Do you need a financial adviser?
By Bob Moeller
WEAC Member Benefits
November 2005
Financial
Planning Seminars
Achieving
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At some point in their "wealth accumulation" phase, many members start to think about the need to have a financial adviser. They frequently ask me if I think they need one and if I can recommend one near where they live.
First, I want to emphasize I believe most people can greatly simplify their financial decisions and do quite well without an adviser. The investment world has done much to assist people who want to simply make a few decisions and get on with life. Such decisions would be along the lines of:
- I'm going to get into a good, low-cost TSA, IRA, etc.
- I'm going to allocate my investments between some stable "safe" investments, a small number of index funds, etc.
But many people don't make it simple. They accumulate a hodge-podge of investments, some good and some not so good. They don't have a firm grasp of what they are doing and why. It gets to be a real burden to direct their own financial life and they are not quite sure they know enough to do it right.
So they turn to insurance "financial advisers" or broker "financial advisers" or bankers. They get advice that they may not understand. Most often they do not know what the advice is costing them.
Costs aren't so important when your investments are going up 12% a year, but when interest rates are low, and the stock market is going nowhere, costs get to be very important. With 10-year treasury bonds paying only 4.3% per year you can't justify paying 1% per year for an adviser to recommend a mutual fund that charges you 0.7% to purchase treasury bonds.
When you seek out financial advice the first rule to remember is nothing is free. (Even my service is not totally free; you pay union dues for it.) There are basically three approaches to charging you.
First is commissions. Insurance agents marketing life insurance or annuity products rely on commissions for their income. Quite frequently they will not have your best interests in mind. Similarly, stock-brokers or others selling mutual funds rely on commissions and may be more concerned with their rewards than yours.
Since many people don't like to pay commissions, salespeople devised a different way to extract their fees.
Calling themselves "fee only" planners, they charge a percentage of your assets to manage them. In brokerage houses these are called wrap accounts, and brokers love them. For a fee of say 1% to 1?% per year of your total account value they will shun commissions. In stock trading, heavy traders might save money using this method, but most members do not.
Sometimes your money will be invested in an in-house type mutual fund where your holdings will be small amounts of many different companies selected by computer for hundreds of customers.
The third method of paying for advice is to pay the adviser on an hourly basis.
There is of course the risk that the adviser will dawdle and charge you for too many hours. Still, this method is one I most often recommend. The main safeguard you must insist on is that any time you don't like the deal you can stop. Fees here might vary, but expect something in the area of $150 an hour, more if your services require complicated, expensive outside resources.
I believe that once your program is properly set up you can do well with just a few hours of consultation a year.
Finally, many advisers make a lot of money by making you pay for an initial review. For example, American Express has been cited in publications for selling the review and then making sure the review proceeded to recommend mostly mutual funds on which American Express and its agents made more.
The best solution? Managing your money takes time but is necessary if you want to become financially secure. Realize that you can adopt some basic principles and simplify the process. Resolve that you will read a little each month about financial matters. Make sure you never make a decision on investments or on whom to use for advice without understanding just how much it will cost vs. what you might gain.
If you do wish to utilize a financial adviser, remember one key fact: Financial advisers come in all guises. There is no official requirement for training, licensure, etc. There are several designations, meaning that some training was taken. You've seen titles using CLU, CFP, etc. CFP, for Certified Financial Planner, does mean extensive study and testing was done before the person could use the designation.
None of these designations mean a person must sell you what is best for you. What I recommend you look for is a person who is an RIA (Registered Investment Adviser). (I am an RIA and CFP). An RIA must take fiduciary responsibility for the recommendations. In other words, they must recommend products that are best for you, not just "suitable." Read any agreement you have with your adviser and see if he or she acknowledges fiduciary responsibility. If so, I believe you can feel more confident you are getting good advice.
Posted November 4, 2005