Help in hiring financial professionals

 The Right Way to Hire Financial Help - 2nd Ed.: A Complete Guide to Choosing and Managing Brokers, Financial Planners, Insurance Agents, Lawyers, Tax Preparers, Bankers, and Real Estate Agents

by Charles A. A. Jaffe | Feb 12, 2001

 

I've used this book multiple times and lent it to friends and clients who needed to hire an attorney, real estate agent, CPA, and other financial professionals. Don't let the 2001 publication date deter you. The advice and questions to ask when hiring a financial professional haven't changed much over the decades. 

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.

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 

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

 

 

Why is it Harder to Become a Hairdresser than a Financial Adviser?

“In most states, the minimum level of education needed to become a broker or an investment adviser is lower than the education requirement needed to become a hairdresser or an electrician.... Most states do not require a high school diploma or a Graduate Equivalency Degree (GED) to become a broker or an investment adviser. No minimum education requirement exists to qualify to sit for the Series 7 or Series 65 exams [regulatory qualifying tests to be eligible to sell securities]…many people who work one-on-one with clients do not attain education beyond this level.” Wall Street Journal writer Jason Zweig (4/8/16) reports on a recent academic study revealing the lack of public awareness of who is a fiduciary (search in this blog for more details). "The investing public has no clue how under-educated many securities salespeople are, according to the study."

“Transparency in the investment industry: Public perception of brokers and investment advisers”

Leisa Flynn, University of Southern Mississippi, G. Wayne Kelly, University of Southern Mississippi, & Patrick A. Lach, Eastern Illinois University

http://www.wsj.com/public/resources/documents/TransparencyinInvestmentIndustry.pdf

Surprise -- There's a Good Chance Your Broker Is Ripping You Off

"Good financial professionals can help us grow our nest eggs, save money on taxes, and plan effectively for the future. But lousy ones can really hurt us -- and apparently there are a lot of them out there." "It's reasonable to be intimidated by the world of investing as, after all, few of us ever learned much about it in school. Thus, it can seem as if a reasonable and safe thing to do is to seek out professional guidance or to simply accept professional advice that's offered. According to a recent study, though, it turns out that's not such a safe move."The report,  titled The Market for Financial Misconduct "examined the records of more than a million financial advisors and former financial advisors between 2005 and 2015 and learned that a shocking 7% of them -- 87,000 in total -- had been disciplined for misconduct or fraud."
"Note that the 7% represents those that were misbehaving and discovered. The percentage of total misbehavers is likely significantly higher, as those who were never caught are not included in the 7%." Read  more at:  http://www.fool.com/investing/general/2016/03/09/surprise-theres-a-good-chance-your-broker-is-rippi.aspx

Deception in the Financial Service Industry

"To be blunt, there is deception all around us. The primary presidential elections are a perfect example – whether it is Republicans debating with Republicans, Democrats questioning other Democrats, or Republicans and Democrats fighting each other, there is so many half-facts and conflicting information that it is impossible for everything said to be true."
"There is an equal amount of deception in the financial service industry. Whether you are watching CNBC, reading Forbes Magazine, or listening to a local salesperson promote his financial product, it is hard to believe we are ever getting the complete story from an unbiased perspective regarding any personal finance issue."
What type of behaviors should make you skeptical of your financial advisor? Read Lon Jeffries' blog post: http://networthadvice.com/deception-in-the-financial-service-industry

More evidence that financial advisers may not benefit clients

As recently reported in The Wall Street Journal,by Daisy Maxey on July 24, research in Europe found that:
"Investors trading stocks with assistance of financial advisers are more diversified and overcome some common pitfalls, a new working paper from European researchers found.
But they are worse off overall than investors who trade independently, because their stock purchases underperform, the study says.
The findings suggest advisers “do not help investors make superior stock purchases,” wrote the researchers, who examined client transactions at a large, unidentified Swiss bank.
There was “consistent evidence” that stock trades made by investors in conjunction with an adviser underperformed benchmarks as well as trades investors made independently, the researchers say.
Moreover, the underperformance was “particularly severe if the client-advisor contact was initiated by the adviser, suggesting that advisers actively approach clients with rather poor trading ideas,” the paper says.

What if investors had an independent second opinion?

