Q&A: How to tell if you’ve got the right financial advisor

Dear Liz: I have met with a financial advisor, but he wants every investment to go through him. Although he is an advisor, he works for a company and wants me to buy their products. I’m a little resistant about this. What’s your advice?

Answer: Anyone can call himself or herself a financial advisor or a financial planner. There are no education, experience or ethics requirements for using those titles. A more accurate job description for this guy might be “product salesman.” He may not charge you upfront, but he’ll make commissions from those products and will recommend them even if there are better, cheaper options available.

If you want someone who puts your interests first, look for a fee-only advisor who’s willing to act as a fiduciary. “Fiduciary” means the advisor promises to act in your best interests. And don’t confuse “fee only” with “fee based.” Fee-only advisors are compensated only by their clients. Fee-based advisors may charge their clients while accepting commissions for the products they recommend. You can get referrals to fee-only advisors from the Garrett Planning Network at www.garrettplanningnetwork.com and the National Assn. for Personal Financial Advisors at www.napfa.org.

If you want someone to give you comprehensive financial planning advice, make sure that he or she has the appropriate credential such as Certified Financial Planner (CFP) or Personal Financial Specialist (PFS) and that you verify the credential with the group that issued it (the CFP Board of Standards for the CFP, and the American Institute of Certified Public Accountants for the PFS).

If all you want is help with investment management, though, you may not even need an advisor right now. “Robo advisors” offer automated portfolio management using computer algorithms. Robo-advising began with start-ups like Betterment and Wealthfront and it’s now offered by more established companies, including Charles Schwab and Vanguard.

Q&A: Paying an advisor vs. doing it yourself

Dear Liz: I started with a fee-only advisor 10 years ago. She moved to another company a few years after and I followed. She’s really done well for me. My question is, now that I’m getting ready to retire, should I manage my own accounts to avoid incurring commissions or fees? I don’t anticipate making any major changes to my portfolio.

Answer: If your advisor is truly fee-only, then you aren’t paying commissions on your investments. You’re paying fees to her plus fees for the various investments you own.

You can’t avoid fees. While you’re smart to want to avoid paying too much, you also need to consider the value you’re getting. Is your advisor a comprehensive financial planner who can answer your questions on most aspects of your finances, from budgeting to estate planning? Has she helped you stick to your investment plan in good times and bad? Can she serve as a watchdog as you age, monitoring you and your accounts for signs you’re at risk for fraud or bad decisions?

If you’re not getting your money’s worth, then you have two options: looking for a cheaper deal or an advisor who will give you more service.

For example, if your advisor is just providing investment management and you’re paying more than about 1% of your portfolio for her services, then you might well consider doing it yourself or turning to one of the many automated investing services that charge one-quarter to one-half a percentage point. Alternatively, you could look for an advisor who can be a comprehensive planner for the same fee, or less, than you’re paying now.

Wednesday’s need-to-know money news

2Today’s top story: 4 steps to managing your parents’ bank accounts. Also in the news: How banks boost overdrafts by counting big debits first, how to determine whether to pay down debt or save for retirement, and mistakes to avoid when choosing a financial advisor.

4 Steps to Managing Your Parents’ Bank Accounts
Taking the reins.

Many Banks Boost Overdrafts by Counting Big Debits First, Report Says
Putting transcations in a certain order can guarantee overdraft fees.

This Calculator Will Tell You Whether to Pay Down Debt or Save for Retirement
Which should you choose?

3 Mistakes to Avoid When Picking a Financial Advisor
Selecting the right one for your needs.

Q&A: Where to find help with managing your finances

Dear Liz: I am a mid-30s single woman who needs accountability in managing my finances and paying down debt. I have about $7,000 in credit card debt and $9,000 in student loans and I earn $55,000 a year. I feel as though I may have the financial means to do this but require a knowledgeable, structured approach. I’d like to work with someone to set up a plan and help me stay on track with it. I’ve considered trying LearnVest as well as smaller privately owned financial planning companies and a financial coach. Do you have any recommendations for finding assistance that could best suit my needs? Does what I’m looking for even exist?

