category may be leading exciting, interesting lives and are therefore too busy to attend to something as mundane as dealing with their personal finances. Or they may be leading mundane existences but are too busy fantasizing about more-appealing ways to spend their time.
The dangers of doing nothing are many. Putting off saving for retirement or ignoring your buildup of debt eventually comes back to haunt you. If you don’t carry adequate insurance, accidents can be devastating. Fires, earthquakes, flooding, and hurricanes show how precarious living in paradise actually is.
If you’ve been following the do-nothing approach all your life, you’re now officially promoted out of it! You bought this book to find out more about personal finance and make changes in your
money matters, right? So take control and keep reading!
Doing it yourself
The do-it-yourselfers learn enough about financial topics to make informed decisions on their own. Doing anything yourself, of course, requires you to invest some time in learning the basic concepts and keeping up with changes. The idea that you’re going to spend endless hours on your finances if you direct them yourself is a myth. The hardest part of managing money for most people is catching up on things that they should have done previously. After you get things in order, which you can easily do with this book as your companion, you shouldn’t have to spend more than an hour or two working on your personal finances every few months (unless a major issue, like a real estate purchase, comes up).
Some people in the financial advisory business like to make what they do seem so complicated that they compare it to brain surgery! Their argument goes, “You wouldn’t
perform brain surgery on yourself, so why would you manage your money yourself?” Well, to this I say, “Personal financial management ain’t brain surgery — not even close.” You can manage on your own. In fact, you can do a better job than most advisors. Why? Because you’re not subject to their conflicts of interest, and you care the most about your money.
Hiring financial help
Realizing that you need to hire someone to help you make and implement financial decisions can be a valuable insight. Spending a few hours and several hundred dollars to hire a competent professional can be money well spent, even if you have a modest income or assets. But you need to know what your money is buying. Financial planners or advisors make money in three ways:
They earn commissions based on the sales of financial products.
They charge a percentage of the assets they invest on your behalf.
They charge by the hour (this can also be done through fixed-fee arrangements).
The following sections help you differentiate among the three main types of financial planners.
Commission-based “planners”
Commission-based planners aren’t really planners, advisors, or counselors at all — they’re salespeople. Many stockbrokers and insurance brokers are now called financial consultants or financial service representatives in order to glamorize the profession and obscure how they’re compensated. Ditto for insurance salespeople calling themselves estate planning specialists.
A stockbroker referring to himself as a financial consultant is like a Honda dealer calling himself a transportation consultant. A Honda dealer is a salesperson who makes a living selling Hondas
— period. He’s definitely not going to tell you nice things about Ford, Chrysler, or Toyota cars — unless, of course, he happens to sell those, too. He also has no interest in educating you about money-saving public-transit possibilities!
Salespeople and brokers masquerading as planners can have an enormous self-interest when they push certain products, particularly those products that pay generous commissions. Getting paid on commission tends to skew their recommendations toward certain strategies (such as buying
investment or life-insurance products) and to cause them to ignore or downplay other aspects of your finances. For example, they’ll gladly sell you an investment rather than persuade you to pay off your high-interest debts or save and invest through your employer’s retirement plan, thereby reducing your taxes.
Table 18-1 gives you an idea of the commissions that a financial planner/salesperson can earn by selling particular financial products.
Table 18-1 Financial Product Commissions
Product Commission
Life Insurance ($250,000, age 45):
Term life $125 to $500
Universal/whole life $1,000 to $2,500 Disability Insurance:
$4,000/month benefit, age 35 $400 to $1,500 Investments ($20,000):
Mutual funds $800 to $1,700
Limited partnerships $1,400 to $2,000
Annuities $1,000 to $2,000
Percentage-of-assets-under-management advisors
A financial advisor who charges a percentage of the assets that are being managed or invested is generally a better choice than a commission-based planner. This compensation system removes the incentive to sell you products with high commissions and initiate lots of transactions (to generate more of those commissions).
The fee-based system is an improvement over product-pushers working on commission, but it has flaws, too. Suppose that you’re trying to decide whether to invest in stocks, bonds, or real estate. A planner who earns his living managing your money likely won’t recommend real estate because that will deplete your investment capital. The planner also won’t
recommend paying down your mortgage for the same reason — he’ll claim that you can earn more investing your money (with his help, of course) than it’ll cost you to borrow.
Fee-based planners are also only interested in managing the money of those who have already accumulated a fair amount of it — which rules out most people. Many have minimums of
$250,000, $500,000, or more.
Hourly-based advisors
Your best bet for professional help with your personal finances is an advisor who charges for his time. Because he doesn’t sell any financial products, his objectivity is maintained. He doesn’t perform money management, so he can help you make comprehensive financial decisions with loans, retirement planning, and the selection of good investments, including real estate, mutual funds, and small business.
