How to Choose a Financial Planner Adviser Annual Fees Your Investm
How to Choose a Financial Planner, Adviser - Annual Fees, Your Investm...
This widow had a reason to worry. She had been sold two expensive annuities — just about the last thing a 90-year-old needs — and the rest of her portfolio consisted mostly of risky stock funds and junk bond funds. The planner was making a fortune as the widow's dwindled.
R. Kikuo Johnson What is your financial planner doing with your money? A natural reaction would be to file this story next to that of Bernie Madoff or other brazen crooks. But that would be too easy. Like every I know, the widow's adviser really seemed to believe that she was doing her client a great service. In fact, she considered her a dear friend. My point is this: Bad advice is epidemic in my industry, and it doesn't come only from villainous fraudsters such as Madoff. It also comes from pleasant, empathetic folks who are merely responding predictably to my industry's perverse incentives and self-serving ethical standards.
We financial planners are masters at persuading ourselves that what's in our best interest also happens to be the moral thing to do. By and large, we're good people, which is why we can be so convincing — and so potentially dangerous to your money.
I spent 20 years in the business world as a corporate finance officer before becoming a personal planner more than a decade ago. I started my practice because I knew that a lot of the advice families got was mediocre or worse, and I hoped that I could help counteract that.
That's also why I write very candidly about how this profession works, and what you should know about it before you seek advice from me or any other planner. (This article isn't a plea for business: I have a long waiting list and don't need to advertise.)
For two years I penned these insights anonymously in a column called The Mole in Money magazine; today I write for the website CBS MoneyWatch and elsewhere, often giving an insider's view of my industry and how it treats its clients.
Sad to say, the worst cases often involve older clients. We planners target you because you have the largest nest eggs, and the more money we manage, the bigger our take. Also — and let me be frank here — you often view your money more emotionally than younger people do, because you have so much at stake. And that makes you vulnerable. What planners want from you I'm a certified financial planner (CFP) and a member of the Financial Planning Association (FPA). Roughly 70 percent of the FPA's 23,800 members are CFPs; earning the designation typically requires months of study to pass a reasonably tough exam. About half of the members have been in business at least 15 years. As an organization, we want to establish planning as a true profession, one seen in the same light as medicine, the law and accounting. But that's not our only motivation: Planners have financial aspirations of our own. We make money by getting it from you. This isn't evil in its own right. But it is a conflict of interest, and it pervades everything we do.
Help you build a diversified, low-cost investment portfolio — and then stick with it.
Make sure you have the lowest-cost insurance coverage for your needs. Help you make the best moves regarding Social Security and your pension. Reduce taxation on your investments.
Help you pass assets to your heirs.
Initials galore
We spend a great deal of effort trying to win your trust. A CFP is a serious designation, but that's not true of all the strings of initials after our names: At least 100 financial designations are in circulation, each meant to convey expertise in something. Some prove only that the planner passed an easy exam. One organization, representing the Certified Retirement Financial Advisor (CRFA) designation, solicited me in 2007 to obtain both this “prestigious designation” and to sell me the names and contact information for older people who might want to buy an annuity. (CRFA spokesperson Lynda McColl says that the organization is under new leadership and has not sold names since 2007; its current certification requirement consists of a 100-question test.)
Other businesses will anoint us (for a fee) with even loftier distinctions. For instance, I've received an America's Top Financial Planners award from the Consumers' Research Council of America.
Forbes.com found that the council's Washington, D.C., address was a rented mailbox, and its vetting process is questionable, to say the least: To memorialize my honor, I called the 800 number the council gave me and received a $183 acrylic plaque — bearing the name of my dachshund, Max Tailwag’er. After I wrote about this in my MoneyWatch column, the council contacted Forbes.com (but not me) to demand the plaque’s return.
And there’s the email I recently got from AmericasTopAdvisors.com, telling me I was among the top 1 percent of advisers in the United States. Recipients of this honor are chosen via “peer nomination, industry recognition, or significant press mention,” the message said. To earn this accolade, I had only to pay an annual fee of $995 (minus a 20 percent discount). How we make money drives what we sell
Advisers make money in two main ways. You need to understand which method your planner has chosen, because that helps explain his or her behavior. We either get a commission to sell you a financial product, or we charge an asset-based fee — typically 1 percent annually of the assets you let us manage.
