Objective information about financial planning, investments, and retirement plans

Don’t Settle for Suitable Financial Advice

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My first blog post  relating to a Fiduciary Standard that many of us had hoped would soon be enacted into law Why Should I Care if My Financial Advisor is a Fiduciary? was written in October, 2009.  It’s now September, 2013 and we are still waiting for a Fiduciary Standard.  As an investor you should be outraged.  Moreover, in my opinion, you should not have to settle for financial advice that involves selling you financial products that are merely suitable for you.

Suitable for whom?

This definition from the Clausen Miller law firm which I used in my 2009 post is still the best concise definition of the suitability rule that I have found:

The suitability rule provides that when a financial representative recommends to an investor the purchase, sale or exchange of any security, a financial representative shall have reasonable grounds for believing that the recommendation is suitable for such investor upon the basis of the facts, if any, disclosed by such investor as to his or her other security holdings and as to his or her financial situation and needs. 

So what’s the problem?  The rule says nothing about the financial advisor putting the interests of the client above their own.  In fact a registered rep with a broker-dealer owes their first loyalty to the B-D firm.  There is nothing to say the rep should put a client in the best financial product available, just simply a financial product that is suitable for their needs.  As an example, a rep for a given broker-dealer might push a variable annuity product offered by their employer instead of a lower cost VA offered by another firm like Vanguard that might be a better fit for their client.  Among the reasons for this is the fact that there is no way for the rep to be paid for selling the lower cost product.

Why is it taking so long to adopt a fiduciary standard? 

In my opinion this has not happened because the major financial services firms don’t want it to happen.  They have deep pockets and have spent a lot to lobby against doing the right thing for you, the investing public.

Some of the major brokerage firms have said that they will not be able to serve investors with smaller account balances if they have to adhere to a Fiduciary Standard.  Are they serious?  And if they are is this a bad thing for those investors?  Are these firms and their registered reps really doing smaller investors a favor by putting them in high cost, poor performing financial products that often enrich the advisor far more than the client?

Why work with a financial advisor who is a fiduciary? 

First as you have likely surmised I’m terribly biased.  I am a member of NAPFA and a fee-only financial advisor who adheres to the Fiduciary Oath that all NAPFA members sign.

Beyond this, however, don’t you deserve an advisor who puts your interests first?  Aren’t you entitled to advice that isn’t tied to the sale of financial products?  NAPFA has published this guide to selecting a financial advisor.  There is some great information here and I encourage you to use this as you choose the right financial advisor for your unique situation.

Don’t settle for suitable financial advice.  Insist on a financial advisor who puts your needs first and provides advice based only on helping you to reach your financial goals.

Please contact me at 847-506-9827 for a free 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

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Your Stockbroker is Not Your Friend

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This is a guest post from Bob Richards, the publisher of The Retirement Income Blog.

Your broker may seem like he wants to help you make money and odds are he does.  Unfortunately, he works in a system that decreases the possibility he can help you.

Your Broker Does Not Give You the Best Advice

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Your broker has positioned himself as your advisor, someone acting in your interest.  However, this is not always so.  If he works for a large firm, that firm issues his paycheck and he is beholden to that firm.  Say he works for ABC Financial.  Notice that he often recommends the mutual funds or annuities created by ABC Financial.  This allows his firm to not only get a commission when you buy the fund but also fees for managing the fund.  So even though there may be better-performing funds he can recommend, he is under no obligation to do so.  His legal obligation is only to sell you what is suitable, not what is best.  And he often recommends “packaged products” such as mutual funds, annuities, or wrap accounts rather than individual stocks and bonds.  It is much easier for his firm to bury high fees in a packaged product.

You Broker May Not be Competent 

In order to become a broker (now called financial advisors at many firms), one must take a test.  The exam is like most exams—you memorize a bunch of information and then regurgitate it.  The test is multiple-choice.  Any intelligent 12-year-old can pass the exam. In fact, many brokers attend a 40-hour cram course the week prior to the exam as their only preparation. Furthermore, the exam tests knowledge about rules and regulations and almost nothing about what it takes to help you make money.  From my experience as a former branch manager for a major brokerage firm, about 80% of the brokers know very little about the market or the investments they sell. The other 20% may have actually taken investment management, economics and finance classes in school but this is not a prerequisite for becoming a broker.   Alternatively, the 20% who are knowledgeable may have educated themselves.

