The decision to hire a financial planner or adviser (or to keep the one you have) is not an easy one. For all the talk of regulation within the industry, there are very few common standards, so it's easy for someone to say they are a financial adviser or to obtain many of the profession's meaningless credentials, for that matter.
Over the last 20 years or so, firms like mine have proven that you can be objective, independent and true client fiduciaries (serving the client's financial interests first and foremost) and do well by doing things the right way. This has frightened the traditional players (Wall Street firms, banks, insurance companies) and encouraged them to try to offer the same types of services to their clients. However, they have avoided the requirement to be client fiduciaries as their existing operations allow them to say they are financial advisers when in fact they are still licensed as salespeople and earn income from conflicted advice.
Why, you might ask? Quite frankly, there's way more money to be made by creating a financial plan for a client and then implementing that plan with commissionable products such as annuities, insurance policies, high-expense mutual funds, etc.
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This creates a conundrum for the typical investor looking for unbiased, conflict-free advice, so I've created a 20-point checklist to help people make the right decision when hiring a financial adviser or planner. (If you'd like a copy of the full checklist, I'd be happy to send it to you.)
Following are three of the most important criteria:
1. The firm must be a fee-only firm.
In other words, the firm and the advisers receive all their compensation directly from their clients and not from any other source. They do not receive commissions from mutual fund companies, insurance companies, brokerage firms or any other provider.
Why is this so important? You cannot be in the business of providing objective advice and also sell a product that fits that advice. Have you ever gone into a Lexus dealership and thought maybe they would recommend a BMW after listening to your preferences in a car? Of course not. Now, if you hired an "automotive consultant" to help you decide which car to buy based on your criteria, you'd expect that person to give you the best answer for your situation and help you find the best deal, all things considered. Imagine how you'd feel if your consultant recommended a Hyundai Genesis, and you found out that he or she received a $500 finders fee from the dealer after you drove off the lot.
In my world, it's a given that people come to us for objective advice. Most don't know or have the inclination to make the decision on this mutual fund versus that or this insurance policy versus that one or which strategy is the best for retirement, and they rely heavily on their adviser for unbiased advice.
2. You did not meet this adviser at a dinner "seminar" or an "educational series" held at a local college or university (and not presented by university staff).
Both of these activities fall into the "con game" category and are vestiges of the "advice by brokers" world. I'm sure you've gotten invitations to a dinner at a nice local restaurant sponsored by an adviser or advisory firm, or maybe you've received a multi-page brochure on "Successful Money Management" or some such nonsense with a University logo on it.
Unfortunately, most of these seminars are in fact packages purchased by commissioned advisers or brokers who then go to the school to hold the seminar on their campus. It looks like something the university put together, but it most often is not. Many times, the presenters follow up with the attendees to solicit them as clients. I cannot believe that a quality institution would allow these, as it amounts to an implicit endorsement in my opinion.
In reality, you should have more to do in life besides go to a financial seminar anyway, but let's assume you have a keen interest in learning more about retirement planning or investments, and you do attend. Rule number one: don't buy anything. Rule number two: remember rule number one, and enjoy your meal. And take anything said there as potentially highly conflicted advice.
3. The adviser exhibits a consistent focus on keeping your expenses and fees low.
I know you've heard about this ad nauseam, and I don't want to beat a dead horse, but most people don't realize the carelessness of many advisers regarding this point.
One of my newest clients hired us after many years at a Wall Street firm. When we reviewed his statement together, I was shocked to find that he was being charged 1.5% for the advisers fee, plus the underlying mutual fund management fees, some as high as 1.5%. So, his costs for someone to assemble a portfolio of high-cost funds was at least 3% per year.
Considering that many fee-only advisers charge no more than 1% as an advisory fee and implement portfolios with firms such as Vanguard, T. Rowe Price and Dimensional Fund Advisers, who have average expense ratios of less than 0.4%, a typical brokerage firm client could save at least 1.5% per year and get better advice. On a $100,000 portfolio, that's a savings of $45,000 over 30 years, assuming no growth.
Yes, Virginia, fees do matter.
As I said, there are several additional items you should watch out for when selecting an adviser, such as demonstrated competence, attitude and philosophy, experience and worthwhile credentials. The bottom line is that this is your money, so choose wisely.
Doug Kinsey is a partner in Artifex Financial Group, a fee-only financial planning and investment management firm based in Dayton, Ohio.
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