Objective information about financial planning, investments, and retirement plans

3 Financial Products to Consider Avoiding

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Red and white sign to avoid construction zone

Before buying ANY financial product make sure that this product is right for you in terms of your unique, personal financial situation.  Financial products are tools and just like your projects around the house you should use the right tool for the job, not the tool that the financial rep wants to sell to you.

Here are three financial products that you should consider avoiding.

Equity-Indexed Annuities 

Equity-Indexed Annuities are an insurance-based product where the returns are tied to some portion of the performance of an underlying market index such as the S&P 500.  They are also called fixed-index insurance products and indexed annuities. Your gains are limited to a portion of what the index gains and there is generally some sort of minimum return to limit (or eliminate) your risk of loss.  As you can imagine these were pitched heavily to Baby Boomers and retirees after the last market downturn and are still being sold based upon fear today.

Two problems here are generally high internal expenses and surrender charges that keep you locked in the product for years. Worse yet, these internal expenses can be hard to isolate. If you decide to go ahead with the purchase of an Equity-Indexed Annuity be sure that you understand all of the details including the level of index participation, expenses, surrender charges, and the health of the underlying insurance company. Check out FINRA’s Investor Alert regarding Equity-Indexed Annuities for more cautionary information.

Proprietary Mutual Funds

It is not uncommon for registered reps and brokers to suggest mutual funds from the family run by their employer. In many cases they are incentivized or even required to do so. While some of these funds are perfectly fine, all too often in my experience they are not.  Whether via high fees and/or low performance these are often investments to be avoided.

A lawsuit against Ameriprise Financial brought by a group of participants in the company’s retirement plan alleged the company breached its Fiduciary duty by offering a number of the firm’s own funds in the plan and that these funds then paid fees back to Ameriprise and some of its subsidiaries as revenue sharing. The suit was ultimately settled.

JP Morgan also settled a suit by some retail investors over the bank steering clients into their more expensive proprietary funds over those of other families.

Load Mutual Funds

It is important that you understand the ABCs of mutual fund share classes.  In the commissioned/fee-based world reps often sell mutual funds that offer compensation to them and to their broker-dealers.  A shares charge an up-front commission plus a trailing fee (often a 12b-1) of somewhere in the neighborhood of 0.25% or more.

B shares charge no up-front commissions, but carry an additional back-end load as part of the ongoing expense ratio.  This can amount to an addition 0.75% or more added to the fund’s annual expenses.  In addition these shares also contain a surrender charge that typically starts at 5% if your sell the fund before the end of the surrender period.  B shares have been largely phased out by most fund providers.

C shares typically have a permanent 1% level load added to the fund’s expense ratio and carry a one year surrender period.

These sales loads ultimately reduce the amount of your investment and are an expensive form of advice. Nobody expects financial advisors or any other professional to provide financial advice for free. Unless the person to whom you are paying these pricey loads is providing extraordinary advice, this is a very expensive way to go.

The DOL fiduciary rules

The fiduciary rules introduced by the DOL (Department of Labor) in April of 2016 impose a far greater level  of disclosure on financial advisors. The rules require financial advisors to act as fiduciaries when providing advice to clients on their retirement accounts such as IRAs.

The fiduciary rules require advisors to have their client sign a disclosure document for many financial products with sales charges and trailing commissions if used in a retirement account. Load mutual funds and proprietary mutual funds will most likely require a BICE (Best Interest Contract Exemption) disclosure. Additionally Equity-Indexed Annuities were not exempted from these disclosures in the final draft of the rules as they had been in earlier drafts.

It will remain to be seen how the fiduciary rules will impact these three products, both within retirement accounts and overall. As an example, broker Edward Jones recently announced that mutual funds and ETFs will no longer be offered to clients in retirement accounts where commissions are charged.

Before making any financial or investment decision review your specific situation. Consult a fee-only financial advisor if you feel that you need financial advice.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

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Reverse Churning Are You a Victim?

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One of the best things about being a freelance financial writer and blogger is that I often learn new things in the course of my writing. A reader recently left a comment on a post here on the blog and mentioned reverse churning. Until that time, I had never heard this term, but after a bit of research its’s one more thing that clients of stock brokers and registered reps need to be aware of.

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What is churning?

Investopedia defines churning as “Excessive trading by a broker in a client’s account largely to generate commissions. Churning is an illegal and unethical practice that violates SEC rules and securities laws.”