A Radical Proposal for Investors: What if investors had an independent second opinion? By Daniel Solin (3/18/15). Selectively quoted from his article in US News & World Report. Read his full article at: http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/03/18/a-radical-proposal-for-investors

“I have a radical proposal for you to consider. Stop making investment decisions for yourself.” Here’s why:

·         You’re not good at it.

·         You’re not prepared for retirement.

·         You follow bad advice.

·         Why you need a new decision model. There is a wealth of evidence indicating that people are better at making decisions for others than they are at making those same decisions for themselves.

For whatever reason, individual investors make awful decisions and are likely to continue doing so.

Daniel Solin’s proposal: In a perfect world, investors would rely exclusively on registered investment advisors (RIAs) who have a fiduciary duty to place the interest of the investor above their own. Unfortunately, we don't live in a perfect world. Investors, it seems, will continue to rely on financial planners who have a lower standard of duty and whose advice is both conflicted and contrary to the weight of academic support.

“To surmount these formidable obstacles, I propose introducing a new disruption to the financial services industry. It involves the creation of advisory firms whose sole purpose is to give a second opinion on the portfolios of their clients. These firms would charge an hourly or project fee. They would be contractually prohibited from converting the consulting arrangement into an advisory one. Their advice would be totally independent. They would offer no other products or services.”

"Conflicted investment advice" costs Americans $17 billion a year!

Too many consumers follow the advice of financial "advisers" who are really salespeople working on commission.
"The math here is:

• There's about $1.7 trillion in individual retirement accounts invested in funds that pay brokers to recommend them.
• The people who invest in those funds could improve their performance by about 1 percentage point a year by switching to other funds that don't pay brokers." Matt Levine explains: "The way that a lot of retirement investing advice goes is that you go to your broker and ask him what you should invest in, and he says, "Oh Fund XYZ is great, put all your money in Fund XYZ," and the reason he does that is not that he loves Fund XYZ in his heart of hearts, but rather that Fund XYZ writes him a big check for steering you its way. I'm sorry, but that is the way it works. I mean maybe he also loves it in his heart of hearts, but that is not observable; the check is. As is Fund XYZ's subsequent underperformance versus its benchmark." If your financial adviser is NOT a fiduciary, then you are losing out. Not all financial professionals   act entirely in your best interest. While investment advisors are required to follow a principle known as the fiduciary standard, brokers are only required to recommend "suitable" investments. Details on the fiduciary standard at: http://www.cnbc.com/id/102447585.  Read more detail from Levine: http://www.bloombergview.com/articles/2015-02-23/white-house-is-not-fond-of-backdoor-retirement-payments

Where to Turn for Financial Advice

Where to Turn for Financial Advice

A webinar presented by the University of Florida Extension Service

February 25, 12:00 p.m. to 1:00 p.m. EST (10-11 am Mountain Time)

We will discuss how to evaluate different types of financial professionals, the meaning behind their professional designations, and the ways they arecompensated.  We will also provide resources for free, reliable and non-commercial financial information.  Register at http://bit.ly/finpro2015

When Judging Financial Advisers, Look Beyond the Annual Return

As I've mentioned numerous times, whether your adviser is a fiduciary and puts your interests before his or her own is the most important criterion in choosing or assessing an adviser. Just because the stock market did well in 2014 (11%) doesn't mean your adviser is working in your best interest. Paul Sullivan provides more advice and perspective in The New York Times Money blog: http://www.nytimes.com/2015/01/10/your-money/when-judging-financial-advisers-look-beyond-the-annual-return.html?_r=0

How is a financial adviser like a palm reader?

"Dilbert" creator Scott Adams raised hackles when he recently compared investment advisers to palm readers.  “It goes without saying that Scott Adams’s comparison wasn’t meant as a compliment to financial pros." according to reporter Priya Anand.
"The reason it is legal to open a palm reading shop is that the public understands it to be entertainment and not prediction," Adams wrote on his blog. "You can buy investment advice if you want it, but not until you sign a document acknowledging that science says no one has magical stock-picking skills ." So… Anand put his comparison to the test and was surprised by the "alarming number of similarities."  Get the details at: http://www.marketwatch.com/story/we-asked-a-palm-reader-and-a-financial-adviser-how-to-handle-our-money-2014-08-13