Answer: It’s not always easy to find a fee-only financial planner who will help with budgeting and debt repayment. Many advisors cater to high net worth individuals who typically don’t have the same cash-flow issues as middle Americans.

The Garrett Planning Network offers referrals to fee-only planners who charge by the hour at www.garrettplanningnetwork.com. These advisors have the certified financial planner credential and, unlike many other fee-only planners, don’t have minimum asset requirements for new clients. You can interview a few prospects by phone to get an idea of the cost, but expect to spend at least a few hundred dollars to get started and then hourly fees for ongoing help.

If you’re OK not meeting with your advisor in person, LearnVest offers email access to a dedicated advisor who is either a certified financial planner or a registered investment advisor representative. For a $299 setup fee and a $19 monthly fee, you’ll get a customized financial plan as well as step-by-step instructions for implementing it.

Another option to consider is a nonprofit credit counselor. These agencies offer debt management plans for those who struggle to pay their credit card bills, but many also offer budgeting classes and financial coaching. You can get referrals from the National Foundation for Credit Counseling at www.nfcc.org. Your initial meeting with a counselor will be free. If you opt for a debt repayment program, the enrollment cost is capped at $75 and the monthly fee at $50, although many agencies charge less.

Q&A: How does a lottery winner find a financial advisor she can trust?

Dear Liz: I’m a middle-aged, single, childless woman who won a very nice lottery prize. I took the “cash value” option and after paying federal tax, I was left with $1.2 million. I would like to pay cash for a home, have a tidy nest egg put aside and have money for travel and other occasional luxuries. I also receive a disability pension of $1,800 a month, which includes medical and dental benefits. Do I need a financial planner at this point? I was figuring I knew what to do, but may need an expert to help me go about doing it.

Answer: One of the things you’ll notice, if you haven’t already, is how people will come out of the woodwork to “help” you with your money. Some position themselves as advisors, while others will be offering “business opportunities” or just looking for handouts.

You would be smart to seek out a trustworthy fee-only financial advisor to help make the most of your money and to deal with all those who want to part you from it. The phrase “That sounds interesting — let me run it past my financial planner” can short-circuit a lot of importuning.

The planner can help you determine a safe spending rate for your windfall and discuss some issues you may not have considered, such as the need for more liability insurance (since you’re now a bigger lawsuit target) and a plan to pay for long-term care.

The advisor you want won’t be found at your doorstep or in your email box, begging for your business. The best planners are too busy advising to run after lottery winners. You can find referrals to fee-only planners at the National Assn. of Personal Financial Advisors (www.napfa.org) and the Garrett Planning Network (www.garrettplanningnetwork.com). Interview at least three and make sure they’re willing to sign a fiduciary oath to put your interests first.

Q&A: Dealing with a big lottery win

Dear Liz: My brother-in-law won a good chunk of money playing the lottery. He is waiting for the check to come any day now. He is willing to give me $2 million. The question for you is how I can maximize that amount of money short term or long term?

Answer: If your brother-in-law has any sense at all, he’ll realize he shouldn’t have promised any gifts before he assembled a team of professional advisors. And they almost certainly will have a dim view of him giving you a seven-figure sum.

Handouts that large have gift tax consequences. Anything over the annual exemption amount, which this year is $14,000 per recipient, has to be reported on a gift tax return. Amounts over $14,000 count against his lifetime exemption limit, which is $5.45 million this year. Once that limit is exceeded, he’ll owe substantial tax on any gifts.

Also, the $5.45-million limit is for gift and estate taxes combined. Any part of the exemption he uses during his lifetime for gifts won’t be available to shield his estate from estate taxes when he dies. Although, given his apparent generosity, he may not have enough left at his death to trigger an estate tax.

It’s not uncommon for those who receive large windfalls to wind up broke, especially if the amount is much larger than they’re used to handling. More than a few professional athletes and lottery winners have wound up in bankruptcy court. They spend or give away money at a clip that simply isn’t sustainable.