Your broker sells you offerings he may not understand.  Investments come with a prospectus.  I have never met a broker who read the prospectus of the investments sold. The way he often learns about the investments is by attending a luncheon given by a wholesaler (a sales person to sales people) who provides the sales talking points for the broker to incorporate in his pitch.  Because the broker cannot distinguish between a “good” and “bad” investment, he generally sells what his firm recommends. 

A Better Investment Professional

Very few investors realize that there are two types of professionals in the investment business. I have described so far a registered representative, the technical term for a stockbroker who sells investments and earns commission. There is another type of investment professional called a registered investment advisor. This person has obtained a license that permits him to give investment advice for a fee. He won’t sell you something and earn a commission (though some brokers and registered reps are both sales people and registered investment advisors via their firms). He will give you advice in return for payment. He is also legally responsible to you as a fiduciary. The definition of fiduciary duty:

“A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the “principal”): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.”

The way that most registered investment advisors work is that they manage your investment portfolio for a percentage of the assets for which they are providing advice (e.g. 1% of the portfolio value would be $1,000 annually on a $100,000 portfolio). Because of the way they are compensated, they have no motivation to sell you this stock, that stock, that mutual fund or this bond. Their motivation is to retain you as a client and to make your account grow. Only in this way can they make more money from you by helping you grow a larger investment nest egg from which they can collect their 1%. Yet others simply work hourly much like an accountant or an attorney or via a fixed retainer. Again, they have no incentive to sell you the product-du-jour as does a broker.

Advice for Selecting an Investment Professional

So here’s the advice I’d like to give every investor.

  • Do not buy packaged products because unless you read the 80 page prospectus, you are likely being ripped off in terms of high fees.
  • Buy individual stocks and bonds and no load mutual funds which you must buy on your own because commission brokers don’t sell them.
  • Either deal with a registered investment advisor who will charge you fees and not commissions or you’ll need to learn enough about investing to do it yourself.

This is a guest post from Bob Richards, the publisher of The Retirement Income Blog.

Please feel free to contact me with your investing and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

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My Thoughts on PBS Frontline The Retirement Gamble

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Gamble

The PBS show Frontline recently aired The Retirement Gamble, an investigative documentary on the state of retirement savings and the problems with 401(k) and similar retirement plans.  The show did a great job of highlighting a number of issues and was pretty scathing in its treatment of the financial services industry and workplace retirement savings plans.

As a professional who serves as a financial advisor to a number of 401(k) plan sponsors as well as to individual clients (most of whom are either close to retirement or in retirement) I watched this broadcast with great interest.  Here are my reactions to what I saw.

Key issues highlighted by The Retirement Gamble

  • The high fees imbedded in some retirement plans, often these fees are next to impossible for the average participant to uncover.
  • Poor investment choices offered in some plans.
  • There are a lot of lousy 401(k) plans out there.
  • The confusion and frustration that many retirement savers in 401(k) and other defined contribution plans feel due to the fact that they are responsible for accumulating enough for retirement.  This is in contrast to the era when many folks were covered by a defined benefit pension plan where the investment risks and responsibilities for funding the plan were on the employer’s shoulders.
  • While the issues highlighted were not new to me nor to many of us in the industry, I think this documentary was a bit of an eye-opener to many in the general public.  I say this as there have been several surveys taken over the years where a shocking number of investors responded that they had no idea that there were fees charged by their 401(k) plan.

Where the documentary fell a bit short in my opinion 

As regular readers of this blog and those who follow me on Twitter and other social media outlets know, I am highly in favor of lower retirement plan fees and anything that increases transparency for investors.  That said I thought The Retirement Gamble had a very decided bias against the financial services industry and almost felt as though they had come to their conclusions before they started on the project.