Churning conjures images such as the boiler room in the movie Glengarry Glen Ross (actually they sold real estate) or the iconic 2002 ad by Charles Schwab (SCHW) in which a brokerage house manager is depicted as telling the brokers, “Let’s put some lipstick on this pig” in reference to a sub-par stock he wants them to pitch to clients.

What is reverse churning?

A 2014 piece by Daisy Maxey in The Wall Street Journal describes reverse churning as follows:

“The Securities and Exchange Commission says the practice of so-called “reverse churning”–putting investors in accounts that pay a fixed fee but generate little or no activity to justify that fee–is on its radar. Regulators will be watching for signs of double-dipping by advisers who generate significant commissions within a client’s brokerage account, then move that client into an advisory account and collect additional fees.”

Evidently this occurs in brokerage accounts that at one point generated significant commissions for the broker from the purchase and sale of individual stocks or other commission generating transactions. If the activity in the account tails off the broker makes little or nothing from this client.

As a way to generate continual fees from this type of client the broker may suggest moving to a fee-based advisory account, often called a wrap account.

Under this arrangement there is an ongoing fee based upon the assets in the account plus often trailing commissions in the form of 12b-1 fees from the mutual funds usually offered in this type of account. These generally include proprietary mutual funds offered by the brokerage firm or at the very least costly actively managed funds in share classes geared to offering broker compensation.

Fee-based is not fee-only

Fee-based is often confused with fee-only. I suspect the brokerage industry likes it this way.

Fee-only compensation, which I wholeheartedly support, means that the financial advisor earns no compensation from the sale of financial products including trailing fees and commissions. Their fees come from their clients. These can be hourly, a flat-fee or as a percentage of the assets under management.

Fee-based compensation, also called fee and commission by some, is a mix of the two forms of advisor compensation. A common form of the fee-based model entails the client paying the advisor to do a financial plan and then if the client chooses to have the financial advisor implement their recommendations this will often be via the sale of commission-based products.

The version with fee-based advisory accounts associated with reverse churning by brokers and registered reps arose out of a 2007 rule that prohibits the charging of fees in brokerage accounts. Many broker-dealers have a registered investment advisor (RIA) arm which runs these accounts.

The fiduciary rule

The new fiduciary rules makes fee-based accounts more desirable for brokers and other fee-based advisors. These types of accounts will become even more prevalent with the disclosures required for retirement accounts under these new rules.

There has been a movement towards fee-based accounts in the brokerage world for several years now, likely in anticipation of the eventual issuance of these rules. This movement should accelerate in IRAs. In some cases, this will be a good thing as clients will fully know what they are paying in terms of fees.

In other cases, clients will find themselves paying 100 basis points or more in wrap fees for accounts where they were formerly trading infrequently on a commissioned basis. Whether the fee-based account will be a better deal will vary.

If all they are getting is an expensive managed account filled with bad to mediocre mutual funds that charge high fees on top of the wrap fee, this is not a good deal. If the advisor does little more than collect a fee, this sounds like the definition of reverse churning based on my understanding of the term. Much will depend upon the level and types of advice clients receive for the fees they will now be paying.

Buyer beware 

If you are working with a stock broker or registered rep and they propose moving to a fee-based or wrap account, you should take a hard look at what you are being offered. What is the wrap fee? What types of investments are used in the account? Are they expensive actively managed mutual funds that throw off 12b-1 fees in addition to wrap fees? What is the track record of the manager of the account that the advisor is proposing? What types of advice and service will you receive for the fees you will paying?

The Bottom Line 

I can’t recall hearing about a case of churning in recent years. Reverse churning is a new term to me, but from the perspective of a broker or registered rep fee-based advisory accounts make a ton of sense. They provide ongoing fee income and frankly require little attention from them. If your broker proposes a wrap account to you make sure you understand how this arrangement benefits you the client. Clients of brokers and fee-based advisors are likely to see more of these types of accounts proposed to them as the implementation of the new fiduciary rules nears.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Stock Market Highs and Your Retirement

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Today both the S&P 500 Index and the Dow Jones Industrial Average hit all-time highs. This comes less than a month after a 610 point drop in the Dow in the wake of the Brexit, the vote taken in U.K. where they decided to leave the European Union.

