How to Hire a Financial Planner You Trust
CFP Board CEO Kevin Keller joins our Your Money's Worth podcast to offer best practices for hiring a financial planner. Also, our hosts Ryan Ermey and Sandy Block discuss the nationwide coin shortage and the basics of hedging for inflation.
Ryan Ermey: Amid current economic chaos you may be considering financial advice, but who should you hire? How much should you pay them? And how do you know they're on the up and up? I sit down with CFP Board CEO Kevin Keller to get answers to these questions and more in our main segment. On today's show Sandy geeks out over a nationwide coin shortage and I delve deep into the ins and outs of inflation. That's all ahead on this episode of Your Money's Worth. Stick around.
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Ryan Ermey: Welcome to Your Money's Worth. I'm Kiplinger's associate editor Ryan Ermey, joined by senior editor Sandy Block. Sandy, we are talking about a pet topic of yours today. You must be excited.
Sandy Block: I love this story, and I had witnessed this story happening because, as I've mentioned before, I've been going back and forth on the road quite a bit for family issues. I stop at Dunkin Donuts often, because I need to caff up, and every time I stop at a Dunkin Donuts or gas station or anything, there's a sign saying, "Please use exact change." It's everywhere. If you get out at all, you'll see this.
Sandy Block: If you talk to the banking people they'll say, "It is not a shortage. It is a coin disruption." But the fact of the matter is, the retailers do not have enough. They can't make change. It's because people are not spending cash. It's a pandemic thing. First, it was toilet paper. Then it was yeast, Clorox wipes, now it's quarters and dimes and nickels. People are not making cash purchases. They're buying things online or when they do go out, they're using credit or debit cards because they feel like that's safer.
Ryan Ermey: I mean, yeah. Who wants to deal with dollars and cents that everyone has had their grubby hands on?
Sandy Block: Right. And so there's several things going on. One is that some retailers are rounding up. If you go to Kroger's and you make a cash purchase, they'll round up the amount and add the excess to a store loyalty card, if you have one or donate it to charity. Now, the U.S. mint actually put out a press release calling on Americans to spend that change, to empty their sock drawers, and couches and be a Patriot. Be a good American and get your quarters and dimes out and spend them and get that money back in circulation.
Sandy Block: So, I'm working on a story about this. As I said, I'm kind of really into it, and I have a few suggestions. One is it used to be if you walked into your bank with a pile of change they would look at you like, "Please leave." But now they want that change, so lots of banks and community banks and credit unions are more than happy to roll up your change. One Wisconsin bank even offered $5 for every $100 in coins. That was so popular that that promotion has ended.
Ryan Ermey: Yeah. I saw that a couple of banks were giving generous offers for the coins, and if people can smell free money all of a sudden it works.
Sandy Block: Oh, yeah, yeah. There were a couple of Chick-fil-As that were offering a free sandwich if you brought in coins, and that's ended too, but keep your eyes out. The bankers tell me there may be more incentives to come if the coins don't materialize, but a couple. So if you go to the bank, turn in this change that's piling up, put it in your emergency account, pay off your credit card or debt or donate it to charity. Put that money to work, because it's not doing anything for you in your couch or your sock drawers. The other thing you can do, and you've probably seen these, Ryan. Have you ever seen these Coinstar kiosks in the supermarkets?
Ryan Ermey: Yes. Although I seem to remember that you used to have to pay some kind of a surcharge in order to get your money.
Sandy Block: Well, here's the thing. You still do. If you've just want cash for your coins, they'll charge you 11.9%, which is ridiculous. But if you opt for a gift card, you get 100%, no fees, and they have gift cards from Amazon. That would be the one I would do, because then you can kind of use it anywhere. Lowe's, Home Depot, Starbucks. So if you choose the gift card, you basically get 100%. Coinstar will also let you deposit your change in the account of a participating charity, so we'll put the link so you can do more on that in the show notes. But if you've got a lot of coins sitting around folks, spend that money people.
Ryan Ermey: Roll them up, bring them in.
Sandy Block: Roll them up and spend them.