Commissions can range from a recurring annual fee of 1 percent for some kinds of mutual funds to as high as 10 percent for certain annuities. If we sell you a $100,000 annuity with a 10 percent commission, we get a $10,000 check.
You can’t see this commission the way you can see, for example, a real estate broker’s take when you sell a home. The size of the commission is often reflected only in the penalty you pay if you try to get your money back before the insurance company has had time to recoup the commission.
Obviously, a planner who works on commission would want to sell you products that yield the highest commission — typically, load-carrying mutual funds, hedge funds, private investments and a host of insurance investments, ranging from annuities to universal life.
A commissioned planner at a big financial firm like Merrill Lynch, Wells Fargo Advisors or MorganStanley SmithBarney might also be under pressure to make a sales quota or to sell particular investment products the firm wants to sell, whether or not they’re the best investment for you. This is not to say that all commission-based planners are out to rip you off; they’re not.
And if you don’t have more than $100,000 or so to invest, commission-based planners may be the only ones who will take your business. But the conflict of interest is particularly stark in the commission business.
Fee-based planning
Another model is fee-based financial planning, which has been gaining ground on the commission model. (About one-third of FPA members say they work for fees only, no commissions.) In theory, charging you 1 percent of your assets each year aligns our interests with yours: We have no incentive to sell you a particular investment just because it brings us a higher commission than another, and if your portfolio grows, so does our fee.
But there are still conflicts. It encourages us to capture as much of your money as we can. That’s why few of us will ever tell you to pay off your mortgage: Using $100,000 to discharge a loan rather than investing it could cost us $1,000 a year in fees.
The fee model also limits where we advise you to invest, since we’ll favor putting you in products set up to pay us automatically each quarter. Few planners will tell you about, say, a higher-paying certificate of deposit at a bank, because banks don’t pay planners. You’ll have to find such investments yourself. (DepositAccounts.com and Bankrate.com both let you compare yields for accounts at banks and credit unions.)
How to Choose a Financial Planner
Beware the good adviser who does bad things with your money
A widow just shy of her 90th birthday recently asked me to review her . This happens a lot: Much of my practice involves giving second opinions to other financial planners' clients. See also:This widow had a reason to worry. She had been sold two expensive annuities — just about the last thing a 90-year-old needs — and the rest of her portfolio consisted mostly of risky stock funds and junk bond funds. The planner was making a fortune as the widow's dwindled.
R. Kikuo Johnson What is your financial planner doing with your money? A natural reaction would be to file this story next to that of Bernie Madoff or other brazen crooks. But that would be too easy. Like every I know, the widow's adviser really seemed to believe that she was doing her client a great service. In fact, she considered her a dear friend. My point is this: Bad advice is epidemic in my industry, and it doesn't come only from villainous fraudsters such as Madoff. It also comes from pleasant, empathetic folks who are merely responding predictably to my industry's perverse incentives and self-serving ethical standards.
We financial planners are masters at persuading ourselves that what's in our best interest also happens to be the moral thing to do. By and large, we're good people, which is why we can be so convincing — and so potentially dangerous to your money.
More on Investing
– Receive access to exclusive information, benefits and discounts. Who I amI spent 20 years in the business world as a corporate finance officer before becoming a personal planner more than a decade ago. I started my practice because I knew that a lot of the advice families got was mediocre or worse, and I hoped that I could help counteract that.
That's also why I write very candidly about how this profession works, and what you should know about it before you seek advice from me or any other planner. (This article isn't a plea for business: I have a long waiting list and don't need to advertise.)
For two years I penned these insights anonymously in a column called The Mole in Money magazine; today I write for the website CBS MoneyWatch and elsewhere, often giving an insider's view of my industry and how it treats its clients.
Sad to say, the worst cases often involve older clients. We planners target you because you have the largest nest eggs, and the more money we manage, the bigger our take. Also — and let me be frank here — you often view your money more emotionally than younger people do, because you have so much at stake. And that makes you vulnerable. What planners want from you I'm a certified financial planner (CFP) and a member of the Financial Planning Association (FPA). Roughly 70 percent of the FPA's 23,800 members are CFPs; earning the designation typically requires months of study to pass a reasonably tough exam. About half of the members have been in business at least 15 years. As an organization, we want to establish planning as a true profession, one seen in the same light as medicine, the law and accounting. But that's not our only motivation: Planners have financial aspirations of our own. We make money by getting it from you. This isn't evil in its own right. But it is a conflict of interest, and it pervades everything we do.