Difference Between Stocks and Bonds

Over the past 15 + years we’ve seen two market peaks followed by pronounced market drops.  The S&P 500 peaked at 1,527 on May 24, 2000 and then dropped 49% until it bottomed out at 777 on October 9, 2002.  The Dot Com Bubble and the tragedy of September 11 all contributed.

The S&P 500 rose to a high of 1,565 on October 9, 2007 only to fall 57% to a low of 677 on March 9, 2009 in the wake of the Financial Crisis. Since then the market has rallied with the S&P closing at a record 2,152 today. As someone saving for retirement what should you do at this point?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is a great time to review it and see where you are relative to your goals.  Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has a ways to run and might even be undervalued. Maybe they’re right. However don’t get carried away and let greed guide your decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner . Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

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How Does Your Financial Advisor Define Success?

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I am grateful to Jean Chatzky for her selection of this blog as her top pick among investing blogs in a recent piece for AARP Finance Blogs You Should Read.  In her write-up she generously calls me “An entertaining writer prone to football references…”  With that said I could think of no better way to start a piece about your financial advisor’s definition of success than with a mention of the University of Louisville’s rehiring of Bobby Petrino as their head football coach.  To this college football fan, Louisville’s definition of success is clear and unambiguous.  Is your financial advisor’s definition of success just as clear?

Photograph of Coach Bobby Petrino at the 2010 ...Just win baby

The short story is that the University of Louisville rehired Bobby Petrino as their football coach to replace Charlie Strong who had left for Texas.  Petrino was highly successful at Louisville from 2003-2006 before leaving for greener pastures.  Petrino’s alleged lack of character and morals typify everything that critics point to as being wrong with big-time college sports, however I’m pretty confident that none of that was a factor in the decision to hire him.  He is a talented coach and a proven winner and Louisville needs both qualities as they move to the ACC next season to compete with the likes of Florida State, Clemson, Miami, and Virginia Tech.

As the late Al Davis, founder and owner of the Oakland Raiders, said, “Just win baby.”

For those of you who read this blog on a regular basis you know that I am a fan of openness and transparency in the financial services industry so I have no issue with Louisville’s motives for this move, though I did razz my friend, NAPFA study group mate, and UL grad Greg Curry immediately (Greg is an outstanding Louisville-based fee-only advisor).

Just as Petrino was clearly brought in to win, many financial advisors sadly seem to be in this business with the primary motivation of winning, which I am defining here as earning a whole lot of money for themselves.  Why else would sales training be such a big part of the orientation programs at many firms?  Why else would there be sales contests with nice prizes such as trips to luxurious destinations for selling certain financial products?  Don’t get me wrong I’m not against earning a good living, just not at the expense of the people whose interests are supposed to come first and foremost.

For more on Petrino and Louisville check out this piece on the CNN/Sports Illustrated site by Andy Staples and this one by Michael Rosenberg. 

Is your advisor a wolf? 

In keeping with our tradition for fine family entertainment on Christmas day, this year’s family movie outing was The Wolf of Wall Street.  Watching the film made me wonder what I’ve been missing by being a fee-only advisor all these years (just kidding).

Clearly I am not insinuating that if your financial advisor earns all or a substantial portion of their income from commissions and product sales that they also participate in dwarf tossing, consumption of mass quantities of drugs, lewd sex acts, or other forms of debauchery.  I do wonder if their measure of success is the same as that of the characters portrayed in the film, namely money.  Specifically money that inures to them from selling financial products to you.

While many advisors who sell financial products are competent professionals motivated by their client’s best interests, you always have to wonder if a particular investment, annuity, or insurance product is being recommended because it is the best product for you or rather because it is the most lucrative for the advisor.

As long as some financial services firms run sales contests for advisors and incent sales production this conflict will always be there.

My definition of success 

My definition of success is simple.  I am only successful as a financial advisor if my clients achieve success. 

I would venture to say that my closest circle of financial advisor colleagues, my NAPFA study group, would wholeheartedly agree with this definition.  My guess is that the bulk of my fellow fee-only NAPFA colleagues would as well.

If you are looking for a financial advisor to start off the New Year right check out this guide from NAPFA. 

Make sure that you clearly articulate your goals and your definition of financial success to your current financial advisor or to any advisor that you are considering working with.  Clear and open communication is a vital part of a successful client-financial advisor relationship.

Please feel free to contact me with your questions. 

Check out an online service like Personal Capital to manage all of your accounts all in one place.  Please check out our Resources page for more tools and services that you might find useful.

