Chapter 10 – On Your Own or Hire an Advisor

Chapter 10

On Your Own Or Hire An Advisor?

Jack Brennan in his book, Straight Talk on Investing says, “Remember, it’s in the interest of many financial services companies to make you think that investing is difficult.” While Mr. Brennan’s statement is true, so is Warren Buffet’s, “Investing is simple, but not easy.” What Mr. Buffett is referring to is the natural tendency to make behavioral mistakes, which can really hurt returns. So, if you are not disciplined, then you might need someone to keep you on track. But there may be another reason to use an advisor that is just as important—do you want to spend time managing your assets? Delegating management to an advisor can provide you with freedom to do things you enjoy more and insulate you from nerve-racking market gyrations that cause worry.

If you are just starting out and you haven’t accumulated a large asset base, you probably do not need advice, and you don’t need to spend a lot of time on your investments. However, if you have accumulated a hodgepodge of investments in various places, you may need some help in sorting things out. Before you decide one way or the other, evaluate your own situation and personality. Jonathan Clements in a Wall Street Journal article comments “If you want to see the greatest threat to your financial future, go home and take a look in the mirror.” Jane Bryant Quinn in The Washington Post gives a similar warning “The green—in our eyes and in other peoples wallets—brings out the worst in us. I don’t mean morally, I mean our worst instincts as investors. We think we make rational decisions. More often, we veer from hope to fear and back again, with out putting our brains into gear at all.”

Know Your Tendencies
You now know that building a good portfolio is not difficult, and if you can do that an advisor cannot put you into better investments. But there may be unseen behavioral hazards awaiting the unsuspecting investor, and this is where a good advisor may pay off.  Ask yourself the following questions:
*Am I impulsive?
* Do I have the temperament to act without panic?
* Can I view my situation objectively?
* Can I stay with the plan through thick and thin?
* Am I too competitive?
* Do I tend to procrastinate?

Answering yes to any of these questions may increase the tendency to make behavioral mistakes which cost money. Mistakes are generally made by investors who do not know the fundamentals, including the behavioral pitfalls. Belsky and Gilovich in “Why Smart People Make Big Money Mistakes” suggest that when we consider important financial decisions, instead of asking knowledgeable friends or professionals what they think about the changes we are considering, ask them what they think about the process used to make the decision. It is far more revealing.

In addition, there is the issue of desirability. Do I enjoy managing my own investments? Am I willing to take the time to learn what I need to know. If the answer is “not really,” then this is a valid reason to hire an advisor.

A good advisor may save an investor from making major errors, which would more than justify the added expense. So, there are very valid reason to use an advisor. But then, the investor needs to avoid another major mistake—choosing the wrong advisor. If you decide you need professional guidance, there are two ways to get it. One is to put your assets under management (AUM). The other is to manage your own investments but consult with an advisor occasionally on an hourly basis to ensure you are on the right track.

Here are the general ways advisors are compensated.
Commission only: No direct charge for financial planning or investment advice. Recommendations consist of investments and financial products that have commissions or fees that will come out of your investment. And investment choices will be limited to those investment options that pay commissions. Most of the investment options that carry no commissions will be excluded.
Fee-based or fee and commission: A fee is charged for financial planning or investment advice. Recommendations consist of investments and financial products that have commissions or fees that will come out of your investment.
Salaried: No direct charge, but incentives and awards are often provided in addition to the salary when certain financial products are purchased based on the advisor’s recommendations. Recommendations may also include investments and financial products that charge commissions or fees.
Fee only: The advisor receives no commissions; his or her only compensation is the fee you pay directly. The advisor may charge in one of two ways. Either a percent of assets under management or other direct fees that might include hourly consultation or a retainer for a specific project. The advisor receives no commissions; his or her only compensation is the fee you pay directly. There should be no investments or financial products offered that asses commissions.

Choosing An Advisor
The great paradox of using an advisor is that you must know some basics in order to evaluate the advice, and once you do, you also know enough to consider doing your own management. If you have gotten this far through the primer, you are already a more knowledgeable investor.

You now have some sense of what proper investing fundamentals are, which means you have some defense against really bad advice. The professional advice you receive may or may not be in your best interest, but from what I’ve seen, you are far more likely to get biased or even harmful advice if you don’t choose carefully. Unfortunately, because of extremely loose industry standards, it isn’t easy to find an advisor who is qualified and one you can trust.

What comes to mind when you hear the terms financial planner, financial advisor, investment counselor or wealth manager? You might be surprised to learn that these titles mean absolutely nothing. The Financial Institution Regulatory Authority (FINRA), formerly NASD, does not recognize them. Here is some enlightenment from Rick Ferri, who holds the Chartered Financial Analyst (CFA) certification: “The financial industry plays the game like no other. Every advisor calls himself something that makes him seem like an expert, but few people are. At brokerage firms, everyone is a Vice President. If they are not a VP, they are either very new or on their way out the door. In addition, everyone calls himself or herself a Financial Consultant, Financial Advisor, Financial Coach, Retirement Specialist, or some other nonsense title that means nothing. These are all self-appointed titles, and they can change with the wind.”