  • The show did not highlight a single good 401(k) plan and there are many out there.
  • The show did not highlight a single person who had used the 401(k) to accumulate a significant nest egg. I have the privilege to serve as advisor to a number of folks who have done just that.
  • While I am an admirer of Vanguard founder John Bogle and use index funds extensively in the 401(k) plans that I advise and in the portfolios of all clients, I disagree that there are no actively managed funds worthy of investor’s dollars.  That’s not to say that these are the majority of active funds, but they do exist.  Finding them and determining if they are an appropriate investment choice for a plan sponsor to offer is what plan investment consultants are paid to do.
  • While the program did mention advisors who act as Fiduciaries in passing, the focus was on those advisors, reps, and brokers who sell plans and/or suggest investment options that serve to line their pockets sometimes at the expense of the plan’s participants.  Why not interview some advisors who do the right thing for their plan sponsor clients and the participants of those plans?
  • The worst part of The Retirement Gamble was that while many problems and issues were brought to light, there was little in the way of advice or suggestions for plan participants on what to do to improve their situation.

I do have to say that the most amazing part of the show was the interview with the head of Prudential Retirement Christine Marcks.  She insisted that she was unaware of any of the research showing the advantages of low cost index investing over high cost active management.  While she may or may agree with the findings, the fact that she insisted that she was unaware of this research was jaw-dropping in my opinion.  I think Ms. Marcks should have been coached prior to her appearance by someone at Prudential.

The documentary is very worthwhile and if you haven’t seen it there is a link to the video on our Resources page.  Please weigh in below as to your thoughts on The Retirement Gamble.

Please contact me to discuss all of your investing and financial planning questions. 

Retirement plan sponsors, do you need an independent review of your company’s plan?  Do you need help selecting a new plan provider?  Are you looking for ongoing  financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees?  Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

Check out an online service like Personal Capital to manage all of your accounts all in one place or purchase the latest version of Quicken to get a handle on your finances.  Please check out our Resources page for more tools and services that you might find useful.

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The Ameriprise 401(k) Lawsuit – What Does it Mean to You?

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A lawsuit brought by a group of current and former employees of financial services firm Ameriprise has been allowed to proceed.  The suit alleges that Ameriprise violated their fiduciary obligations as the sponsor of the 401(k) plan it offers to employees.  The main issue is that Ameriprise offered a number of its proprietary mutual funds as options in the plan; these funds were allegedly expensive compared to other non-proprietary options that could have been utilized.  Further it is alleged that these funds paid revenue sharing and other fees to Ameriprise and several of its subsidiaries.

What does this mean to you as a 401(k) participant? 

The implications of this suit are pretty clear.  If Ameriprise is found to be guilty of breaching its Fiduciary duty by stocking their 401(k) plan with sub-par, expensive proprietary funds this moves us further along the path of accountability by retirement plan sponsors for the retirement plans offered to their employees in my opinion.

During 2012 your company (generally via its retirement plan provider) provided several disclosures regarding your 401(k) plan.  While some of these disclosures were not all that revealing (and others may have been downright cryptic) these disclosures began to “open the curtain” a bit.  In anticipation of these disclosures I am aware of several providers who improved their plan offerings as well as activity on the part of a number of plan sponsors who started to look at other platforms and providers for their organization’s 40(k) plan.

The temptation among many employees is to ignore information received about your 401(k).  Hard to blame them, much of this information is poorly written and hard to understand.  However, you would be wise to review the disclosures received and any future disclosure materials.  Do your best to become an informed plan participant.  Review the mutual funds (or other investments) offered.  Are they typically at least in the top half of their category in terms of investment performance?  Are the expenses low relative to other funds in the same fund peer group?  Could less expensive share classes of the funds offered that be considered?  This last point includes even low cost index funds that may be offered.  For example, low cost Vanguard has several share classes that are lower in cost than their basic Investor share class.

I’m not necessarily advocating that you sue your employer for offering lousy investments or for sponsoring a plan that is sub-par, but there is nothing wrong with joining together with other co-workers and presenting your concerns about the plan to your employer.  By definition a 401(k) plan and other defined contribution plans put the onus on you to save and invest for your own retirement.

What does this mean to organizations that sponsor 401(k) plans? 

