Can you trust the Certified Financial Planner designation?

An investigation by The Wall Street Journal revealed that "thousands of advisers with the coveted Certified Financial Planner designation listed in the group’s public directory as having clean records had histories of customer complaints, bankruptcies, regulatory problems or criminal records."

"The CFP Board had been relying solely on planners to self-report red flags in their records when they renewed their certification annually. The Journal’s investigation found that many such red flags were publicly disclosed on a website run by the Financial Industry Regulatory Authority, a watchdog organization funded by the brokerage industry—but not in the CFP Board’s directory":     LetsMakeAPlan.org

Source: CFP Board to Tighten Oversight of Financial Advisers

https://www.wsj.com/articles/cfp-board-to-tighten-oversight-of-financial-advisers-11576626090

So you think you're going to time the market and jump in when things look good

Forget about it! The stock market lurches up and down in dramatic gains and losses with no warning!
No bell rings at the bottom of the market signaling it's time to buy!
Some recent examples, among the gut wrenching downward drops:
March 27, 2020 the Dow Jones Industrial Average jumped 12.8%! in one day!
April 9, 2020: the DJIA leaped 12.7%.
This was the index's best rally since 1974 (before many investors were born).
there were only 7 days in all of the stock market history that the market rose at a faster rate.
The stock market (whether measured by the DJIA or the broader S&P 500 largest companies) can swing wildly in one day. It does not increase or decrease gradually. Due to computerized trading, it's NOT individual investors or individual professionals deciding to buy or sell on any given day. So much of trading is based on algorithms that automatically buy and sell based on computer models.

So... what does this mean for individual investors:
Don't have money in the stock market that you will need in the next 5 years.
Have a serious talk with yourself about your risk tolerance, time horizon, investment goals, and, especially for retirement investors, your capacity for risk.
Risk capacity is different from risk tolerance. How secure is your job? does your spouse/partner have a secure income? are you single? Do you have a mortgage? How much debt do you owe?
Besides, plenty of evidence has demonstrated that investor risk tolerance is NOT stable but increases with rising (bull) markets and plummets with falling (bear) markets. Those risk tolerance quizzes that investment pros require you to fill out... not worth the paper they are printed on.
What did you do with your investments during the financial crisis of 2008-09? 
Don't make short sighted decisions based on the hype of today's stock market report.

Remember that investment losses inflict twice as much pain as similar dollar amounts of gain provide pleasure. Losses hurt twice as much as gains feel good, even when the potential loss is relatively small and doesn't pose much risk.  This is the concept of Loss Aversion. Loss aversion explains why too many investors sell at the bottom of the market and wait to resume investing until prices have risen, often above what they sold their investments for in order to avoid a loss. They locked in a loss by not understanding their own risk tolerance and investment psychology.
A market decline is an opportunity to buy stocks when they are on sale. Why is it that individual investors love to buy when stocks are overpriced? Buy a case load when the product is on sale.

Instead of trying to time the market, invest a set amount each month to add to your portfolio, regardless of the price. Practice dollar cost averaging. 

Work with a trusted financial adviser who is a fiduciary and committed to putting the client's needs above their own.
Determine a realistic asset allocation for the long run and stay the course. 
P.S. Good luck with that!

How does your financial adviser get paid? And why does it matter?

"With markets in turmoil, investors need financial advice more than ever. Unfortunately, figuring out where to get it and how to pay for it just got a little harder" according to Jason Zweig writing for The Wall Street Journal. Until recently you could find this information about Certified Financial Planners from Letsmakeaplan.org. But the CFP Board of Standards will no longer disclose this info on the website.
Why does how your adviser get paid matter? Search for "fiduciary" on this blog fro a reminder.
Financial advisers on commission earn a slaes fee when you trade stocks or other securities, buy insurance, or other financial products. So they may not charge you for advice, you are paying indirectly when they recommend a product and you buy it. Hmmm... think about the implications.
A fee-only adviser charges either a one-time or recurring fee for advice and/or managing your portfolio.
The letsmakeaplan website had served as a fast way to find a Certified Financial Planner. Now... not so much.
A 2019 investigation by The Wall Street Journal revealed that about 6,300 CFPs listed on the website had faced criminal or regulatory problems not disclosed on the website.
While the CFP Board requires members to adhere to a code of ethics, there is little enforcement.

Once again, it is essential to ask your adviser directly if they serve as a fiduciary. Check out links on this blog.

Hundreds of financial professionals pose a risk to their clients!