Which may be the road down which your brother-in-law has started. You can take advantage of your relative’s ignorance by holding him to his pledge or you can do the right thing, which is to encourage him to hire fee-only advisors — including a CPA, an estate-planning attorney and a comprehensive financial planner who’s willing to sign a fiduciary oath — to help him deal with this windfall.

Tuesday’s need-to-know money news

how_to_build_an_emergency_fundToday’s top story: How two extra years in college could cost you close to $300,000. Also in the news: How a financial advisor can help with life insurance, tips for paying off student loans if you didn’t finish college, and why 66 million Americans don’t have an emergency fund.

2 Extra Years in College Could Cost You Nearly $300,000
An incentive to graduate on time.

How a Financial Advisor Can Guide Clients’ Life Insurance Decisions
Seeing the bigger picture.

Tips for Paying Off Your Student Loans if You Didn’t Finish College
Strategic repayment could save you money.

66 Million Americans Have No Emergency Savings
A recipe for disaster.

Should you bail on stocks?

Stress Level Conceptual Meter Indicating MaximumIt’s a trick question, of course. If you’re asking it, then it’s time to review your long-term investment strategy (or to come up with one, if you haven’t done so).

The bottom line is that trying to time the market is a loser’s game. Those who say they can do it are blowing hot air up your skirt. Sure, some people sell in time to avoid the worst of a downturn–and then they typically miss the rebound that inevitably follows.

If you’re investing for a goal that’s decades away, such as retirement, then the day-to-day fluctuations of the market are irrelevant noise. Even if you’re close to retirement age, you’re still going to need a hefty exposure to stocks to give you the growth you’ll need over time to offset inflation. You can’t expect gains without declines, though. They’re part of the deal.

If you really feel you need to do something, then get a second opinion on your current asset allocation–how your investments are divided among stocks, bonds and cash. You can get free advice from sites such as FutureAdvisor or look into low-cost options from Vanguard or Schwab, among others. Another option is to hire a fee-only planners who charge by the hour or who charge a retainer or a percentage of assets. The Financial Planning Association has tips on choosing a financial planner. Once you have a target asset allocation, you’ll have a map to follow regardless of what the market does.

 

How you can benefit from the robo-advisor price war

iStock_000014977164MediumDigital investment advisor Wealthfront snagged some headlines this week by dropping its minimum investment from $5,000 to $500 and calling out its competitors, particularly Betterment, for charging too much.

Which is kind of unfortunate, because it could leave people with the impression that Betterment is gouging people, when it (like most of the other robo-advisors) charges a fraction of what other advisors do, and Betterment has no minimum investment requirement.

Betterment’s charge ranges from .15% to .35%. On accounts under $10,000, Betterment charges a minimum monthly fee of $3 unless investors set up auto-deposit. Wealthfront manages the first $10,000 you invest for free, and charges one-quarter of one percent (.25%) above that.

By contrast, many human advisors charge 1%, or even more, to manage investments. If you’re not familiar with robo-advisors, you can read about them here and here.

Roboadvisors, in other words, are providing the cheap, conflict-free investment management that many people, especially those without big portfolios, have been waiting for. They’re even a possible lower-cost solution for those with big portfolios, now that Vanguard is offering a robo-advisor service paired with access to human financial advisors for a .3% annual charge.

If you’re intrigued by the idea of low-cost investment management, don’t let a little dust-up between competitors dissuade you. Check out your options and make up your own mind.

 

Your financial advisor: just a car salesman?

Retro Car Salesman C

Is this your financial advisor?

Wall Street is trying to prevent new rules that would require financial advisors to put your interests ahead of their own. Big brokerage firms have said they simply won’t serve the middle class if they can’t offer conflicted advice to them. Even more telling, MetLife Inc. CEO Steven Kandarin recently used a car salesman analogy that compares financial advisors to Ford and Chevy dealerships. Car salesman aren’t required to point out the better deal across the street, Kandarin asked, so why should financial advisors?

If you think the people advising you about your life savings should only be held to the standards of car salesmen, then do nothing. If you think they should be held to a higher standard, contact your Congressional representatives now:

http://www.usa.gov/Contact/US-Congress.shtml