Thoughts on Financial Planners

In Get Advice from People Who Are Where You Want to Be, I again stated my bi-monthly rant on financial planners who have lots of "head knowledge" but aren't doing well in their personal finances. A reader (who is a financial planner and also blogs at Swim Upstream to Wealth) left the following comment that I found insightful:

This is good advice although as a financial planner who is younger and doesn't have a multi-million dollar portfolio I think you need to do more than look at a financial statement. I know lots of older planners who have made a lot of money by pushing product.

One time I attended a Financial Planning Association meeting where a planner (really a broker) who made a million dollars a year was speaking. Trying to model myself after him, I asked how he did it. I figured someone who made that kind of coin must be a great planner who provides strategies that really builds his clients' wealth.

He said, "I recommend whatever fund offers the highest commission or best trip." So his clients weren't getting the best investment portfolio. Rather, they got what paid him the most regardless of the fund's performance. And, as you can imagine, the poorer performing funds tend to pay higher commissions because they can't stand on their own merits. And, most folks don't know that insurance and mutual fund companies give trips, merchandise, and even cars to salesmen who sell the most product.

So I agree that you need to learn from experienced people. Just don't assume that a fat wallet means they really match your vision or principles.

This comment left me with several thoughts:

1. How does one decide whether a younger financial planner is good or not using my criteria since the planner hasn't had time to do well financially? I'm not sure of the answer, but I know what I'd do -- I'd probably avoid them simply because of their lack of experience. If I was to seek financial advice from a planner, I'd want a good combination of knowledge and experience (like I would with a doctor, gardener, and almost any other service person I'd pay), and a younger planner simply wouldn't have had the time to get the experience I felt was needed to advise me. So I'd opt for someone who had been a planner for some time, and also look at her personal finances (or at least inquire about them) to see if she was successful at applying her own advice and doing well as a result.

2. Good point on the "top" financial planners -- many got that way simply by recommending high-priced options that weren't really the best options for their clients. I have two thoughts on this:

• Always remember that many financial advisors are salesmen first and advisors second. Forgetting this could cost you a fortune.

• This is another reason you need enough financial knowledge yourself to determine what is and isn't a good investment.

3. "Just don't assume that a fat wallet means they really match your vision or principles." Well said. And since it's often hard to sort through all the variables, this makes picking a good financial planner even more difficult. As a result, I prefer my method -- learn financial principles yourself and manage your own money.

Comments

[Ron@TheWisdomJournal]

As someone who is giving consideration to getting into this field, I'd recommend using a fee based planner. You know your fees up front and there isn't a conflict of interest between what benefits the client and what benefits the planner.

[tom]

It blows my mind that at a Financial Planning Association Meeting there was a broker selling the idea to push only high commission products. Aren't the Financial Planning Associations supposed to be the governing bodies that try to weed out these people?!

[garyatk]

This is exactly why the only financial planner to use if you need one is a fee based financial planner. Most people don't need one until they get close to retirement unless they have maxed out thier 401k's and IRA options. In todays world with companies like Vanguard offering Target Retirement account options, investment selection is an easy job. After many mistakes and lessons learned, I have learned that trying to beat the market is pointless. I now live under the motto that bulls and bears both make money, but pigs always lose!

[Ryan S]

I'm really not sure what the value of a financial planner really is. Maybe if you are irresponsible with your money or are absolutely clueless about personal finance? I really don't need someone to tell me to invest in a Index fund or target retirement fund.

[whatever]

Ryan S, not all indexes or target retirement funds are created equally.

In addition to that, they are too focused on some asset classes while not investing in others.

They have their time and place, but are not the end all to be all.

Here is a guy I like listening too and recomend:
Paul Winkler
website: http://paulwinkler.net/
podcast feed: http://paulwinkler.net/upload/feed.xml

[Dan]

I think that I would look to a younger planner assuming we had the same outlook etc. Only for the fact that he/she is trying to make their name and would be perhaps more motivated in giving me the service I desired, and working maybe just a bit harder to make sure that I got what I wanted.

[Jesse]

I don't think I'd rule out a young planner -- sometimes motivation to make their mark is a very strong factor. (What Dan said basically).

I would still want to evaluate the planner's own finances and see if, given the shorter time they had, they were still operating under principles with which I agreed.

[Mike Hunt]

I'd think most FMF readers are the do-it yourself type of crowd. I sure am. I keep some money in some Janus funds (more out of history than anything else) and invest in stocks based on my own research. I use about 10 - 20% of my net worth in the stock portfolio and really try and research the companies I buy.

You can pay for a financial planner but the ones that charge recurring fees are quite parasitic. Please read Warren Buffett's letters to his investors, the 2008 letter had a lot mentioned about financial planners. Did you know the industry takes 20% of all the money generated in the market? So use a low cost index fund (use ameritrade and buy the index fund for a $9 trade and nothing else) as an investment.