"A proposed rule from the Financial Industry Regulatory Authority that would impose restrictions on firms employing high-risk registered representatives and financial advisers may apply to 61 financial-services companies, said FINRA CEO Robert Cook. John Salerno, who manages the high-risk representative program, said hundreds of individuals have been identified as presenting risk to clients."
https://www.investmentnews.com/article/20190517/FREE/190519929/finra-makes-its-list-to-target-hundreds-of-rogue-individuals 
ALWAYS ask a financial salesperson/adviser if they are a fiduciary... which means they must put the client's interests first. 
Check related blog posts on fiduciaries. The Obama administration proposed regulations requiring financial salespersons and advisors who deal with retirement accounts to be fiduciaries but the trump administration shot down that consumer protection. 

Check the background of investment professionals at https://www.finra.org/ using Broker Check.

Maybe your financial "adviser" has been taking advantage of you

"The Securities and Exchange Commission's program to persuade investment firms to self-report conflicts of interest has led to a settlement under which 79 firms return $125 million in fees to clients. The firms placed clients in share classes with expenses higher than those in other share classes available without disclosing that fact." (Retirement Security SmartBrief)
"Advisers to Repay Fund Investors" by Dave Michaels in The Wall Street Journal (3/12/19) states that 79 investment advisory firms have agreed to pay $125 million to clients thwo were over charged for their investments.
If you are not familiar with the term "fiduciary" then it's time to search this blog and educate yourself.
These "advisers" sold high cost mutual funds to their clients in order to boost their own earnings or qualify them for earning prizes like vehicles and trips. These practices have been around for as long as the industry has been selling financial products. Equally suitable lower cost funds were available for these clients who ended up earning less on their investments due to the difference in fund costs.
Top of the list is Wells Fargo, the "king" of egregious consumer practices. Why does anyone still do business with Wells Fargo? Deutsche Bank is also involved in this settlement.

So you think you're a good judge of financial advice?

The vast majority of financial advisers do not take advantage of their clients. BUT... "About 7 percent of U.S. advisers have misconduct records in civil or regulatory proceedings." And previous studies have shown it is easy to cover up these bad records.
Squared Away Blog's author Kim Blanton explains the study:
"A new study finds that various things can trip people up and make them trust an adviser who is giving out bad advice. These influences included a good first impression of the adviser. And one way for an adviser to make a good first impression is by initially confirming the client’s own views on investing before introducing poor advice."
Why give bad advice? Advisers who are not fiduciaries may have an incentive to recommend costly products that pay them a high commission or qualify them for bonuses or other incentives like trips to Hawaii.
"The subject of this study – judging the quality of financial advice – is important at a time workers are carrying a heavy load of responsibilities for managing their 401(k) accounts, and the accounts are becoming more critical to their retirement outlook."
Read the summary of the study and its conclusions at: https://squaredawayblog.bc.edu/squared-away/are-we-able-to-judge-financial-advisers/
And heed Kim's conclusion after reading the academic study: "Left to their own devices, the public’s financial acumen is generally poor, and a good adviser will steer them toward sound decisions. But this research indicates that investors can get into trouble if they aren’t able to detect when they’re getting bad advice."
So be skeptical, educate yourself (using this blog), and get a second opinion, just like you would before major surgery.

How much are you paying your financial advisor? How much are they earning in commissions?

Now that the Trump administration has nixed the fiduciary standard which would have required financial advisors to hold the best interests of their retirement clients above their own pocketbooks. The Obama administration's Labor Department had proposed a rule that financial sales people/brokers/advisors who deal with retirement accounts and clients would have to follow a fiduciary standard whereby they would have to act in their client's best interests rather than selling the client a financial product that produced the highest commission.  Well forget that! Unless you work with a certified financial planner (CFP) or other professional who follows a fiduciary standard don't trust your "advisor" to do what is in your best interest.
Currently the Securities and Exchange Commission (SEC) chair is proposing a new ruling to protect consumers that would require brokers to disclose their sales incentives, sales contests and commissions.

"Most brokerage firms pay their employees more for selling certain products over others, depending on how lucrative they are. This can result in customers paying more for products and services than they need to, though brokers defend the practice as the only way to reasonably offer a range of investment options." ("Brokers fight to keep pay perks, by Gabriel T. Rubin. The Wall Street Journal, 12/26/18 p. B1.

Does your financial advisor put your interests before his/her's?

The term "fiduciary" has been in the news for past couple of years. The Obama Administration proposed a rule that financial advisors who deal with retirement must follow a fiduciary standard rather than a "suitability" standard. A fiduciary must put the client's interests ahead of her/his own (i.e., costs, commissions, etc.); previously most advisors only had to recommend products that were "suitable" for the client (but perhaps were more costly than other alternatives, thus paying the advisor a higher commission and costing the consumer higher fees and lower returns). The Trump administration has rolled back this rule.