What Planners Can Do for You
Help you define your financial goals.Help you build a diversified, low-cost investment portfolio — and then stick with it.
Make sure you have the lowest-cost insurance coverage for your needs. Help you make the best moves regarding Social Security and your pension. Reduce taxation on your investments.
Help you pass assets to your heirs.
Initials galore
We spend a great deal of effort trying to win your trust. A CFP is a serious designation, but that's not true of all the strings of initials after our names: At least 100 financial designations are in circulation, each meant to convey expertise in something. Some prove only that the planner passed an easy exam. One organization, representing the Certified Retirement Financial Advisor (CRFA) designation, solicited me in 2007 to obtain both this “prestigious designation” and to sell me the names and contact information for older people who might want to buy an annuity. (CRFA spokesperson Lynda McColl says that the organization is under new leadership and has not sold names since 2007; its current certification requirement consists of a 100-question test.)
Other businesses will anoint us (for a fee) with even loftier distinctions. For instance, I've received an America's Top Financial Planners award from the Consumers' Research Council of America.
Forbes.com found that the council's Washington, D.C., address was a rented mailbox, and its vetting process is questionable, to say the least: To memorialize my honor, I called the 800 number the council gave me and received a $183 acrylic plaque — bearing the name of my dachshund, Max Tailwag’er. After I wrote about this in my MoneyWatch column, the council contacted Forbes.com (but not me) to demand the plaque’s return.
And there’s the email I recently got from AmericasTopAdvisors.com, telling me I was among the top 1 percent of advisers in the United States. Recipients of this honor are chosen via “peer nomination, industry recognition, or significant press mention,” the message said. To earn this accolade, I had only to pay an annual fee of $995 (minus a 20 percent discount). How we make money drives what we sell
Advisers make money in two main ways. You need to understand which method your planner has chosen, because that helps explain his or her behavior. We either get a commission to sell you a financial product, or we charge an asset-based fee — typically 1 percent annually of the assets you let us manage.
Commissions can range from a recurring annual fee of 1 percent for some kinds of mutual funds to as high as 10 percent for certain annuities. If we sell you a $100,000 annuity with a 10 percent commission, we get a $10,000 check.
You can’t see this commission the way you can see, for example, a real estate broker’s take when you sell a home. The size of the commission is often reflected only in the penalty you pay if you try to get your money back before the insurance company has had time to recoup the commission.
Obviously, a planner who works on commission would want to sell you products that yield the highest commission — typically, load-carrying mutual funds, hedge funds, private investments and a host of insurance investments, ranging from annuities to universal life.
What Planners Can' t Do For You
Pick winning investments to beat the market. Build wealth without risk. Let you in on any deal that looks too good to be true. How sales quotas affect youA commissioned planner at a big financial firm like Merrill Lynch, Wells Fargo Advisors or MorganStanley SmithBarney might also be under pressure to make a sales quota or to sell particular investment products the firm wants to sell, whether or not they’re the best investment for you. This is not to say that all commission-based planners are out to rip you off; they’re not.
And if you don’t have more than $100,000 or so to invest, commission-based planners may be the only ones who will take your business. But the conflict of interest is particularly stark in the commission business.
Fee-based planning
Another model is fee-based financial planning, which has been gaining ground on the commission model. (About one-third of FPA members say they work for fees only, no commissions.) In theory, charging you 1 percent of your assets each year aligns our interests with yours: We have no incentive to sell you a particular investment just because it brings us a higher commission than another, and if your portfolio grows, so does our fee.
But there are still conflicts. It encourages us to capture as much of your money as we can. That’s why few of us will ever tell you to pay off your mortgage: Using $100,000 to discharge a loan rather than investing it could cost us $1,000 a year in fees.
The fee model also limits where we advise you to invest, since we’ll favor putting you in products set up to pay us automatically each quarter. Few planners will tell you about, say, a higher-paying certificate of deposit at a bank, because banks don’t pay planners. You’ll have to find such investments yourself. (DepositAccounts.com and Bankrate.com both let you compare yields for accounts at banks and credit unions.)