Ryan Ermey: Some retailers will change you out, because they want the change now. So if you just have a bunch of coins and you don't even want to bother with the Coinstar thing, you want cash, you might be able to go into your... I think Dollar Tree was one or Dollar General.
Sandy Block: Oh, I bet. Because those are cash places for sure. Yeah.
Ryan Ermey: Right. So Dollar Trees have been posting signs saying, "We'll purchase your rolled up coins for cash."
Sandy Block: I mean, yeah. The larger issue here is that this is indicative of what we've written about in the past that's been accelerated by the pandemic, is that we are moving away from cash in general. This is just another sign, and I think certainly when you talk to younger people, "When was the last time you used cash?" They're like, "What's cash," right? So I think that this is a short-term problem. The long-term outlook is that we're just going to be using less and less cash for purchases and the pandemic has kind of accelerated that trend.
Ryan Ermey: So yeah, as you mentioned, we'll put everything up in the show notes. Of course, we have all kinds of coverage about the ramifications of a cashless world. So maybe that's something that we can talk about further on future episodes, but we'll see if what we got going on right now, we'll put that up in the show notes for you as well.
Ryan Ermey: Coming up, Sandy is with me in spirit as I interviewed Kevin Keller about how to find the right financial advice. Come right back.
Ryan Ermey: We are back, and in these uncertain times this may be the time that people are needing advice more than ever, so who better than Kevin Keller? He is the CEO of the CFP Board and he joins us now. Kevin, thank you so much for coming on.
Kevin Keller Thank you, Ryan, and happy to be here.
Ryan Ermey: So who should be considering a financial planner in general, and given the economic chaos brought on by the pandemic, are you seeing more people seeking advice?
Kevin Keller: Well, Ryan, first of all, that's two questions. The first question, who should be seeking advice? Those of us at CFP Board and the CFP community believe that everybody can benefit from competent and ethical advice. As it relates to kind of the chaos that we're in, the answer is yes. We are seeing more people seeking out advice. You write about this. We've been in a bull market tear for, what is it? 10 years or so now.
Kevin Keller: A lot of people think, "Well, I don't need anybody to help me with advice. The market's going up, I'm going to ride along with the market." But as you recall there in March, earlier this year when there was a fairly sizeable correction, people realized that the market doesn't always go up. And a CFP professional can play an important role in working with his or her clients. One of the things that we know is that those folks who enlist the help of a CFP professional to create a plan, they feel more confident. Our research shows this over and over. They have a higher sense of confidence than those who maybe are working with an advisor who's not certified.
Kevin Keller: The chaos that we're in, it's no secret. It causes stress and the certainty of at least knowing your financial position, knowing that you have your financial life in order, again, helps reduce that stress.
Ryan Ermey: Yeah. I mean, hear you. Keep an eye out for those double barrel questions. I am famous for them. So the pricing varies on advice. and we've always recommended going with the only financial planner rather than one who works on commission. What kind of pricing models are out there? And here comes the double barrel: What kind of model should people generally gravitate toward?
Kevin Keller: Well, if you step back, if we could, Ryan -- let's start with the fact that there is no free lunch and there is no free advice. So let's start with the fact that you're an individual. A lot of people think, "Oh, I'm not paying anything. I make investments and I don't pay my advisor. I don't have to pay anything." There is no free advice. Now, we at CFP Board are compensation neutral, and I would suggest maybe that... you said fee-only, I would suggest that the real F word is not fee-only, but is fiduciary. As you think about when you're selecting an advisor, you want somebody who's going to commit to be a fiduciary for you.
Kevin Keller: Look, financial products are complicated and many of them -- to your point, and I think implicit in your question is that there are embedded fees and it's hard to really know. So that's why we suggest, and the 87,000 people who hold CFP certification in the U.S. have committed to CFP Board to act as a fiduciary to their clients. That's the right F word, not fee-only. There are many fee-only folks out there. They do a great job.
