10 Things Financial Planners Won’t Tell You, Part I
by Richard
Don’t give me any credit for this one. I have reprinted this article its entirety from the June 16, 2009 issue of Smart Money (though we’ve added all the links). It is a devastating insight and exposé of the dirty little secrets in the world of financial planning.
Talk about biting the hand that feeds you!
(Copyright: SmartMoney Magazine)
1. “I got this gig on a whim.”
There’s a huge market of consumers out there desperately seeking financial guidance—especially in the wake of the 2008 market crash. And a wealth of advisers are eager to serve them. In the early 1990s, only about 25,000 people called themselves financial planners, according to Boston-based research firm Dalbar, but by 2006 that number had climbed to around 650,000. Part of the reason for the boom is that anyone can present themselves as a financial planner—one of several generic titles for someone who provides advice to clients about how best to handle their money. (As opposed to money managers, for example, who actually manage your accounts.) And since there’s no required training or experience necessary, why not hang out a shingle and tap into the profit?
But it can get even trickier than terminology—many of those seeking to provide you with financial advice are actually trying to sell you something. Bank-employed pitchmen are often called “personal financial consultants,” for example, while insurance salesmen may present themselves as “financial advisers.” Indeed, “The bulk of people who market themselves as financial advisers are salespeople,” says the Consumer Federation of America’s director of investor protection, Barbara Roper.
How can you be sure you’re hiring a qualified pro? You can start by narrowing the field to one of the 56,000 Certified Financial Planner licensees out there (visit www.cfp.net). In contrast to run-of-the- mill planners and advisers, CFPs do have to meet specific requirements: Their license means three years’ minimum experience and passing a comprehensive 10-hour exam. Next, grill candidates on how much real planning they’ve done. Wind Lake, Wis.–based CFP Jim Cantrell says he’s met advisers who claim to have 10 years’ experience, “then you find out that they became a planner only a year ago and spent eight years as a bank manager.”
2. “I’m a jack-of-all-trades and master of none.”
James Eccleston, a Chicago-based securities lawyer, recalls a client of his who met with disaster when a financial planner failed to advise him about the tax ramifications of exercising stock options. Instead, the planner convinced the client to buy a second home, Eccleston says, using the stock as collateral for the mortgage, “and the coffin was sealed, because this was a 100-percent position in Cisco.” When Cisco stock tanked during the tech-bubble fallout, the client’s portfolio plunged, from $1.7 million to about $5,400. He was forced to liquidate all his shares and take a $100,000 second mortgage on his primary home to meet margin calls—then got whacked with a $400,000 tax bill.
A good financial planner should work alongside outside professionals— accountants, lawyers, insurance brokers— to offer you the best service. However, at some firms, like the one Eccleston’s client used, the planner tries to do everything himself. Beware. “If they’re claiming that they have the expertise to do it all, I would seriously question that,” Roper says. Like tax planning, estate planning poses great risks, says Eccleston, since flaws might not show up until the client retires or dies. His advice: Doublecheck anything your financial planner says about taxes or estate planning with a lawyer or CPA.
3. “I have ghostwriters draw up your plan.”
So you met with a planner, outlined your goals, and left feeling that your financial future was in good hands. It might come as a disappointment, then, to learn that this wonderful planner won’t be finishing the job. Outsourcing financial plans to a secondary firm or freelancer is a growing trend, especially among big firms, enabling planners to spend more of their time wooing new clients. “It’s the current corruption in financial planning,” says John E. Sestina, cofounder of the National Association of Personal Financial Advisors. But when a plan is done by outsiders, Sestina says, the information gets stale; there is less intimacy and more room for error. “You can’t act on issues as soon as they crop up,” he says.
And don’t assume the planner will offer up this detail without prompting, says Sherry Rhoades, a Plano, Tex., certified financial planner who says she doesn’t outsource. “[There’s] no need for the client to know.”
4. “I’m a high-pressure shill in disguise.”
The majority of financial planners work on commission, which doesn’t mean they’re bad people but can make for some bad financial planning. When Laguna Hills, Calif.–based Certified Financial Planner Scott Dauenhauer worked at a few big-name brokerage firms during the ’90s, he says he was constantly being pushed into selling the firm’s proprietary—and often poorly performing—mutual funds, variable annuities, or wrap accounts. “We got pressured to sell them because the payout was higher,” says Dauenhauer. “But there was no talk of whether it was right for the client.”
To avoid such conflicts of interest, shop for a planner through the National Association of Personal Financial Advisors (www.napfa.org), a strictly feeonly group (no charge-backs, kickbacks, trails, or other hidden commissions) with more than 1,700 members. NAPFA planners have to sign an oath stating that they’ll never receive commissions and promising to put their clients’ best interests first. Along with having three years’ experience, they must take 60 hours of continuing education every two years and submit sample plans for review by other NAPFA members.
5. “Am I ‘fee-only’ or ‘fee-based’? Um, let’s not split hairs.”
As the public’s suspicion of commission-driven planners has grown, so has the market for “fee-only” planning—in which financial planners charge for the advice they provide but don’t get any commission on the products they sell. The popularity of the approach has inspired some financial planners “to clothe themselves in the ‘fee’ word,” says New York–based CPA and former NAPFA Chairman Gary Schatsky. Indeed, more than 40 percent of certified financial planners now call themselves “fee-based,” which means that they charge you an upfront fee and collect commissions on products they recommend, according to the Certified Financial Planner Board of Standards.
According to the most recent statistics from the CFP Board, fee-based revenue for registered representatives had climbed to roughly 33 percent of total revenue in 2004, versus 10 percent of total revenue in 1996—and the trend is still going strong. To be sure that your “fee-only” or “feebased” planner is true to his claims, ask for a written breakdown of fees, especially those associated with each investment product, suggests Virginia-based CFP Randall Kratz. “If someone doesn’t have what he makes in writing, I wouldn’t work with him,” he says.
(Tune in tomorrow for the rest!)