And to Tom's post above I answer this:

Why should a financial planner be regulated unless he is making fraudulent claims? These guys are in business to make money for themselves. It puts them in a big conflict of interest with growing your money because they need to profit too whether or not your portfolio goes up! The major regulator on them of course is healthy competition! I'm sure other planners can advertise about the million dollar planner and try and take the person's business by competing of costs and fees... the funny thing is that everyone tries to find the person who beats the average but by definition it's impossible to have a majority beat the average. What I find is that the funds that have a great year 1 almost always have a terrible year 2.... it's the curse of chasing the winners, expect to get burned.

-Mike

["Mo" Money]

I once had a young financial planner (just out of school) who told me that investing in an index fund was "stupid". I hope he is doing well in his new job, he doesn't work for me. Anyone who says something is stupid is stupid.

[Saver gal]

I agree that the average saver/investor can invest in index funds or target date funds on their own. But an observation as to Mike Hunt's post. TD Ameritrade is $9 per trade for stocks, but $49 to buy a mutual funds such as a Vanguard index fund.

[Duane Gran]

Simply ask the planner if he or she is a fiduciary. A fiduciary obligation means that the advisor cannot put his interest ahead of yours. Request a copy of their ADV-II form (the SEC uses this to clarify the fee structure) for more detail.

[Zook]

Great article and discussion...

There are plenty of reasons to have "help" along the way with a financial planner regardless of age, especially a fee-only FIDUCIARY planner. Allow the planner or even the salesman to EARN your trust. Trust shouldn't come easily because they have a series 7.

Even do it yourself types should consult, run things by a solid planner, who has EARNED their trust, from time to time...

And might I add, a lot of the "do it yourself" crowd need the extra help. They like to think they got it all under control and have all the answers, but there is always something that they can improve. I'll give you an example below.

I helped someone who had money in a S&P 500 index fund. They thought everything was great and that they were "index investing" with the best of them. No worries, right? Come to find out, the fund had an expense ratio over 1 percent!!!! (Oh, don't worry, there are hundreds of S&P 500 funds with varying ER's from dirt cheap to amazingly high, ALL tracking the 500)

So their $75,000 in this "index fund" was costing them over $1000 a year in fees. I recommended/implemented a tax-loss harvesting goal to get of the S&P 500 fund, which allowed them to lock in a few thousand in losses to be deducted from their 2007 tax return. They also had dividend reinvesting switched "on" and made tax accounting at their cheap brokerage firm a nightmare and also brought their asset allocation out of whack a little. So I reworked some of their holdings and purchased the Vanguard Total Stock Market index in a lump sum (long term holding period as well) using the ETF "VTI" with an expense ratio of .07% plus a $15.00 commission from the brokerage firm (call it $100 for the first year of purchase and the expense ratio).

So, for this case, was I worth the $125 I charged for this?

This do-it-yourself person was paying $1000+ a year, for this ONE fund and by paying me a reasonable sum that made me happy for the time, I saved them $900 a year and built a relationship. There are folks like me in this world that aren't out there to sell the worst fund because I get a vacation.

Also, if anyone is paying $50 a trade for a mutual fund, especially if it is Vanguard or Fidelity, shame on you. Simply get the taxable, 403b, 401k, IRA etc. into the account with the actual company or go talk with a financial planner and they can help you out. :o)

[Todd]

I think both the financial planner's personal finances and experience are many times overrated as an indicator of their ability.

Being a younger guy (early 30's) I am biased but I have always thought experience is many times overvalued. Note, I am not discounting the importance of experience but only saying people put too much importance on it. Personally, people have underestimated my ability based on my age simply because I am not old enough to have done something long enough. In most cases I have proven them wrong. At the same time, I have worked with many people who had years and years of experience but who I felt were incompetent.

The personal finances of the planner are also overrated. I have used many quality mechanics who haven't addressed their broke down cars or doctors who know medicine in and out but don't live a healthy lifestyle.

The best estimation of a financial planner's ability (if you can accurately get it) is the financial success of their clients. Are they making money for their clients and meeting the needs of their clients? If so, use them. After all, you don't care if your doctor smokes if he has the knowledge to cure your lung cancer. Once again, it goes back to using someone based on a known reference.

[Trung Ma]

I think people don't understand the role of a "real" financial planner/adviser. Yes you included FMF judging from the what I have read so far.

A FP should basically help you with "structuring" your financial affairs, as in for example providing the a balance between tax advantaged investments vs absolute returns.
Or structuring your estate properly using combinations of trusts and insurance policies with buy/write agreements for businesses as well as key man insurances with disability covers.

An FP shouldn't be promoting themselves as just someone who provides investments or just 1 particular investment. This is completely wrong and does the industry and their clients no service at all. A true FP really assess all types of investments whether it be direct property or managed funds or direct equities, life settlement insurance policy buyouts, bonds, futures, options, bet spreads, forex, etc. and makes sure that the client has proper "STRUCTURE".

Also a fee for service type of planner is good. However there are many forms of "fee for service". there are those that charge a straight percentage each year usually 1% of funds invested (is this commission by another name?!!) , others charge by the hour, others charge just a flat dollar figure fee per year based on an estimate of the amount of work needed for that client ie amount of reviews and restructuring needed.