To say that companies who offer 401(k) plans, consultants and advisors (like yours truly), and ERISA attorneys are watching this suit with a great deal of interest is an understatement.  Essentially this suit could say to employers that if you offer a crappy, high cost 401(k) plan with lousy investment choices it could cost you.  And you know what, with the number of lousy 401(k) plans that I’ve seen offered over the course of my career this advisor would have no sympathy for Ameriprise and those involved with their plan should they lose the suit.  Offering your own funds and receiving revenue sharing from them to boot, really?  What’s OK about that?  I wonder how much of their own money senior Ameriprise executives have in these proprietary funds.

My hope is that this suit will help motivate employers who don’t already focus on offering the best 401(k) plan possible to look at ways to improve their plan.  I am fortunate to have a group of 401(k) sponsor clients whose main concern is doing the best that they can for their employees.  Don’t get me wrong, these companies are concerned with meeting their Fiduciary obligations and managing their Fiduciary liability as a plan sponsor.  I view these goals as being very consistent with offering a top-notch plan for their employees.  From my experience a sound process to choose and monitor investments based upon an Investment Policy Statement generally results in a better result for the plan participants.  Add to this a regular review of the plan providers (record keeper, custodian, etc.) and you have the ingredients of a solidly run plan.

I wonder what Tommy Lee Jones would say to the employees if he was used as a spokesperson to “sell” the 401(k) plan internally?  

Morningstar.com is a great tool for reviewing and analyzing the mutual funds offered in your plan.  I use this site every day; check out the free trial for their premium services. 

If you are a 401(k) plan participant and would like some help allocating your account from among the choices available to you, and/or with your overall financial planning and investment needs please feel free to contact me. 

Retirement plan sponsors, do you need an independent review of your company’s plan?  Do you need help selecting a new plan provider?  Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees?  Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

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3 Financial Products to Consider Avoiding

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It’s a New Year and many of us are looking to start the New Year out on the right foot financially.  Couple this with the upcoming tax season and this is prime time for the financial product sales types.   Before buying ANY financial product make sure that this product is right for you in terms of your overall financial situation.  Financial products are tools and just like your projects around the house you should use the right tool for the job and not the tool that the financial rep wants to sell to you.

Here are three 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.  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 expenses and surrender charges that keep you locked in the product for years.  The reality based upon my experience is that while most investors suffered major losses during 2008-09, my clients (and the clients of other financial advisors with whom I network) had generally made up those losses in a relatively short period of time and now find themselves decently ahead of where they were.  I’m not sure that an expense laden Equity-Index Annuity would have made them any better off.  If you decide to go ahead with the purchase of an Equity-Indexed Annuity be sure that you understand all of the details including index participation, expenses, surrender charges, and the health of the underlying insurance company.

Proprietary Mutual Funds

 It is not uncommon for registered reps and brokers, who are compensated all or in part by commissions or trailing fees from the mutual funds they sell, to suggest mutual funds from the family run by their employer.  While some of these funds are perfectly fine, all too often in my experience they are not.  Whether from 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 alleges the company breached its Fiduciary duty by offering a number of the firm’s own funds in the plan and these funds then paid fees back to Ameriprise and some of its subsidiaries.  JP Morgan settled a suit by some retail investors over the bank steering clients into their more expensive proprietary funds over those of other families.

While this is most common in the world of fee-based and commissioned reps, if you are working with the advisory units of a fund company such as Fidelity or Vanguard you should also question recommendations that are exclusively or mainly into their own proprietary funds.  Though I like and use funds from both families you should still question these types of recommendations.  Moreover anyone who pushes you to invest mainly with mutual funds offered by their employer should be questioned vigorously.

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 many of the major 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.

Look I certainly don’t provide financial advice for free and wouldn’t expect any other professional to do so either.  Unless the person to whom you are paying these pricey loads is providing extraordinary advice, this is a very expensive way to go.  My very biased opinion is that you should look for a fee-only advisor who isn’t compensated based upon the products they sell to you.  Rather fee-only advisors generally act as fiduciaries and are paid for their professional advice and expertise without the conflicts of interest inherent in selling financial products.

The above comments are general and reflect my opinions.  However no financial product is right or wrong in every case.  Before making any financial or investment decision it is best to review your specific situation.  Consult your financial advisor if you work with one.

Please feel free to contact me with questions about any financial products you may be considering or to address your investment and financial planning advice needs. 