Kevin Keller: You asked about what are some of the pricing models? We're seeing some innovation of late, typically fee-only planners. And even, in fact, others as well charged on assets under management, so clients would pay 1% of assets under management. But as more and more planners out there look at how they want to serve their clients, there are a lot of clients who don't have a big asset base upon which an advisor can provide that advice. So we're seeing monthly subscriptions, we're seeing quarterly fixed arrangements or a fixed annual fee. Certainly there are assets under management, and there are other ways as well. But again, the key being, make sure that you're working with a fiduciary.
Ryan Ermey: Now, I remember when I first started at Kiplinger, I was fact-checking a lot of these stories and it was like alphabet soup anytime you were talking with about financial planners, you had CFPs and CFAs and ABCs or whatever. We've always recommended going with CFPs, in particular. What generally separates a CFP from the kind of alphabet soup titles, and how can I go about finding one?
Kevin Keller: Well, the FINRA is the regulator for Wall Street, essentially. They maintain a list of designations and certifications. That list, Ryan, has over 200 different designations in financial services alone. And you're right, that not all certifications are the same. Some of these certifications on that site, it's a weekend class in an open book test, but CFP certification is rigorous. It's a high stakes exam. Typically, a person prepares anywhere from 18 to 24 months at a minimum. We have a three year experience requirement.
Kevin Keller: So, what separates CFP from the others, and a couple of those that you mentioned, there are some good, we're not talking badly about all, but look, we have a code of ethics and there are consequences when an individual doesn't live up to that code of conduct. Then their competency requirements, the education, it's essentially like six college level classes along with a rigorous exam that 40% of the people who take actually fail and don't make it through. Then we have the experience requirements. So it's a combination of the competency and the ethics that set CFP apart.
Ryan Ermey: And you mentioned that CFPs are held to a fiduciary standard, for people who might not be familiar with that term, that basically just means that they have to act in the client's best financial interest. Right?
Kevin Keller: That's absolutely right. Yet, some recent research that we did at CFP Board showed that people know they need one. They know they need one, but oftentimes they're not really sure why they need one. Really there are three components of a bonafide fiduciary standard. The first is a duty of loyalty, so when an individual is a fiduciary on your behalf they're pledging a duty of loyalty to do, as you would say, what's in your best interest. But there's also a duty of care that goes along with a fiduciary standard, with that duty of loyalty. That duty of care means that they're going to do the rigorous background, that they're going to be prepared, that they're not going to provide advice on things that they're not qualified to do. So, that's the second piece.
Kevin Keller: Then there's a third duty that often isn't talked about, but it's a duty to follow client instructions. So those three pieces, the duty of loyalty, duty of care and the duty to follow all make up a fiduciary. And again, the 87,000 plus advisors in the U.S., who are CFP-certified have all pledged that commitment to CFP Board.
Ryan Ermey: Something that we briefly touched on earlier here was that there are some pricing models that favor young people. This is something that we like to touch on in the podcast, because a lot of young people who might be listening out there may not have a lot of money. They probably feel like they're in need of advice, but they may not think that they're able to afford it. Are planners willing to work with these sorts of clients and help them keep costs low?
Kevin Keller: Some planners specifically target this area. You may be familiar with the XY Planning Network, which largely offers advice on a monthly retainer fee. So depending on the complexity of an individual's financial life, it may be as little as $99 or $149 a month, then you've got somebody you can talk to. These are people typically who are younger, who probably have student loans, just like many younger folks do who might not yet have accumulated wealth, but they may need, and frequently do need advice more than somebody who's more established and may have more means. So there are planners out there who work with these different business models, and people should, our listeners and your readers shouldn't just think because I don't have a big portfolio that an advisor won't work with me.
Ryan Ermey: All right, so you go out, you find the planner, you get someone who's a CFP, who's a fiduciary. You find a pricing model that makes sense to you. I guess the last step is how do you kind of do your due diligence to make sure that you're getting the best person for you.
