Financial Planner Secrets Part 1
How is anybody supposed to make good financial decisions when there is so much information around with much of it being inaccurate (at best)?
I have run across every sort of "excuse" for poor choices with money: from listening to an uncle, aunt or other relative who only has their personal experience to draw from ... to buying products the person doesn't need and can't afford from an unscrupulous financial salesperson.
All you want to do is use the resources you have (money, time and energy) in as efficient a manor as possible. What could be simpler?
Commercial Advice Not So Good
Of course, every profession probably has some skeletons in the closet that the participants would rather not tell you about. The more complicated the profession, the easier it is to use the limited knowledge of clients against their better interests. In economic and contract theory, this is called "information asymmetry."
What you don't know can definitely hurt you.
Thank goodness there are third parties there to shed light on shady practices ... except when the information they are disseminating is even more worthless. A good case in point is an article I ran across called "9 Things Financial Advisers Don't Want You to Know."
Today, I want to address a couple of these points and set the record straight. This will be a continuing work in progress. We'd be here for days before I got through all 9 secrets.
Financial Planner vs. Financial Advisor
The very first mistake that the author makes (and in my mind one of the biggest and most common mistakes in the financial media) is confusing a "financial advisor" (or adviser as the author spells it) with a "financial planner." They are two distinctly different animals. Citing research from the CERTIFIED FINANCIAL PLANNER™ Board of Standards as an introduction to the need for working with a financial advisor is like using research from the American College of Surgeons to validate the need for pharmaceutical companies.
Financial Advisors sell products. Investment Advisors tell people what to do with their investments. That is why I call them financial salespeople rather than "financial planners." Real Financial Planners have a process (that usually includes tools and techniques) so that their clients can make better financial decisions (which each of us make dozens of times each and every day).
1 - They're Checking You Out First
This is the first of the nine points the author brings up as something advisors don't want you to know.
First off, it's not a secret - at least not for a Real Financial Planner. I tell all potentials that the first meeting is a no-risk way for both of us to see if this is a relationship we want to continue. I won't try to provide financial planning services to someone if I don't think they will implement on the plan. That would be a waste of their money and my time and would result in a disgruntled former client running around telling people that "financial planning doesn't work" or that I "ripped them off."
Financial salespeople and investment advisors need to know if you have the assets or income to support their fees. That depends on their business model. They get paid to sell products. They might give some advice on the side "for free" but they won't bother with that if they can't make more than enough on the product sale or through asset management fees to cover their time.
So the real secret here is also not a secret - "No Service is Delivered for Free!" If it looks like you're getting it for free, you're paying for that service in some other way.
2 - If It's Too Good To Be True, It Probably Is
Is this really a secret? True, the investment advisor world lives and dies off of performance reporting even though they always disclaim such reports with the standard, "past results are no indication of future performance" clause.
The one secret most investment advisors won't tell you is how much investment risk your hard-earned wealth is exposed to in that portfolio of growth stocks. On that issue I am outspoken and ignored by most investors who would rather focus on the 10% investment returns they wish they could get rather than the 30% investment losses that are quite possible with a risky portfolio.
Glossing over investment risk is an issue and that would be a good point to make - but the author of this article doesn't make it. Learn more about investment risk through my videos on the Risk Spectrum and Risk Perception.
3 - They Are Largely Unregulated
This is just plain false. Once again the author is confusing "financial advisor" with "financial planner."
Investment representatives who work for the big name brokerage firms (what most people consider as "financial advisors") are all regulated by FINRA. Registered Investment Advisor firms operate under the 1940 Investment Act and are reviewed either by the SEC (Securities and Exchange Commission) or their local State authorities. Insurance salespeople are regulated by the state's Insurance Commissioner. All must pass a test and all must maintain (an albeit minimal amount of) ongoing education.
True, anybody can call themselves a "financial planner" and avoid regulation. It is important to work with a Real Financial Planner who is a CERTIFIED FINANCIAL PLANNER™ professional (CFP®). A CPA (Certified Public Accountant - more taxes than financial planner) or CFA (Certified Financial Analysts - more investment advisor than financial planner) can be a possible alternative. All three adhere to a fiduciary standard and can lose the privilege of using their designation by putting their own interests ahead of yours.
Be careful. Many financial salespeople call themselves "financial planners" when in fact they are just peddling their products with no regard for the work that Real Financial Planners do. That's an inside-the-industry dispute that has gone on through the ages and will continue.
The Madoff Syndrome
I'm going to wrap up this week's blog with a comment on one other event that seems to be permeating both this article and the financial press in general - Bernie Madoff.
Bernie Madoff is probably the biggest skeleton in the financial services closet. He ran a multi-billion dollar Ponzi scheme. He was a crook (as convicted) and deserves to be in jail. I'm sure there are many more crooks in the ranks of the financial services world (although hopefully none that big).
Bernie Madoff was regulated. He operated under the 1940 Act and the SEC. Regulation won't stop people from building Ponzi schemes and stealing people's money. Regulation when done correctly (which these days almost never happens), will force transparent business operations and expose the crooks and scammers very early in the process.
The reason Bernie Madoff was allowed to go so long was not because of "not enough regulation." It was because there are "too many needless regulations" which make operations more complicated and LESS transparent. That is how "investment advisors" or "insurance salespersons" can call themselves "financial planners" while they are just managing investments or selling financial products.
Stories like the one on the "9 Secrets Financial Advisers Don't Want You to Know" only make matters worse - unless this article and others to follow do something to clear up the issue.
John