Do-it-yourselfers check out morningstar.com to analyze your investments and to get a free trial for their premium services. Check out Personal Capital for a variety of online services including expense tracking, financial planning capabilities, and investment monitoring.

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A Look Back

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I have been blogging for a bit over three years now.  This has been a great outlet for my love of writing.  Working as a

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financial advisor is about the best “job” one could have and I feel fortunate to be able to share what I’ve learned over the years with you.

Just as I often review the assumptions that I use in choosing investments to recommend to my clients, I thought it would be interesting to take a look back at a few of the prior posts on this blog and to update the underlying situations.

2010 The Year of the Fiduciary? 

Well 2010; 2011; and 2012 have come and will soon all be in the books without a uniform Fiduciary Standard that must be followed by all financial advisors dealing with the investing public.  I’ve read that this will be a top item for consideration among the regulators in 2013.  I hope this is the case.  One definition of Fiduciary:

fi•du•ci•ar•y – A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest. 

I think this is the right way for all financial advisors to treat their clients; some very deep pockets in the financial services industry disagree.  

Is Your Financial Advisor Like a Replacement Ref?

I wrote this on September 26th of this year two days after the infamous Monday night game where the replacement refs robbed my beloved Green Bay Packers on a blown call at the end of the game in Seattle.  This was the game that brought the NFL referee lockout to an end.  Since then the Packers have won 7 of their last 8 games and stand atop the NFC North, Seattle has also had a good season and stands a 8-5 and are in the playoff hunt.  Nothing in this update about finance but I have been a lifelong NFL and Green Bay Packer fan.

Lessons From the Groupon and Facebook IPOs

Since writing this shares of Facebook have risen to over $27 per share from just under $18 when I wrote this post in early September of this year.  This is still far below the $38 IPO price in May, but the stock appears to be in the midst of a rally.  Time will tell how the company fares as a publically traded entity.

Groupon went public at $20 per share in late 2011.  The stock currently sits around $4.25 per share almost the same price as when I wrote this post in September.  Since then there has been some excitement as at least one hedge fund has purchased shares and the Board retained founder Andrew Mason as the company’s CEO amid speculation that they had considered replacing him.  Lastly there were some rumors that Google, a former suitor, was once again interested in acquiring the company at what would be a bargain price compared to their last offer.  I fail to understand the economics of the daily deal “industry” and view this IPO as nothing more than a payday for the founders and the investment bankers.

That Nice Man at Church Wants to Sell Me a ….

Since writing this post in January of 2011, Bernard Madoff remains in jail, one of his sons committed suicide by hanging himself in his apartment, and four years after Madoff’s arrest the trustee assigned to try to recover assets has recovered about half of the $17.5 billion that investors lost.

In the interim another famous Ponzi schemer Alan Stanford has been convicted and imprisoned.  Sadly financial fraud, including affinity fraud, is still rampant and all investors need to protect themselves.

Risk, Reward, and Peyton Manning

When I wrote this post in March the Colts had just waived Manning rather than pay him the $28 million due him at the time.  Seemed like a reasonable bet at the time given that he was coming off of neck surgery and had missed the entire 2011 season.

Peyton ended up in Denver and has the Broncos on the cusp of the playoffs with 10 wins as I write this.

Meanwhile the Colts took Stanford’s Andrew Luck as the first overall pick in the draft and he has performed beyond expectations.  He has the Colts in the playoff hunt after the team won only 2 games during 2011.  Further the team has rallied in the face of adversity with their coach being forced off the sidelines to battle leukemia.  Thankfully he is in remission.

Overall a win-win for both teams, both teams are so far being rewarded for the investments they made in Manning and Luck.

Just as with these blog posts, it’s a good idea to revisit your reasons for making financial and investment decisions to see if things panned out as you had thought at the time.  This is not to second guess yourself, but rather to reexamine your assumptions to see if you need to adjust your decision making process in the future. 

As always please feel free to contact me with your financial planning questions.

Photo credit:  Wikipedia

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How much is Financial Advice Worth?

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A fellow NAPFA advisor  and I were pondering this question this morning.

Retirement

Our meeting was centered upon marketing our 401(k) participant advice services to employers, individuals, and related service providers.  In our minds people should be beating our doors down given the general state of retirement readiness in this country.