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Choosing A Financial Advisor? – Ask These 6 Questions

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Deciding to hire a financial advisor can be a tough decision for many investors. Once you’ve made this decision, how do you go about finding the right advisor for you?  Here are six questions to ask when choosing a financial advisor: 

Madoff, Looking the Other Way

How do you get paid?

Fee-only advisors receive no compensation from the sale of investment or insurance products. When selecting a financial advisor, ask yourself whether you feel that a financial advisor who receives a significant portion of their compensation from the sale of financial products can really be counted on to recommend solutions that are in your best interest?

Are you the next Madoff?

One of the tactics used by Bernard Madoff to perpetrate his fraud was to send clients his own statements instead of statements generated by a third-party custodian like Charles Schwab, Fidelity, TD Ameritrade, and others.  A third-party custodian provides periodic (monthly or at least quarterly) statements independent of any reports provided by the advisor.  You should never give your investment dollars directly to a financial advisor, they should always be sent directly to the custodian.

This is critical if the advisor will be providing on-going investment advice.   In fact it is a deal-killer if this is not the arrangement.  If the advisor says something like “… we send out our own statements to our clients…”  end the conversation and find another advisor.

Are we the exception or the norm for you?

Ask your financial advisor about their client base. If you are a corporate employee looking for help planning for the exercise of your stock options, you should ask the adviser about their knowledge and experience in dealing with clients like you.  A financial advisor who deals primarily with teachers or public sector employees might not be the right choice for you. Likewise if the advisor’s typical client has a minimum of $1 million to invest and your portfolio is more modest, this advisor might not be a good fit for you.

What can you do for me?

If the advisor’s primary service is focused in an area like constructing bond portfolios for their clients and you are looking for a financial planner to construct a comprehensive financial plan for you, this advisor may not be a good match.  Make sure to find someone who offers the types of services and advice that you are seeking.

What are your conflicts of interest?

Financial advisors who are registered representatives will often be incentivized to sell insurance or annuity products promoted by their broker dealer or employer.  Ask how they select the financial and investment products they recommend to clients. Ask them directly about ALL forms of compensation they will receive from working with you, and if they will disclose this information on an ongoing basis. Ask them if there are any restrictions regarding the products they can recommend.

Do you act in a fiduciary capacity towards your clients?

In laymen’s terms, you are asking if the adviser is obligated to put your interests first. The brokerage industry uses the suitability standard, but in my opinion this falls far short of a true Fiduciary Standard. This argument continues in the financial services industry as the regulators work through this issue.

The questions listed above are just a few of the many questions you should ask when choosing a new financial advisor or to ask of an advisor with whom you currently have a relationship.

As an investor, it is ultimately up to you to select the right financial advisor. Do your homework and due diligence. The National Association of Personal Financial Advisers (NAPFA), the largest professional organization of fee-only advisors, has a guide to selecting an advisor called “Pursuit of a Financial Adviser Field Guide,” which is an excellent resource for those seeking the help of a professional financial advisor.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.  

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Friday Finance Links April 19, 2013 – What a Week Edition

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Chicago Floods-31

I think that we would all be hard-pressed to recall a week like this one with the tragedies in Boston and in Texas.  In addition there was a large amount of rain locally here in the Chicago area with wide-spread flooding in parts of the city and the suburbs.  Best wishes to all who were impacted.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs

Jon explains The Two Sides Of Investment Risk at Novel Investor.

Ken discusses Asset Correlation – Definition, Examples, Problems, and Why It Is Important at AAAMP Blog.

Leah explains How to navigate college financial aid offers at Living on the Cheap.

Robert discusses The Best Self Employed Retirement Plans at The College Investor.

Posts from Fellow NAPFA Members 

Sterling tells us How Financial Advisers Get Paid at Jim Blankenship’s blog Getting Your Financial Ducks In a Row.

Alan Moore suggests that we  Just Ask “Do You Have A License?” at Figuide.com.   

Other financial articles from around the web 

Steve Parrish tells employers Why You Should Care About Your Employees’ Retirement Plans at forbes.com.

Elizabeth O’ Brien tells us Why your boss wants you to retire on time at marketwatch.com.

Robert Powell says that Singles swing into retirement with little savings at marketwatch.com.

I took a week off from my contributions to the US News Smarter Investor Blog, but you can check out my prior posts at my author page. 

Here’s wishing everyone a great weekend.  