Therefore, it is essential that consumers ask their advisor: "Are you a fiduciary? Are you putting my best interests ahead of your financial gain?"
Read Peter Fisher's article:

Why Conflicting Retirement Advice Is Crushing American Households

In a 2015 report by the Council of Economic Advisers, the authors estimate that “the aggregate annual cost of conflicted advice is about $17 billion each year.” This conflicting advice comes from individuals and institutions that are "compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest." (full quote).

"Unfortunately for the American family seeking 'professional' financial advice, the choices are few. Just a small percentage of financial professionals are able to offer financial advice without facing the conflicts outlined by the Council of Economic Advisers." 

Very few are "fee-only advisers who follow a true fiduciary standard that prohibits commissions on products recommended to clients and legally requires the advisers to always put their clients’ interests first." 

Check out a list of questions you should ask your advisor at: https://www.forbes.com/sites/forbesfinancecouncil/2018/08/17/why-conflicting-retirement-advice-is-crushing-american-households/#470655621355 

Fiduciary Rule Delayed by Trump Administration

The Labor Department said an 18-month postponement of enforcement of several key provisions of the fiduciary rule has become official. The effective date of the best-interest contract exemption and related exemptions has been changed from Jan. 1, 2018, to July 1, 2019.
Financial "advisors" can continue to put their own financial interests ahead of their clients thanks to the pro-business, anti-consumer Trump administration.Financial salespersons can continue to recommend investments that line their pockets and put their own interests ahead of their clients.
Why should advisors put their clients best interests ahead of their own? Just one more anti-consumer action from the current powers.
Have you asked your "advisor" yet whether he is a fiduciary? If not, it's long past time.

Three Ways to Protect Your 401(k) If Trump Kills the Fiduciary Rule

"A new move by President Donald Trump may mean higher costs for individual investors and retirement plans, especially 401(k)s offered by small businesses. The good news, though, is that you can protect yourself against his order, which delays and reconsiders the so-called fiduciary rule, if you ask the right questions."
"Brokers often get incentives to steer clients into certain financial products, which can charge very high fees. President Barack Obama’s White House had estimated that these conflicts of interest were costing American investors $17 billion a year. The Department of Labor’s fiduciary rule, scheduled to go into effect in April, would have fought this, requiring financial advisers to put clients interests before their own when providing advice on retirement accounts." Writer Ben Steverman suggests asking your adviser 3 questions:
1. Are you a fiduciary?
2. How are you paid?
3. What are my fees?
Read the details: https://www.bloomberg.com/news/articles/2017-02-03/three-ways-to-protect-your-401-k-from-donald-trump

 

 

So you think your adviser has your best interests at heart...

"About 80% of investors think their financial adviser has a fiduciary duty to put their interests first, according to a report by Spectrem Group. However, most investors use brokers who must offer investments suitable for the client but who are not bound to a fiduciary standard, the report says." Be sure you understand the difference between a fiduciary and someone who is selling you 'appropriate' products. The difference is critical to your financial well-being and could make a big difference in how much you are paying for financial advice, which is never free. Search for other items on this blog with the key word: fiduciary

Brokers Fight Rule to Favor Best Interests of Customers

If you think your broker or financial “advisor” has your best interests at heart, think again. “David O’Brien, a certified financial planner, has tried to repair the retirement portfolios of several victims over the years. There was the high school science teacher who didn’t realize she had been sold a variable annuity, where layers of incomprehensible fees devoured nearly 2.5 percent of her retirement savings each year. Then there was the woman fighting cancer, who was also sold a high-cost annuity, but whose underlying investments were tied up in a money-market type fund — one that cost 1.5 percent annually.”  “Brokers are not necessarily required to act in their customers’ best interest, even if they are advising on their retirement money. While that would seem to be a basic consumer protection, in Washington and on Wall Street it has proved to be wildly contentious.” Don’t deal with any financial professional who doesn’t have a fiduciary responsibility to put your interests first. Tara Siegel Bernard explains the details in the New York Times:  http://www.nytimes.com/2014/06/13/your-money/rule-to-make-brokers-act-in-clients-interest-still-pending-after-4-years.html?ref=your-money

Is your adviser working in your best interests? Understanding fiduciary responsibilities

“A fiduciary is a person… who has been placed in a high standard of trust. A financial adviser fiduciary has the legal responsibility and liability to place your interests first — ahead of their own. Registered Investment Advisors (RIAs) are fiduciaries and are legally bound to place a client's best interest above the firm's. While you might think all financial service providers are fiduciaries, most aren't. For example Brokers are not.” “Some financial advisers say that they are ‘fee-based.’ This is also not the same as ‘fee-only.’ These semantics can lead to the false conclusion that advisers are fee-only fiduciaries when they are not.” For more details read Lisa Hay’s advice at: http://www.marketwatch.com/story/is-your-adviser-working-in-your-best-interests-2014-04-10