Kevin Keller: Yeah. Well, thank you for that question. I think I should mention that, certainly one way to start that search is with the CFP website, LetsMakeAPlan.org. A little plug there, but look, let me tell you what you shouldn't do. You can ask your friends and neighbors for recommendations, but that's probably a place to start, not a place to stop right? Don't end there, because I'll tell you, my mother-in-law, she had an advisor. I don't get involved obviously, but my mother, they had an advisor, Jerry. Their guy was Jerry, and Jerry was from church. Jerry sold them products that were completely inappropriate. They didn't understand the complexity.
Kevin Keller: So look, here's what I would say, on our website there are 10 questions to ask your financial advisor. Arguably, the most important decision an individual will make is who is going to be their advisor, much more important maybe than the decisions that they'll make once they're engaged. Those 10 questions are a great place to start.
Kevin Keller: A couple other things. Brokercheck, it's a website that is available, and every broker in the United States is listed there. Folks should take a look and make sure to see if there's a disciplinary history. My mother-in-law's adviser, Jerry, after I heard what was going on I looked and of course Jerry had a long list of-
Ryan Ermey: Not Jerry from church.
Kevin Keller: Jerry from church did. So look, word of mouth is important. CFP, letsmakeaplan.org, Brokercheck, these are all important things that folks should take a look at before they engage that planner. My last suggestion is don't just talk to one person, feel free to shop around and find somebody who you think fits your circumstances or somebody who you feel like understands and works with clients like you.
Ryan Ermey: I'll tell you what, shop around might as well be the tagline of this podcast. Well, we will have links to all of the sites that Kevin mentioned, as well as to the story that he is quoted in about finding advice that Sandy wrote in Kiplinger's Personal Finance. It's up on the website now. I miss you, Sandy. And in the meantime, Kevin, thank you so much for coming on and we'll have to have you back on soon.
Kevin Keller: Great, thanks.
Ryan Ermey: After the break, find out why investors hate inflation and how you can hedge against it.
Ryan Ermey: We are back, and you and I are both back, Sandy. We're here and before we go, an 'Explain Like I'm Five' segment. Today I'm talking about inflation, Sandy. It's everyone's favorite subject.
Sandy Block: That's right. And it's also very controversial, because whenever we write a story saying that inflation is historically low we'll get a ton of e-mails from people saying, "Hey, I just went and bought some hot dogs and they've gone up a lot." So to some extent it's in the eye of the beholder, but I think there are a lot of really macro issues effected with inflation that you're going to tell us about. Right?
Ryan Ermey: I will tell you about it. And I'll tell you about your hot dogs, too. And before I get into it, might I just say a little bit of inside journalism baseball. I wrote one of my favorite leads ever for this story. So I likened investor's relationship with inflation to the relationship between Diahann Carroll and Joan Collins on "Dynasty." A lot of animosity there, but my editor didn't think that people would get the reference, but the conceit of that... and I changed it to "Dallas," which I suppose more people...
Sandy Block: I can't believe you got the reference. I mean, you weren't even born.
Ryan Ermey: I had to do a little bit of research.
Sandy Block: There you go.
Ryan Ermey: But there is one. Well, look, there's like some clips in, let's call it the gay canon from "Dynasty."
Sandy Block: Oh, totally. All that hair? Shoulder pad? Totally.
Ryan Ermey: There's a scene between the two of them where Joan Collins is serving Diahann Carroll champagne, and Diahann Carroll goes, "It's burned. It was obviously frozen in the bottle at some point."
Sandy Block: And Blake? Come on.
Ryan Ermey: Anyway, I never watched "Dynasty," but I'm familiar with it. The idea was that if you were old enough to remember "Dynasty" or "Dallas"...
Sandy Block: You we're old enough to remember inflation. Exactly.
Ryan Ermey: You're old enough to remember when it was a big deal.
Sandy Block: Huge deal.
Ryan Ermey: It was a humongous deal back in 1980, I think that was the record when inflation crested 13% year over year. These days it's been much, much lower. So let's start with the five-year-old basics here. Inflation is basically just the rising cost of goods and services over time. It's generally expressed as a percentage, as we just pointed out there. And the yardstick that most people use is called the consumer price index (CPI), which tracks the price of a basket of various consumer goods. So if we're talking about a 13%, that's a 13% year over year gain in the CPI, the main causes of inflation either demand increases faster than production, which drives up the cost of goods and services, or for whatever reason, production prices in the economy go up and then businesses pass those prices through to consumers.
