Chapter 25: Getting Help with Money

Mark Hanna: “The name of the game, moving the money from the client's pocket to your pocket.”

Jordan Belfort: “But if you can make your clients money at the same time it's advantageous to everyone, correct?”

Mark Hanna: “No.”

– The Wolf of Wall Street (2013)

This book is meant to get you started managing your financial life. But you may not have the desire or confidence to do everything yourself. You may want someone to help you figure things out and keep your impulses in check. Where do you turn for help?

Once you look, financial advice is everywhere. You have financial tele-evangelists on call-in shows. You have personal finance columnists and bloggers. You have an industry of over 300,000 “financial advisors” with an alphabet soup of credentials. You have Nobel-prize winning economists, “millionaires next door,” rich and poor dads, and your buddy at the bar. Everyone is dispensing financial advice.

At the end of the day, whoever you turn to, three things matter: competence, incentives, and trust. You should talk to potential advisors and probe on each of these.

Competence

Help is best coming from someone who knows what they are doing. Turns out that selling financial products or calling yourself a “financial advisor” just requires passing some basic licensing exams. The bar is low. So to get a handle on competence, here are some things to look for.

Credentials

Credentials are no guarantee, but at least they tell you somebody spent time studying, passing exams, and getting a minimum level of education and experience. There are dozens of credentials in financial services. Here are some of the most widely recognized:

Financial planning

Certified Financial Planner (CFP®)

Chartered Financial Analyst (CFA®)

Chartered Financial Consultant (ChFC®).

Taxes

Certified Public Accountant (CPA)

Enrolled Agent (EA)

Insurance

Chartered Life Underwriter (CLU®)

Investments

Certified Financial Analyst (CFA®)

Estate Planning

Law Degree (Juris Doctor (JD))

Experience

Experience does not mean an advisor should be old. Still, a twenty-two-year-old will probably have less of it. Experience should be relevant. You want a sense that a person has encountered situations similar to yours, has seen different market environments, and can think creatively about your situation. You also want someone who knows their limitations and who will direct you to a specialist if necessary.

Expertise

You may require somebody with specialized knowledge in an area such as estate planning, planning for people with disabilities, retirement planning, or debt counseling. Or who has expertise with clients in your profession or demographic (e.g., race, gender, sexual orientation), all of which bring their own planning challenges.

Investment Track Record

If somebody tells you about how they achieved “superior returns” in the past, ignore it. Even if they have lots of charts and graphs. In fact, be suspicious if this is how they try to show that they are “competent.” And don’t be drawn in by stories or jargon—more often than not these are just dressed-up sales pitches.

Incentives

Financial help is not free. You should know how and how much you are paying for what you get. Here are the ways people get paid:

Commissions: A percentage of the transaction. For any transaction recommended to you, find out if the advisor earns a commission, and how much. If they say “Oh, the company pays me the commission” that’s a red flag. You may not pay directly, but you pay. Also ask whether they earn any “bonuses,” “overrides,” or other compensation based on the transaction. Finally, ask whether they will earn “trail commissions,” which means some ongoing payments after the initial transaction.

Asset-based fees: A percentage of your account balance. While fees are coming down in the investment industry, 1% of your account balances every year is still common. Many advisors who use this model tout being “fee-based.” We saw the damage this can do to savings in Chapter 12. Fee-based does not mean low cost.

Fixed fee: This could be a periodic dollar amount, or a one-time fee to prepare a financial plan. Lawyers preparing estate plans often work on this model as well.

Hourly rate: Many lawyers and CPAs work on this basis, and it is increasingly common among financial advisors as well.

Salary and bonus: Advisors working for likes of Fidelity and Vanguard may be paid a salary and bonus. Ask whether their bonus is affected by your financial choices.

Once you understand how your prospective financial advisors are paid, do the math and turn percentages it into dollars. This makes the cost more real and easier to compare.

Why should you even care about all this gory detail? Two reasons. One, it lets you understand the incentive an advisor has to sell one product versus another. Two, it also tells you something about their trustworthiness. If they are transparent, it means they believe in the value of their service. If they are reticent, maybe you shouldn’t open up your financial life to them either.

What about personal finance personalities (like Suze Orman or Dave Ramsey), newspaper columnists, authors, and bloggers. They make money by selling stuff -- books, seminars, newspapers, courses, ads. They often endorse specific companies and get paid for it. Odd as it seems, even when you call or write in with a specific question they don’t call it financial advice. The reason? The answers you get are generic, considered to be general education or entertainment. You didn’t pay to get personal advice.

So it is with this book. It falls into the category of general education. It is not personal advice. To be clear, though, I don’t get paid by anyone mentioned in it.

Trust

How do you know you can trust a financial professional? If you’ve found someone you might hire, it’s time do a little research.

Background Check

Make sure there hasn’t been any known foul play. Start with a Google search of the individual and their firm to learn about them.

Anyone who provides financial advice or sells securities should be registered with the Financial Industry Regulatory Authority (FINRA). Check FINRA’s broker check site to see whether there have been any disciplinary actions.

Check the certifying organizations for any professional designations to see whether they are a member in good standing. For example AICPA lists disciplinary actions against CPAs.

Fiduciaries

You should ask a prospective advisor whether they will act as your fiduciary. This means they have a legal obligation to put your interests ahead of their own. It may surprise you, but many “financial advisors” are not fiduciaries. Often they are only required to make sure their recommendations are “suitable” or are in your “best interest.” Those are lower standards which allow them to favor certain products over others that might better serve your needs. It doesn’t mean their recommendations are bad. Indeed, I would view an honest and transparent answer from an advisor who is not a fiduciary as a sign of trustworthiness.

Custody

Custody (in this context) refers to safeguarding your money. When you put your money in an account at a large bank or brokerage firm, typically that institution is also the custodian of your money. Smaller advisory firms often use these large custodians to hold your money. This is good. Be careful about smaller firms that want custody of your assets themselves. [65]

Interview

Before signing any agreement or contract with a financial professional have a conversation. Talk about how you will interact (in person, virtually, etc.) and how they get paid (see above). Get a feeling for how you fit in with the rest of their client base. Will you be too small to matter? A big fish in a small pond? Do they seem mostly interested in selling you something as opposed to helping you achieve a goal? Do they listen and answer your questions? Do they have humility?

References

Ask for references and talk to those references. Are they current or former clients? Is the financial professional available when needed? Do they listen to their clients’ concerns and understand their needs? Are their recommendations personalized or “off the shelf?” Do they explain recommendations and concepts clearly?

Changing Advisors

Once you have a financial advisor remember that this is a business relationship. It’s okay to switch if things don’t go as you thought they would or your situation changes. You may decide to do more on your own. Your needs may evolve and require different skills. There may be cheaper alternatives. Be professional and polite, but if you gotta go, you gotta go. That’s okay.