Being that I am an FP with his own practice and have been for 8 years, I'm currently 29 now, I am young and would probably be discounted as not worthy by someone like yourself FMF, luckily my 150 clients don't, I also limited the number of clients I have, at the moment I am probably at my maximum, I know advisers with 300 clients, I don't know how this is truly possible if you are to provide proper service to each client, I mean there's not enough days in the year to see 300 clients if you take into account weekends and holidays. I charge a flat fee per year of $3,500.

Some will see this as value, some will see this as not. But what I can tell you is this, I don't take on anyone who walks in the door as a client. I pick and choose who I bring on as a client. And I basically have only 3 criteria.

1. the client MUST be serious about increasing and maximising their financial situation.

2. the client MUST be in a situation where I can add more than $3,500 of value during the year in real dollar terms, ie I can either save them more than $3,500 in taxes or fee's or I can make them more than $3,500 in real investment returns.

3. the client MUST never argue with me about the fee that I charge. I didn't go to university and study for nothing, and I also don't exist on eating air.

I don't care how much the client has to invest or whether they invest anything at all, I may just do a restructuring or insurances or estate planning services for them.

So that's my little rant, I just had to get it out of my system.

Love your blog by the way FMF

[Meg]

And how exactly are you going to know how organized or successful a financial planner or banker has been in his or her personal finances? The one who has a shiny new Lexus in the parking lot or big fat diamonds in her ears?

In any event, I also think you shouldn't be too quick to dismiss young financial services workers simply because they haven't been in the business for decades. Younger people often try harder and work longer in an effort to prove themselves. In short, they add more value. Also, because they are savvy with the internet and grew up in the information generation, they often know more as well.

Senior executives are better sales people for sure. But looking at it that way you're probably worse off going to them if you are trying not to get "sold." The longer someone has been in a job/business, the less they are going to tailor their recommendations for their clients and dig in deep into the meat of the issues. Once you're "successful" you tend to relax into a routine of packaging products and presentations to minimize efforts and maximize their commissions/fees.

I a young banker so I'm biased, but I guarantee you I know more about credit, banking, where to get the best interest rates, how to structure debt, and which investments are best for whom than any senior person in my office. My clients recognize this as well and appreciate the value I add and the time I spend advising on things that don't benefit me financially - from why your credit score is what it is towhere to get the best car insurance, etc.

[Paul Williams]

As a young financial planner, I'm obviously biased, but please take a moment to consider what I have to say.

I'm planning on starting my own fee-only, hourly financial planning firm, and I already know my biggest marketing hurdle is going to be my age. But if people give me a chance to earn their trust, then they'll also get the chance to see:

1. I have much stronger convictions about my ethics than most planners out there. This stems from my faith and also from my youthful idealism. Why is this good? Because I'm not out to make the most money I can by "helping" clients.

2. I have a passion for learning and keep up to date on more financial topics than most "planners" and especially the salesmen. Where I work now, the main advisors forget and misconstrue some of the most mundane details and really seem to have no idea where to find the information. Being young and technologically savvy helps me find information that would take them much longer to find. So while I may be lacking the years of experience in sales & marketing, that lack of experience doesn't seem to have much of an effect on actual knowledge level.

3. My services are going to much less expensive than those of a gray-haired advisor, so they're probably going to get much more net value. Even with years and years of experience, advisors can't change the laws that affect financial planning or the strategies that we can use. All CFPs (Certified Financial Planners) have been exposed (not necessarily learned) to the same concepts and techniques. If I end up giving you the same (or better) advice as a gray-haired advisor, what good would it do you to pay him more money?

Now, if you want red carpet service and don't want to do anything yourself, then go ahead and pay the gray-haired advisors your $$$ for that level of service. If you look at the total cost of using and advisor who charges you 1% of your assets or $3,000 every year, it could mean the difference between retiring at 65 or retiring at 60 (for young people). Working as an hourly planner, I won't be able to give you baseball tickets or give you free dinners. But you will get the results you need at a much lower cost.

@ Tom in the second comment:

HA! The FPA weeding people out? They'll take just about any "financial planning professional" who will pay their fees. They're just starting to talk about ethics and enforcing those ethics. If you want an organization that really screens financial planners, try NAPFA (National Association of Personal Financial Advisors). They're all fee-only, completely fee-only.

@ FMF:

I know you are a big do-it-yourselfer, and I am too so I can understand that mindset. And I wholeheartedly agree that people can learn financial principles on their own. It's not the principles where financial planners come in handy. It's the nuances of the laws - income taxes, estate planning, insurance, etc. - where financial planners can help. A good financial planner will have been exposed to more concepts and strategies than you can learn on your own in your free time. While we may not always remember the exact details (no one really can), we do gain the ability to recognize when there might be an alternative strategy or an exception to some tax rule because we've been exposed to it. Even in the simplest of situations, we can sometimes recognize opportunities that the average person will not generally learn about by reading personal finance blogs, personal finance magazines, or most books from the library. It's not impossible for the average person to learn all these things, but it takes a lot of time. And I would think for most people that is time they'd rather spend with their families or on other hobbies. If you could pay me $100/hour for three hours and I greatly improve your situation (savings of $3,000/year or more) with little time commitment on your part, would you say that's a good deal?