Ryan Ermey: Now, the reason that there's a Diahann Carroll-type relationship with inflation, with investors is that it erodes the value of your money. That quarter in your pocket used to be able to buy a cup of coffee and now you'll need nine more of them. more likely you're paying on your credit card as we discussed, but it's easy to see why retirement investors hate inflation-
Sandy Block: They hate it.
Ryan Ermey: Especially because you spend your life building up your nest egg, and by the time you're ready to live on it and spend it your dollars don't go as far as they used to.
Sandy Block: That's right. And a lot of retirees aren't getting raises like workers. There's this theory that inflation actually benefits workers, because you get raises. This doesn't account with journalism, but with other people you get raises when prices go up. But a lot of retirees are living on fixed incomes, so maybe they have a pension that doesn't change or an annuity that doesn't change, so the value of those things declines as prices go up. So believe me, from the mail I get, retirees know how much everything costs.
Ryan Ermey: So over the past 15 years, annual inflation has averaged about 1.9%, which is well below the 3.4% average annual increase since 1950. So inflation has been low for a while, and no one really quite understands the full picture for why this is happening but there are a few factors that are definitely contributing. One is that there is an aging population and older folks are less likely than younger people to pump money into the economy, and advances in technology, which have made businesses more productive while labor costs have remained relatively low. Plus e-commerce, if you think about how you shop for things these days, now that everything is available for sale online there's a lot of pressure on businesses to keep prices low.
Sandy Block: Huge price pressure. That's right.
Ryan Ermey: So some things are going on now that are interesting. In the wake of the pandemic, which of course brought record unemployment, a recession, a destruction of consumer demand, we're not likely to see a big acceleration in inflation anytime soon. June was a year over year increase of just 0.6% in the CPI. So that's really not a whole lot, but, and this is a big but, Sandy, we think that you should still probably hedge if you're an investor. We think that you should prepare your portfolio for the possibility of inflation. There are a couple reasons for that. If you're a five-year-old and you understand everything you need to know about inflation, now you can walk off, but we still-
Sandy Block: But you're going to get older, five-year-old, and inflation could come back to haunt you, so.
Ryan Ermey: That's right. So first of all, historically inflation has reared its ugly head at unexpected times, and there are some times that inflation could be coming a couple of years down the line. For one thing, the Fed does want it to pick up. The Fed is going to make efforts. They want about a 2% per year inflation target. They want that to be like a long-term average is sort of the best and most easily understood way to put it. So if we have it really low for a while, like let's say it's at 1% for a while, they won't mind a few years at 3% to offset it. The other big thing is that the Fed has been pumping a ton of money, the US government's been pumping a ton of money into the economy in order to maintain or drive up demand. Generally, an influx of money into the economy is thought to be inflationary.
Sandy Block: Inflationary, that's right. Yeah.
Ryan Ermey: Now, this didn't necessarily play out in the years following the global financial crisis. That's because they flood the economy with money and that goes to the banks, and the banks were reluctant to lend, and consumers and businesses were reluctant to spend. So how this all plays out remains to be seen. But the bottom line is, it never hurts over the longterm, especially if you're a longterm investor, to protect your portfolio against inflation. So a couple of quick hits here on how you can do that.
Ryan Ermey: One is called TIPS or Treasury-Inflation Protected Securities. Now, the value of these notes rise in step with CPI, and because the market is currently pricing in low inflation expectations, TIPS are really cheap right now. So right now the way that you determine if it's cheaper, the way that you determine expectations is what's called the break-even point, the difference in yield between a 10 year treasury and 10 year TIPS. Right now, the difference is 1.6 percentage points, implying that investors expect 1.6% annual inflation over the next 10 years.