The type of advisors who hold no useful credential almost always promote high cost commissioned products. These are the high profile guys. They’re the ones who advertise heavily and aggressively look for your business. They promote through “free” seminars, dinners, mailing campaigns and cold calls. Friends and business acquaintances frequently recommend them simply because they’ve met them through business associations, and they don’t know any better. You don’t have to look for these advisors; they will find you!

Bruce Miller, CFP® clarifies; Real Certified Financial Planners (CFP) are bound by something called the ‘brochure rule’, that requires us to immediately disclose lots of information to a prospective client…including from whom and how much we are paid, even if by commissions. This is done by contract before any data collection or advising is done.“The CFP® Board now requires that all CFP® Certificants provide the fiduciary standard to their clients who retain their financial planning services.

And this is what AARP had to say in their July 2006 online magazine: “Fiduciary” means that the person working for you owes you the highest possible duty of care and loyalty, so that a relationship of trust and confidence exists between you and the planner. While you may think that this sort of trust and confidence will naturally exist, a fiduciary relationship usually depends on the facts and circumstances of a particular situation.

This link provides the definition of fiduciary responsibility as defined by The National Association of Personal Financial Advisors (NAPFA):

In the strictest sense, there is a distinction between a financial planner and an investment advisor. The role of ‘Financial Planner’ is unregulated and anyone may refer to themselves as such,  regardless of their training or lack thereof. An ‘Investment Advisor’ is regulated by the SEC, and requires that anyone who holds themselves out as an investment advisor and is compensated for it, must register with the SEC or their state’s equivalent and meet full disclosure requirements and must apply a fiduciary standard to their client’s investments. One other option is the large mutual fund companies themselves. The fees seem to be competitive, and if you are opening a large account, the fees may be reduced or waived. T. Rowe Price, Fidelity and Vanguard are three large, respected companies who are now offering advisor services. Recommendations will be from the company you go with of course, but these three companies offer a wide variety of funds so choices should not be a problem.

Factors to Evaluate When Looking for an Advisor

Look for CFP and CFA designations. Check for any non-compliance issues.
Education and background
Verify that education and background are consistent with credentials.
Do not hire anyone you cannot fire without personal repercussions—friends, family, members of church or social network.
Look for advisors with at least five years experience
It is very important that you get along with your advisor and you have trust in him/her.

Bruce Miller, CFP®: Once you find several credentialed advisors in your area, call and ask them what they specialize in. Tell them what your approximate goals are and if they think they’d be able to assist you. I recommend you then set up personal interviews with at least 2…. 3 is better.

When you do meet, like a visit to your doctor, they should ask questions, listen and take occasional notes. You should do most of the talking. At the end of 30 minutes, they should be able to clearly summarize your position and recommend a general course of action. They should have no hesitation in encouraging you to think over their general recommended approach and their estimated cost range. Any talk of financial products or recommended specific solutions, or even the slightest pressure to sign an agreement at the end of this first meeting is a bad sign and suggests you should go elsewhere.”

Questions to ask potential advisors;
1. Are You a Registered Investment Advisor under the Investment Advisors Act of 1940?
What are your qualifications? Licenses, certifications, regulatory agencies. What organizations, affiliations. How much experience?
2. Do you accept fiduciary responsibility?
3. Please provide a copy of your most recent and accurate disclosure form. ADV-II (Registered Advisor), U-4 (Broker / Dealer)
4. What services do you offer?
How many clients, what type of clients, minimum asset requirements?
5. Are you independent of financial-product sponsors–brokerage firms, insurance companies, banks? Do others you work with or recommend provide you with benefits for your recommendations?
6. What approach to planning and investing do you favor? Stocks, mutual funds, what kind of funds, annuities? Note: The advisor’s approach and risk management style should be in line with yours.
7. Will you be the only person working with me? In the office, outside professionals?
8. How much do you typically charge and how are your fees applied?
9. Will you provide a written statement of all fees, including direct fees and fees paid to other firms or organizations?
10. How will I pay you for various services?

Get an agreement, including costs, in writing for services that will be provided. It may be a good idea to copy these questions and send them before you meet with potential advisors. That will save you and the advisors some time. And it will send them a message that you know what you’re doing.

Be leery of any advisor who suggests annuities, with the exception of low-cost single payment immediate annuities (SPIAs) . Avoid wrap accounts, separate accounts, limited partnerships, private real estate trusts, leveraged funds, equity-indexed annuities, insurance products, cash value life insurance, or any products the advisor tells you can’t lose money. Never hire an advisor that says you don’t pay him—the fund company pays him.

If you hire an advisor, remember he or she works for you.

Bruce Miller (quote): Sometimes the best you can do is to find a planner who doesn’t have a compensation plan that would seem to be at odds with your best interests. And if you have a planner who has decided that ‘his/her own best interests are served by consistently providing a quality plan to his/her clients’, that is probably as good as it gets.

Two links for finding an advisor:

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