Hiring someone incompetent is the primary risk you face when selecting an hourly-based planner. So be sure to check references and find out enough about finances on your own to discern between good and bad financial advice. Another risk comes from not clearly defining the work to be done and the approximate total cost of the planner’s service before you begin, so consider getting these items in writing. You should also review some of the other key questions that I outline in “Interviewing Financial Advisors: Asking the Right Questions,”
later in this chapter.
An entirely different kind of drawback occurs when you don’t follow through on your advisor’s recommendations. You pay for his work but don’t act on it, so you don’t capture its value. If part of the reason you hired the planner in the first place was that you’re too busy or not interested enough to make changes to your financial situation, look for this type of support in the services you buy from the planner.
Some planners charge a fixed fee to whip up a financial plan for you. Remember to ask how much of their time is involved in working with you so that you can assess the amount you’re paying per hour.
If you just need someone to act as a sounding board for ideas or to recommend a specific strategy or product, you can hire an hourly-based planner for one or two sessions of advice.
You save money doing the legwork and implementation on your own. Just make sure the planner is willing to give you specific advice so you can properly implement the strategy.
Deciding Whether to Hire a Financial Planner
If you’re like most people, you don’t need to hire a financial planner, but you may benefit from hiring some help at certain times in your life. Good reasons for hiring a financial planner can be similar to the reasons you may have for hiring someone to clean your home or do your taxes. If you’re too busy, you don’t enjoy doing it, or you’re terribly uncomfortable making decisions on your own, using a planner for a second opinion makes good sense. And if you shy away from numbers and bristle at the thought of long division, a good planner can help you.
How a good financial advisor can help
The following list gives you a rundown of some of the important ways a competent financial planner can assist you:
Identifying problems and goals: Many otherwise intelligent people have a hard time being objective about their financial problems. They may ignore their debts or have unrealistic goals and expectations given their financial situations and behaviors. And many are so busy with other aspects of their lives that they never take the time to think about what their financial goals are. A good financial planner can give you the objective perspective you need. Surprisingly, some people are in a better financial position than they think they are in relation to their goals. Good counselors really enjoy this aspect of their jobs — good news is easier and much more fun to deliver.
Identifying strategies for reaching your financial goals: Your mind may be a jumble of various plans, ideas, and concerns, along with a cobweb or two. A good planner can help you sort out your thoughts and propose alternative strategies for you to consider as you work to accomplish your financial goals.
Setting priorities: You may be considering doing dozens of things to improve your financial situation, but making just a few key changes is likely to have the greatest value.
Identifying the changes that fit your overall situation and that won’t keep you awake at
night is equally important. Good planners help you prioritize.
Saving research time and hassle: Even if you know which major financial decisions are most important to you, doing the research needed to make them can be time-consuming and frustrating if you don’t know where to turn for good information and advice. A good
planner does research to match your needs to the best available strategies and products. A good advisor can prevent you from making a bad decision based on poor or insufficient information.
Purchasing commission-free financial products: When you hire a planner who charges for his time, you can easily save hundreds or thousands of dollars by avoiding the cost of commissions in the financial products you buy. Purchasing commission-free is especially valuable when you buy investments and insurance.
Providing an objective voice for major decisions: When you’re trying to figure out when to retire, how much to spend on a home purchase, and where to invest your money, you’re faced with some big decisions. Getting swept up in the emotions of these issues can cloud your perspective. A competent and sensitive advisor can help you cut through the
confusion and provide you with sound counsel.
Helping you to just do it: Deciding what you need to do is not enough — you have to actually do it. And although you can use a planner for advice and then make all the
changes on your own, a good counselor can help you follow through with your plan. After all, part of the reason you hired the advisor in the first place may be that you’re too busy or uninterested to manage your finances.
Mediating: If you have a spouse or partner, financial decisions can produce real
fireworks. Although a financial counselor isn’t a therapist, a good one can be sensitive to the different needs and concerns of each party and can try to find middle ground on the financial issues you’re grappling with.
Making you money and allowing you peace of mind: The whole point of professional financial planning is to help you make the most of your money and plan for and attain your financial and personal goals. In the process, the financial planner should show you how to enhance your investment returns; reduce your spending, taxes, and insurance costs;
increase your savings; improve your catastrophic-insurance coverage; and achieve your financial-independence goals.
Why advisors aren’t for everyone
Finding a good financial planner isn’t easy, so make sure you want to hire an advisor before you venture out in search of a competent one. You should also consider your personality type before you decide to hire help. My experience has been that some people (believe it or not) enjoy the research and number crunching. If this sounds like you, or if you’re not really comfortable taking advice, you may be better off doing your own homework and creating your own plan.