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5 Steps to a Lousy Retirement

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Lousy Retirement

 I’ve written a number of posts on this site about saving for retirement.  This time let’s turn it around and discuss 5 steps to a lousy retirement.

Invest in stocks at the top of the market 

This tip is timely as major stock market indexes are at all-time highs.  In fact one company, John Hancock recently ran a TV ad encouraging investors who had been on the sidelines during the current market rally to get in now.  The commercial depicted upscale couples sitting in their financial advisor’s office with a sense of optimism about the markets and feeling like this is the right time to invest.  Don’t get me wrong, I have no idea where the stock market is going from here, but four years into a major Bull Market is not the time to be thinking about just getting back into stocks.  A better approach is to have a financial plan that includes an appropriate investment allocation for your situation through the market’s ups and downs.

Invest in high cost broker sold mutual funds 

Whether proprietary mutual funds offered by your broker or registered rep’s employer or mutual funds with expensive loads, these funds are generally bad choices for most investors.  While no financial advisor works for free, unless there is some overriding reason to the contrary it is generally a good idea to avoid these mutual funds.  Rather look for a fee-only financial advisor who sells their advice and expertise and isn’t dependent upon commissions and trailers from the sale of financial products.  This type of structure lends itself to utilizing low cost index funds and actively managed funds across the whole universe of fund families.

Make financial decisions based upon your emotions 

It is said that fear and greed are the two most potent forces that drive the stock market.  Many financial products, especially many annuities (including Equity Index Annuities) are sold by fear mongering sales types with retirees and Baby Boomers as their prime targets.  An annuity might be the right answer for you, but don’t write a check until you review all the details of this or any financial product.  Don’t buy into the doom and gloom scenarios pitched by many financial sales types, especially right after a market decline such as the one we experienced in 2008-09.  Make financial decisions with a clear head, not out of fear, greed, or any other emotion.

Don’t take full advantage of your workplace retirement plan 

Why contribute to a 401(k) plan, 403(b), 457, or similar retirement plan offered by your employer?  It’s much more fun to spend the money on things you want now such as clothes, a new car, that vacation you deserve, etc.  Besides, didn’t 401(k) plans let investors down in 2008-09?  The reality is that your employer sponsored retirement plan is one of the best retirement savings vehicles going.  Even a lousy 401(k) plan is generally worth funding at least enough to receive your employer’s full match if one is offered.  Over the course of my years as a financial planner I can tell you that I have many clients who have accumulated (or are in the process of accumulating) significant sums in their retirement plan accounts that will play a key role in their retirement.

Don’t plan for retirement, just wing it 

Why spend money on a financial plan?  Retirement will just happen and I’ll be ready.  Things have always worked out for me.  The reality is that retirement is a financial journey, both accumulating enough for a comfortable retirement and managing your money during retirement.  While you might win the lottery or inherit a princely sum from some long lost relative, the reality is that a successful retirement takes planning.

As the legendary golfer Gary Player once said, “… the more I practice, the luckier I get…”  The same applies to preparing financially for retirement.  Planning, preparation, saving early and regularly, and your good common sense are all key elements in engineering a successful and comfortable retirement.

Please contact me with any questions you may have or with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

Please check out our Resources page for tools and services that you might find useful.

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Friday Finance Links March 22, 2013 – Go Marquette Edition

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March Madness is underway and my grad school alma matter Marquette pulled out an exciting opening round win over a tough number 14 seed, Davidson.  Butler is up next tomorrow, should be a great game.  I grew up rooting for Marquette as a kid in Milwaukee during the Al McGuire era.  They won it all in his last game as a coach in 1977 and were National runners-up in 1974.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs 

Andrea explains Mutual Fund Turnover Ratio: What You Need to Know to Pick a Fund at Take a Smart Step.

Angie tells us about Herd Mentality: You Are Being Set Up to Fail in a guest post at Value Stock Guide.

Robert shows us How to Understand the Stock Market at The Collge Investor.

Jon explains What Is Preferred Stock? at Novel Investor.

Thanks to John at Frugal Rules for featuring my guest post Financial Advisor Compensation – Why it Matters.

If you are an aspiring blogger or an experienced blogger looking for a few tips check out Jeremy’s new page Guide to Starting a Blog at his blog Modest Money.

Posts from Fellow NAPFA Members 

Tom Orecchio shares a Financial Planning Overview at Figuide.com.

