Today's post comes right from the prestigious New Your Times. They ask the question, "Can your financial Advisors spell Fiduciary." A fiduciary looks out for your best interest. You need to make sure you are not being sold products with commissions as this creates a conflict of interest for the advisor. Your investments and retirement are important. Trust them to a Fiduciary.
Here is the New York Times Article in all it's glory:
LIKE many people, especially in these financially unsettling times, I long for someone to look at our portfolio — such as it is — and tell us how to manage everything so that we can send both our children to the college of their choice, retire at 65 and be able to send postcards from exotic locations to our future grandchildren.
I also do not want anyone to tell me that I am living in a dream world or that just to build our savings, we will have to cut down on expenses like eating out, the occasional shopping spree and tennis lessons.
I want a magician. Or a liar.
But a financial planner would probably be a good start. We do have a stockbroker who assists us in investing our retirement fund. But analyzing where we are financially and where we should be going isn’t a bad idea. What I learned, though, is that while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.
“This is a person giving you advice over some of the most important decisions in your life,” said Sheryl Garrett, author of “Personal Finance Workbook for Dummies” (John Wiley & Sons, 2007) and founder of Garrett Planning Network.
The trouble is, pretty much anyone can hire themselves out as a financial adviser, so you very much have to do due diligence. According to a 2005 survey by the Securities Investor Protection Corporation, four out of five who took the survey failed it — meaning they did not understand how certain investments worked and they did not do rudimentary checks of their planners. The corporation was established by Congress to protect investors in the case of a bankrupt or financially troubled brokerage house.
Just one of every five people surveyed said they read their financial prospectuses, regularly reviewed account statements, checked out the disciplinary background of their stockbrokers or financial planners, and had a financial plan in place.
Yikes. Time to do some homework.
I set about learning the terminology. According to the nonprofit Investment Adviser Association, there are three broad and overlapping categories: investment advisers, stockbrokers and financial planners.
An investment adviser — also known as asset manager, wealth manager or portfolio manager — is a legal term that describes people who are in the business of giving advice about securities, stocks, bonds, mutual funds and annuities. Anyone who manages $25 million or more in securities generally must be registered with the Securities and Exchange Commission. In most states, advisers who manage less than that should be registered with their state’s regulatory agency.
A stockbroker is also a legal term that refers to people who buy and sell securities on behalf of customers, and can also offer a broader range of investment planning. They can work for themselves or for brokerage firms and must take a test given by the Financial Industry Regulatory Authority, a nongovernmental body that oversees securities firms.
A financial planner or consultant, on the other hand, is not a legal definition. It generally refers to providers who develop and possibly carry out comprehensive financial plans for customers based on long-term goals. Planners can deal with such topics as estate and tax planning, insurance needs and debt management as well as help plan college savings or retirement funds.
You may want an investment adviser to provide oversight and management of your portfolio, a stockbroker to help you with the mechanics of buying and selling securities, or a financial planner to look at your entire financial picture and come up with a long-term comprehensive plan, the Investment Adviser Association states on its helpful Web site (www.investmentadviser.org)
So, what do I want to look for (and avoid) when finding someone to help us? One word kept arising over and over — no, not money. It was fiduciary.
Someone who legally has a fiduciary duty will “have to work in the best interests of their client,” said Robert J. Glovsky, president of Mintz Levin Financial Advisors. That means they have to put your interests ahead of theirs at all times by providing advice on investments that will serve you — not them — best.
Investment advisers have a fiduciary duty, while brokers and financial planners may or may not. It’s a confusing legal situation, so the best bet is to ask anyone you are considering hiring straight out, “Are you a fiduciary?”
“If an adviser doesn’t know what you’re talking about or can’t say ‘yes’ with conviction, then that’s your answer,” Ms. Garrett said. And you should walk. Even if they do say “yes,” ask for this and other terms you agree to in writing.
The other big question to ask potential advisers is how they get paid. Commissions on investments they sell to a client? Fee-only, meaning paid by the project or an hourly rate? A percentage of assets? Or a combination of these?
Most experts I talked to said to be leery of financial advisers who work on commission because they have an incentive to get clients to trade and buy on the highest-commission products — an inherent conflict of interest.
Ms. Garrett, whose network links financial planners and advisers who work for an hourly fee, advocates fee-only. She said the average cost is $100 to $300 an hour, depending on location and experience.
Mr. Glovsky, who is also director of Boston University’s program for financial planners, said that you want to make sure the method of payment is reasonable, and know what the planner’s bias might be.
Taking a percentage of assets offers an incentive, he noted. “If they grow, their income grows; if they shrink, their income shrinks.”
Ms. Garrett said, however, that such a system can be expensive, a typical half a percent to 1 percent on, say, a $500,000 portfolio will run up to $5,000.
“If you need care on an ongoing basis, it might be appropriate,” she said. “It’s like the difference between an hourly babysitter versus a live-in nanny. There is nothing inherently wrong with a nanny, but it’s costly and most of us don’t need it.”
Find out what experience and education your planner has. A minimum, say the experts, is a degree as a certified financial planner, which means the adviser has a certain level of education and experience, as well as attends continuing education classes. Certified financial planners are also bound by a code of ethics that includes fiduciary duty. By going to www.cfp.net, the Web site of the Certified Financial Planners Board of Standards, you can learn how to find a consultant with such a degree, as well as how to check for any disciplinary action against him or her.
What should raise red flags? If a planner is solely pushing investments put out by his brokerage firm. If she is advocating buying annuities, particularly variable annuities, for your 401(k) or I.R.A. rollover.
“You’re putting tax-deferred annuities in a tax-deferred account,” Mr. Glovsky said. It’s unnecessary and costly, but may bring your planner a nice fee.
And be wary if all your planner wants to do is talk about investments and is not looking at your overall situation, like whether you are near retirement, are trying to save for a new house or for college.
“They should not be doing investment in a vacuum,” he said.
I thought I had it all under control. Until I looked at the Financial Planning Association’s Web site (www.fpanet.org). It offers a recommended list of 23 documents to gather — from bank statements to check registers to insurance policies to stock options — once you’ve hired your planner.