Ryan Ermey: So if it's over that, if it's more than 1.6 over the next 10 years, and there's a pretty decent chance that that's going to be the case, TIPS are going to beat treasuries. So TIPS you can buy directly from Uncle Sam, TreasuryDirect.gov, which we'll put in the show notes. We also like the Vanguard Inflation Protected Securities Mutual Fund (VIPSX), so check those out.
Ryan Ermey: Floating rate debt as another thing. Inflation and rising interest rates tend to go hand in hand, floating rate loans are pegged to short term interest rate benchmarks that rise along with interest rates. These can pay off in an inflationary environment. I mean, they're a little bit risky sometimes are generally sub investment grade credit rating on these loans, but still worth looking at. The Invesco Senior Loan ETF (BKLN) is one of the Kiplinger ETF 20, that's our list of our favorite ETFs.
Ryan Ermey: Stocks have historically outperformed inflation. Right now we're urging people to consider international names because generally rising inflation in the U.S. results in a weaker dollar, which is a boon for U.S. investors. I feel like I'm doing a little bit more explaining here, but-
Sandy Block: This five-year-old is getting bored.
Ryan Ermey: Yeah, I know. Well, the deal is, if the dollar is getting weaker, then you get more dollars for your profits in foreign currencies, so that's a good thing. A couple more quick ones. Real estate. Generally, if things are inflating, if you own REITs, if you own real estate landlords can raise rents right alongside inflation, so those are generally considered one second rise alongside it.
Ryan Ermey: Gold is often touted as an inflation play. It's certainly been on a tear recently, but the longterm record against inflation is only kind of so-so from enrolling periods from 1973 through May 2020 gold only beat the CPI about 51% of the time. So kind of whatever. Then Fidelity Strategic Real Return (FSRRX) is the last hedge I'd want to recommend. It's sort of a one stop shop. It holds TIPS, footing rates, commodities, real estate, all in one basket. They tested it back to 1973, and it would have beaten inflation 80% of the time.
Ryan Ermey: So if you want to combat inflation over the longterm in your portfolio, consider all of those things. And yes, Sandy, back to the hot hotdogs quickly.
Sandy Block: The hot dogs.
Ryan Ermey: The cost of food has risen-
Sandy Block: Yes, it has.
Ryan Ermey: Much more than the total CPI. So if we're going by June's numbers, the total CPI, 0.6%, but the cost of food has risen by 4.5%. That's because, generally driven by the rising costs of meats, poultry, fish and eggs.
Sandy Block: Some supply chain disruptions, all kinds of sort of pandemic related things are causing food prices to go up, I think.
Ryan Ermey: Right. But the CPI is an average, so it takes a lot of things into account. So the thing that's dragging it down a lot right now is fuel prices, energy prices, gas is down 23.4% over the same period.
Sandy Block: But just on that point, Ryan, then I won't beat this anymore, because our five-year-old has gone out to play.
Ryan Ermey: He's going... yes.
Sandy Block: But a lot of seniors really reject the way that we measure costs and how it affects the annual raises they get in Social Security, because they say the things they spend on are not average. They don't drive that much, but they spend a lot on healthcare, which has always moved a lot faster, so there's this very interesting discussion, whether they should have a whole different CPI for seniors because of the things that they spend money on. They're not really benefiting from the fact that you can get a TV for a whole lot less than you used to, or that computers are cheaper. The things they spend money on, which tend to be mortgages and healthcare, go up much faster than the regular rate of inflation.
Ryan Ermey: So anyway, come for the references to 1980s prime-time soap operas, stay for the in depth analysis of inflation. Yeah, I hope to see you next week. We'll come with some livelier stuff maybe.
Ryan Ermey: That'll wrap things up for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit kiplinger.com/podcast. You can stay connect with us on Twitter, Facebook or by e-mailing us at email@example.com. And if you liked the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.
Links and resources mentioned in this episode:
- America Lurches Toward a Cashless Future
- Slate.com: Everything You Need to Know About the National Coin Shortage
- Find a Financial Planner You Trust
- CFP Board's LetsMakeAPlan.org
- FINRA's BrokerCheck
- Protect Your Portfolio From Inflation
- Rebound in Gasoline Prices Kicks Up Inflation Temporarily