The interesting obstacle that we’ve encountered is a resistance among many plan participants to pay for advice, with fees starting as low as $400 per year.  Both of us run our own separate practices that focus on moderate to high net individuals, and in my case also to retirement plan sponsors, foundations, and endowments.  These folks are used to paying fees and the level of the fees we ask are usually not a surprise to these clients.

We came up with two great questions in terms of the 401(k) participant advice market.  How much is financial advice worth?  Is your financial future worth $400?

I recently needed a new water heater, and we paid upwards of $1,500 for the water heater and the labor to install it.  Given that this is not an area of expertise for me, and the fact that working with our gas connection made me very uncomfortable this seemed like money well-spent.

Depending upon their specialty and your location, an attorney might charge $250 -$500 per hour.  If you find yourself in a situation requiring their legal expertise, most of us wouldn’t bat an eye at these fees.

People routinely spend $1,000; $2,000; or more on a vacation.  This is money well-spent; I know that our adult children still talk about some of the family vacations we took when they were younger.

So how much is competent, unbiased financial advice worth?  Part of the answer lies in the benefit that you expect to receive from spending the money.  I ask the question rhetorically because we really want input.  Please leave a comment with your thoughts; we’d really love to know what you think.

As always please feel free to contact me with your financial planning questions and concerns.

 

Photo credit: 401(K) 2012

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Client Interests Shouldn’t Come First?

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The financial services lobby (primarily major brokerage firms and insurance companies) have vigorously fought a proposed Fiduciary Standard that would cover all who provide financial advice to consumers.

They have made arguments including one that many investors with smaller accounts might find themselves without access to advice as a result of an inability to charge commissions on these smaller accounts (an argument that is not necessarily true).

The bottom line here is that a financial advisor who acts as a Fiduciary is required to place the best interests of their clients first. Maybe I’m making this all too simple, but to me the opponents of a Fiduciary Standard for all advisors are saying that the interests of their clients shouldn’t (or don’t) come first.

If the client’s interests don’t come first, whose interests do come first? I’ll leave that as a rhetorical question for you the reader to answer.

I first wrote about this topic in 2009 in my post Why Should I Care if My Financial Advisor is a Fiduciary? Sadly this debate continues between the regulators, the financial services lobby, and groups who support a Fiduciary Standard for all advisors.

Some resources you can use in choosing the right financial advisor for your needs:

NAPFA’s Pursuit of a Financial Advisor Field Guide; an excellent resource to help guide you through the process of finding the right financial advisor for you.

6 Questions to Ask Your Financial Adviser, an article that I recently wrote for the US News Smarter Investor Blog.

As always feel free to contact me  if I can be of help.

Full disclosure, I am a Fee-Only advisor and a member of NAPFA, the largest professional organization of fee-only advisors in the country. We sign a Fiduciary Oath towards our clients when we join and reaffirm that oath annually upon the renewal of our membership.

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How is my Financial Advisor Compensated? – Fee-Only vs. Fee-Based

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Fee-Only is pretty straightforward. The client pays the advisor for his/her advice. The fees can take one or more of several forms:

• A flat fee for the services rendered.
• A percentage of the client’s investment assets or in some cases another metric such as net worth.
• Hourly

Additionally the fee can be for one-time or ongoing services. In no case will a Fee-Only advisor receive any compensation from sales commissions, trailing commissions, or any other form of compensation derived from financial product providers.

Fee-Based compensation is bit fuzzier and quite often very misunderstood by the public. A typical Fee-Based arrangement might work like this:

The advisor will charge a set fee for the initial financial plan. This is the “fee” part of the arrangement. However, in many cases, if the client wants to implement the advisor’s recommendations for investments, insurance, and other financial products this will be done via the sale of commissioned products.

Where Fee-Based can become even more confusing is in the case of a broker or registered rep using a wrap program as a means to implement investment recommendations. A wrap involves investment management services for a percentage of the assets under advisement, a structure similar to that used by many Fee-Only advisors.

What differs in most cases is that the Fee-Based advisor and their broker-dealer will also receive compensation from the underlying investment vehicles (mutual funds, etc.) in the form of 12b-1 fees or a similar form of trailing fee, or in the form of commissions on stock trades executed exclusively through the advisor’s brokerage firm. Additionally it has been my experience that often the assets under management fee for these wrap programs is higher that charged by most Fee-Only advisors for similar asset levels.

