(Copyright: Smart Money Magazine)
6. “Once I’ve done the plan, I’m outta here…”
Financial planners like to give you the sense that they’ll be with you every step of the way through important financial decisions. But in reality, many clients find that a once-attentive planner becomes increasingly elusive as time wears on. When Kratz worked for a financial advisory firm several years ago, he says he adopted more than 1,000 clients who had been discarded by colleagues, usually because they no longer produced adequate income to keep their planners interested. “Typically, the first year was an intense relationship, but clients complained that they stopped hearing from the adviser after that,” he says. The reason? The commissions had dried up - a lot of products, especially insurance products, are based on one year of commissions before they drop off, says Kratz.
To avoid a shutout, ask prospective financial planners at the interview stage how often you should expect to be in touch. A good reply, says Coupeville, Wash., Certified Financial Planner Kathleen Cotton, is about four times in the first three months to hammer out a plan, then at least once or twice a year after that.
7. “…especially if you’re not so well-to-do.”
The past decade has seen a big push among planners to target high-net-worth clients, and many planners today have a minimum asset requirement—typically $100,000. Considering that, according to the 2004 Census by the U.S. Census Bureau, American households have a median net worth of about $44,000, that leaves a lot of folks out in the cold.
Luckily, middle-class clients do have some alternatives. The Garrett Planning Network (www.garrettplanningnetwork .com) is a ring of 260 planners across the nation who work primarily with the $100,000-and-under income set, charging hourly fees for periodic advice. Similarly, John Sestina has his own network of 20 planners scattered around the U.S.; he says they can even handle some clients entirely over the phone (www.sestina.com). “There’s a large influx of middle-class retirees that have assets that need to be put somewhere, so more and more companies are trying to tap into this market,” says Percy E. Bolton, committee member of the Certified Financial Planner Board of Standards and founder of Pasadena, Calif.–based Percy E. Bolton Associates. “There are two waves of change today—the planners that are going after the super-rich and those that are going after the middle- and upper-middle-class clients.”
8. “Confused? That’s the point.”
Many clients meet with planners only to leave with more questions than answers. “It’s like going to the doctor—you think you understand when you’re there, but then you walk out and think, What was it they said?” says Madeline Moore, a Portland, Ore.–based financial planner. Unfortunately, this confusion is often used to manipulate you.
Sherry Fabricant and her husband, of Plano, Tex., started investing $120,000 with a financial planner at an area brokerage firm at the end of 1997. The planner told them that withdrawal of funds before a five-year period would incur a sliding fee (5 percent of assets in the first year, 4 in the second, and so on). However, not only did the planner put them in high-fee funds without their understanding but he didn’t explain that with any additional investment transaction, the five-year restriction would begin anew. “Recently, we made a huge sell and a huge purchase,” says Fabricant, “and it wasn’t explained that our five years would then start over.”
How can you protect yourself? Ask plenty of questions and write down the responses, and if you don’t get straight answers, move on. “Remember, they work for you,” says Sestina. “So if you never understand what they’re saying, fire them.”
9. “In fact, I don’t even understand your plan.”
There’s a plethora of computer software today designed to help financial planners with clients’ asset allocation, cash flow, retirement planning, and so on. These tools make for quick results, but they can also cause problems—especially when planners don’t understand how the software works.
When Scott Dauenhauer worked at one major brokerage firm, he and his colleagues churned out boilerplate documents that, he says, all looked alike and usually had glaring mistakes— everything from a wrong age (which can render the entire plan wrong) to a misunderstanding of the client’s goals. The danger was that most of his fellow advisers had little training in planning, “so you have a document that’s probably wrong and an adviser who can’t tell you why,” Dauenhauer says.
Cotton suggests that you quiz your planner about any computer-generated plan to make sure he really understands it. You could ask, say, whether the software assumes a flat rate of return on investments or how it deals with taxation issues. You can also test your CFP’s plan against the free service at Financeware.com, which analyzes plans using real stock market returns—and is therefore more realistic than the flat rate used by most planners’ programs.
10. “Good luck busting me for malpractice.”
Since the financial-planning industry is so loosely organized, it’s not surprising that there are no firm regulations regarding consumer grievances. The CFP Board enforces a code of ethics, “but given the limitations of a voluntary certification program, it’s kind of after-the-fact enforcement,” says Roper. So what can you do if you get cheated? If your planner, like most, holds a securities license, you go to FINRA, the Financial Industry Regulatory Authority. But be prepared to wait. Although the majority of arbitration cases are settled in around six months, if your case goes to a hearing, it could take up to 16 months to get a decision.
Even then, there’s no guarantee you’ll get a favorable outcome: In 2007, only 37 percent of investors who had a hearing recovered any money. Also, since arbitration can cost between $15,000 and $50,000, it makes sense only if you’ve lost more than $30,000. If you’re out less than that, start by writing a formal letter of complaint to the supervising manager, then write one to FINRA, the Securities and Exchange Commission, or your state securities regulator. You’re unlikely to get any money back, says Eccleston, but the adviser might face disciplinary action. Even better: Protect yourself in advance by checking out a prospective financial planner’s record. The SEC lists client complaints and regulatory violations on its website (www.adviserinfo.sec.gov), where you can also get details on both SEC- and state-registered planners.