If you have a specific tax or legal matter, you may be better off hiring a good professional who specializes in that specific field rather than hiring a financial planner.
Recognizing conflicts of interest
All professions have conflicts of interest. Some fields have more than others, and the financial-planning field is one of those fields. Knowing where some of the land mines are located can certainly help. Here, then, are the most common reasons that planners may not have 20/20 vision when giving financial directions.
Selling and pushing products that pay commissions
If a financial planner isn’t charging you a fee for his time, you can rest assured that he’s earning commissions on the products he tries to sell you and thus needs a broker’s license. A person who sells financial products and then earns commissions from those products is a salesperson, not a financial planner. Financial planning done well involves taking an objective, holistic look at your financial situation — something brokers are neither trained nor financially motivated to do.
To make discerning a planner’s agenda even harder, you can’t assume that planners who charge fees for their time don’t also earn commissions selling products. This compensation double dipping is common.
Selling products that provide a commission tends to skew a planner’s recommendations. Products that carry commissions result in fewer of your dollars going to the investments and insurance you buy. Because a commission is earned only when a product is sold, such a product or service is inevitably more attractive in the planner’s eyes than other options. For example, consider the case of a planner who sells disability insurance that you can obtain at a lower cost through your
employer or a group trade association (see Chapter 16). He may overlook or criticize your most attractive option (buying through your employer) and focus on his most attractive option — selling you a higher-cost disability policy on which he derives a commission.
“Financial planning” in banks
Many banks have “financial representatives” and “investment specialists” sitting in their branches,
Many banks have “financial representatives” and “investment specialists” sitting in their branches, waiting to pounce on bank customers with big balances. In many banks, these “financial planners”
are simply brokers who are out to sell investments that pay them (and the bank) hefty sales commissions.
Customers often have no idea that these bank reps are earning commissions and that those commissions are being siphoned out of customers’ investment dollars. Many customers are mistaken (partly due to the banks’ and salespeople’s poor disclosure) in believing that these investments, like bank savings accounts, are FDIC-insured and cannot lose value.
Another danger of trusting the recommendation of a commission-based planner is that he may steer you toward the products that have the biggest payback for him. These products are among the worst for you because they siphon off even more of your money up-front to pay the commission. They also tend to be among the costliest and riskiest financial products
available.
Planners who are commission-greedy may also try to churn your investments. They encourage you to frequently buy and sell, attributing the need to changes in the economy or the companies you invested in. More trading means more commissions for the broker.
Taking a narrow view
Because of the way they earn their money, many planners are biased in favor of certain strategies and products. As a result, they typically don’t keep your overall financial needs in mind. For example, if you have a problem with accumulated consumer debts, some planners may never know (or care) because they’re focused on selling you an investment product.
Likewise, a planner who sells a lot of life insurance tends to develop recommendations that require you to purchase it.
Not recommending saving through your employer’s retirement plan
Taking advantage of saving through your employer’s retirement savings plan(s) is one of your best financial options. Although this method of saving may not be as exciting as risking your money in
cattle futures, it’s not as dull as watching paint dry — and most importantly, it’s tax-deductible.
Some planners are reluctant to recommend taking full advantage of this option: It doesn’t leave much money for the purchase of their commission-laden investment products.
Ignoring debts
Sometimes paying off outstanding loans — such as credit-card, auto, or even mortgage debts — is your best investment option. But most financial planners don’t recommend this strategy because paying down debts depletes the capital with which you could otherwise buy investments — the investments that the broker may be trying to sell you to earn a commission or that the advisor would like to manage for an ongoing fee.
Not recommending real estate and small- business investments
Investing in real estate and small business, like paying off debts, takes money away from your investing elsewhere. Most planners won’t help with these choices. They may even tell you tales of real-estate- and small-business-investing disasters to dissuade you.
The value of real estate can go down just like any other investment. But over the long haul, owning real estate makes good financial sense for most people. With small business, the risks are higher, but so are the potential returns. Don’t let a financial planner convince you that these options are foolish — in fact, if you do your homework and know what you’re doing, you can make higher rates of return investing in real estate and small business than you can in traditional securities such as stocks and bonds.
That said, certain real-estate and small-business investments can be risky, inefficient, and illiquid
— so caution by an advisor informed in these fields (and that’s a key point) may be helpful. See Part III to read more about your real-estate and small-business investment options.
Selling ongoing money-management services
The vast majority of financial planners who don’t work on commission make their money by managing your money for an ongoing fee percentage (typically 1 to 1.5 percent of your investment annually). Although this fee removes the incentive to churn your account (frequently trade your investments) to run up more commissions, the service is something that you’re unlikely to need.
(As I explain in Part III, you can hire professional money managers for less.)