Jim Blankenship discusses the Adoption Credit For Tax Year 2012 And Beyond at Figuide.com.

Other financial articles from around the web

Jeanette Pavini tells us how Anti-aging scams can be costly and dangerous at marketwatch.com.

Tom Sightings lays out 7 Steps to Independence in Retirement at usnews.com.

Dan Solin explains why FINRA’s Win is Your Loss at usnews.com.

I took a week off from contributing to US News Smarter Investor Blog but you can check out all of my prior posts at my author page.

Here’s wishing everyone a great weekend.

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Greed is Good – What if Gordon Gekko was a Financial Advisor?

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What if Gordon Gekko was a Financial Advisor?

A recent LinkedIn group discussion about the use of C Share mutual funds caused me to comment that the advisor in question must have been Gordon Gekko.  This made me wonder what the fictional Mr. Gekko would be like if he came to life as a financial advisor.

For those of you who may not know, Gordon Gekko is the Investment Banker from the film Wall Street played by Michael Douglas who uttered the immortal phase, “Greed, for lack of a better word, is good” at the shareholder’s meeting of a company that he was attempting to take over.

Compensation Structure 

I’m pretty certain that Gekko would not embrace the fee-only compensation structure with its transparency and lack of revenue from the sale of financial products.  Rather I suspect he would gravitate to either the commission or fee-based structures.  Certainly his slicked-back hair and big cuff-links would fit the stereo type of the financial advisor as a producer model.   

Load mutual funds 

I’m guessing that Gekko would love the high cost B Share mutual funds and would be doing everything he could to keep clients in this share class as long as he could.  Overall he would likely favor share classes with some sort of sales load in order to increase his income.  No low cost index fund or ETF recommendations from Mr. Gekko.

High cost Variable Annuities 

Gekko would likely suggest that you buy one of the many high cost variable annuities that make him a ton of money and may have questionable results for you his client.  There is nothing wrong with variable annuities; in fact they can be a viable solution for some clients.  What is objectionable is the way these products are often sold and the high cost versions of these products that are generally pushed by fee-based and commissioned reps.  You will never hear them touting low cost, no surrender charge versions of this product that are offered by Vanguard and others.

Life insurance is a goldmine 

Life insurance is a key component in the financial plans of many folks and rightly so.  Life insurance can provide an easy way for a family to build an estate quickly and can help protect their lifestyle should the primary breadwinner die before accumulating a sufficient level of wealth.  Inexpensive term life insurance generally provides the best approach to life insurance.

I doubt that Mr. Gekko would see things this way.  In order for him to realize a big payday from selling you a policy,  some sort of cash value policy such as whole life, universal life, variable life, or some variation would likely fit the bill. He might try to sell you on the value of the policy as an investment or as a retirement savings vehicle.  While there are instances where a cash value policy makes sense, be very skeptical if your agent or financial advisor really pushes one of these products.  Make them show you a realistic illustration.  I’ve actually seen policy illustrations using a 12% annual rate of return.   12%, really?  Oh yes, greed is good I forgot.

Equity Index Annuities 

Whenever I’ve written a post in any way suggesting Equity Index Annuities are not the best alternative for the Baby Boomers and retirees, I receive a fair amount of negative comments that range from disagreement to questioning my knowledge of finance.  This leads me to believe that my comments are right on the money.

Mr. Gekko would especially love the fear-mongering approach that is often used to sell EIAs after a market downturn.  Given the popularity of these products among the financial sales crowd I have to assume the payouts are generous, making this product a natural fit for Mr. Gekko.

Gekko’s approach to the 401(k) world 

If Gekko offered 401(k) plans as part of his practice he’d likely love the high cost group annuity plans offered by many insurance companies.  The worst event from his point of view is the recent 401(k) disclosures mandated by the government.   I wonder if Gekko would even be able to spell the word Fiduciary.

Greed is good as long as greed it is pursued in an ethical fashion and on behalf of an advisor’s clients.  I’m also not saying that every advisor who is paid all or in part via commissions from the sale of financial products is a bad advisor.  Clearly, however, the fee-only model starts with fewer potential conflicts of interest for the advisor.

Gordon Gekko is one of the best movie characters of all-time in my opinion.  Let’s be glad that he is just a fictional character and not a practicing financial advisor.

Please feel free to contact me with your questions. 

Please check out our Resources page for more tools and services that you might find useful.

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