I am a Fee-Only advisor and am admittedly biased. My point in writing this post was not to disparage those advisors who are not Fee-Only, although I do remain convinced that this is the most client-friendly compensation structure. Rather, I want to reiterate that clients and those looking for a financial advisor need to understand what they are paying for, how much they will be paying, and how they will be paying for financial advice and any financial or investment products they will be purchasing.

For more please see my prior posts:

“How is my Financial Compensated?” http://ow.ly/Gmcc

“Why Should I Care if My Financial Advisor is a Fiduciary?” http://ow.ly/GmcQ

The idea for this post originally came from a recent post and some of the subsequent comments on the Oblivious Investor Blog:

“How Much Does a Financial Advisor Cost?” http://ow.ly/Gmfm

Wondering where you can find the names of Fee-Only financial advisors in your area? Check out NAPFA’s website http://napfa.org/ and click on the Find An Advisor button on the left side of the site. (Full disclosure, I am a member of NAPFA and also a member of the organization’s Midwest Regional Board.)

Please contact me at 847-506-9827 for a free 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Photo credit:  Wikipedia

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Why Are You Running Your Company’s 401(k) Plan?

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Smart Money recently ran an article depicting several small companies where either the owner or a group of senior managers were in charge of the firm’s 401(k) plan and who were largely making decisions regarding the plan on their own. The article pointed out that many of these folks do not have a background in either investments or qualified plans.

The focus of the article was to point out to plan participants that in many cases their plan was being run by folks who may or may not be qualified to make decisions as to investments offered, the custodial platform, or the plan record keeper.

My take on this article is to wonder why these small/mid-sized company owners and managers would want to take on this responsibility?

First of all, these individuals would be considered plan fiduciaries,which means that they can be held personally liable under certain circumstances for doing a poor job.

Effectively managing a 401(k) plan involves taking the time to select and monitor the investments, overall plan expenses, as well as the fees and performance of all plan vendors. Today it seems that business owners and their senior managers have more on their plates than ever.

Running a 401(k) plan is about more than the investments. Total plan cost has always been a key issue and is coming more into the limelight as the spotlight shines on the issue of Fiduciary roles and obligations.

Selection and monitoring of Target Date funds is receiving much attention in the press and in Congress in light of the losses suffered in 2008 by some of the shorter maturity date funds. Defaulting to the funds offered by a bundled provider is not always the right answer, this option will likely come under more and more scrutiny over the next few years.

Even if the business owner is a knowledgeable investor in his/her own right, does this knowledge translate into the ability or the time to select and monitor all aspects of a solid retirement plan that is a great option for the majority of the company’s employees?

I’ve seen instances of plans that will take the suggestions of their bundled provider (a fund company such as Vanguard, Fidelity, or T. Rowe, or an insurance company such as Prudential) and implement those suggestions as the plan’s investment lineup. The representatives of these companies are not plan fiduciaries, but company managers running the plan are. I doubt that these folks are trying to do the plan any harm, but at the end of the day their loyalty is to their employer not the plan participants.

If your company’s plan is via an insurance company, your agent or registered rep may be providing investment advice to the plan. Again, this person is likely not a fiduciary, they receive commissions paid by the provider and their loyalties are at best divided.

In the interest of full disclosure I am a fee-only consultant to 401(k) plans providing advice to small/mid-sized plans. If this post seems self-serving I apologize, but this is a key issue for both owners/managers of these companies and their employees. In my opinion, running the company’s 401(k) plan requires a level of diligence and expertise that the “do it your selfer” business owner often does not have. Pulling out a Morningstar report on the funds once or twice per year does not, in my opinion, constitute proper diligence and monitoring of the plan.

For further reading in this area, please see these posts:

4 Signs of a Lousy 401(k) Plan

The Process of Monitoring Investment Holdings

Hellish Retirement Plans

Retirement plan sponsors, do you need an independent review of your company’s plan?  Do you need help selecting a new plan provider?  Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees?  Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) plan options and to get a free trial for their premium services.  

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