6/15/2012 7:36 PM ET|
Can you trust a financial adviser?
Not all financial advisers are created equal. Look for these 5 signs to determine if yours may not be the right one.
Your adviser doesn't need to be a Bernie Madoff-style sociopath to cost you dearly. Ignorance, self-interest and delusions of investing competence can leave you paying above-average expenses for below-average results.
As Madoff showed, determined crooks can circumvent almost any amount of regulation. Yet there are plenty of perfectly legal ways for people to be taken advantage of by those who profess to help them.
Here are some things your adviser may say -- and some that he or she won't -- that should put you on your guard:
1. 'I won't promise to put your interests first'
You don't have to be able to spell the word "fiduciary" to understand the concept. It means the person advising you is sworn to put your interests ahead of his or her own. Lawyers, CPAs and registered investment advisers have a fiduciary duty to their clients by law. Many other advisers, however, do not. They're typically held to the lower standard of "suitability," which means they're not supposed to recommend an investment product that's clearly unsuitable for your situation. They can still try to talk you into something that's more profitable for them than sensible for you, though.
If your adviser is holding herself out as a fiduciary, she should be willing to put that promise in writing. If she refuses to take on that role, you don't necessarily have to fire her -- you just need to understand that her advice could be tainted by self-interest, and proceed cautiously.
(Many advisers believe the U.S. Securities and Exchange Commission will propose that all financial-advice givers be held to a fiduciary standard. So stay tuned.)
2. 'I won't talk about how I'm paid'
Financial advisers typically get paid one of three ways: by commissions on the investment products they sell, by a combination of commissions and fees they charge you (known as "fee-based") or solely by the fees they charge you ("fee-only").
Each method can have its advantages and drawbacks. You don't have to pay as much out of pocket to advisers who earn commissions, although the amount you invest may be reduced by the "loads" charged for the investments, and there is a built-in conflict of interest, since the adviser may favor products that pay higher commissions. Fee-only advice is free of that particular conflict, although it can be expensive.
Your adviser should be upfront and absolutely clear about how he's compensated. If he's obscure about this issue or tries to pretend his advice is free, beware. Somebody's paying, and it will almost certainly be you.
3. 'I don't know much about financial planning'
Pretty much anyone can call herself a financial planner, whether or not she's had any training in the field. Her only training may be what her company tells her about how to sell various investment products.
If you want someone with extensive, comprehensive training, look for one of these designations:
- CFP, which stands for certified financial planner and is the premier designation in the financial-planning industry.
- CPA-PFS, the comprehensive financial-planning designation (personal financial specialist) for CPAs.
- ChFC, or chartered financial consultant, a financial-planning designation granted by the American College, which specializes in educating people who work in securities, banks and insurance.
4. 'I pretend risk and reward aren't related'
The scariest of all financial advisers are the ones who promise high returns with little or no risk. That's not possible in the real world, so you're dealing with someone who's deluded, a dunce or a scam artist.
Here's the reality: Even the "safest" investments contain some risk. With Treasurys and FDIC-insured bank accounts, considered the safest investments anywhere, you typically don't receive enough of a return to offset inflation, so your buying power is eroded over time. Investments that pay more than insured bank accounts and U.S. government debt involve taking other risks, such as the risk you'll lose principal or that you won't be able to access your money when you need it. Another hazard: an investment that promises "safe" returns may depend on the solvency of the company that created it, or may charge high fees, or both.
Most of us need to take some risk to meet our financial goals. For example, we need the inflation-beating returns of the stock market if we hope to retire someday. We should educate ourselves to understand those risks and take them in rational ways. Believing we can make some kind of end run around the risk-reward continuum will just set us up to be conned.
5. 'I guarantee market-beating returns'
Few people can consistently outperform the market. That's why Warren Buffett is so famous -- because he has. Other investors who try often wind up underperforming market benchmarks. Their active trading strategies rack up fees that aren't offset by superior returns.
Any adviser whose strategy involves active trading -- as contrasted with a passive approach that just tries to match the market -- should make it clear that there are no guarantees he'll succeed. Even a strategy that's worked for an extended period can suddenly go cold or underperform in different market conditions.
You should run away from anyone who pretends otherwise. Other advisers to avoid include those who:
- Pretend there are "secrets" to investing or "strategies only the wealthy know."
- Pressure you to invest without giving you time to investigate what you're investing in.
- Want you to invest in any scheme that requires you to recruit other investors. That's known as a Ponzi scheme, and it's illegal, not to mention a disaster for most people who participate.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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Most financial advisers are really not qualified in their field, most of the ones I interviewed wanted to sell something like annuities or other similar instruments. I have been investing on my own because I really would not trust a financial adviser. I would buy mutual funds before i have a financial advisor telling me where to put my money. There are plenty of Madoff's out there that have not been caught up yet. If you don't understand how the game is played don't commit yourself because they will take your money.
We as consumers must read and inform ourselves to be educated about investments just like anything else. Just remmeber 4 things about investing money -
1. IF YOU DO NOT UNDERSTAND THE PRODUCT - HOW INTEREST RATES CAN AFFECT DIFFERENT INVESTMENTS DIFFERENTLY -THEN DO NOT INVEST IN THIS INVESTMENT UNITL YOU DO UNDERSTAND HOW IT WORKS. IF YOUR BRAIN DOES NOT COMPREHEND HOW THE INVESTMENT WORKS DON'T INVEST.
2. IF SOMEONE PROMISES YOU RETURNS THAT ARE NOT AVAILABLE IN OTHER INVESTMENTS OR CAN NOT PROVE TO YOU THAT THIS IS A LEGITIMATE INVESTMENT, RUN AS FAST AS YOU CAN AWAY FROM THIS PREDATOR!!!
3. NO ONE CAN MAKE YOU RICH QUICKLY.
4. Does the person you are dealing with have an investment in the same product he/she is trying to get you to invest in? If not, you better get a good reason why and understand why or do not buy the investment.
Some very good Advice in the previous comments, and for a change I find it refreshing....
I too have seen the eyes of many glaze over, when you start talking about investing or investments.
Even when they have an interest(which they should have) their minds seem to wander away, thinking only about, what is here today....And not long term goals.
That is the main reason for many to go to an RIA, FA or CFP.
Having an interest in the Investing Arena for about 20 years...Always wished I had taken a part-time job in the Field and gotten Certifications in some of the above;....After I retired over a dozen or so years ago,when I had more time....I took over all our Accounts at about that time....Some demand attention, some do not.
Because I also have the interest like a hobby..I would have probably set up a small investment business, and If I could have attracted about 20-30 clients...I could have a paying hobby.
Dreams of my Fathers......
It takes a lot of work, and a lot of research,DD and I feel it's all been worth it over these last 20 years, intensely for over a decade.
I also feel if people can spend the time and they like self investing, they should do it, otherwise make sure who you pick for a FA......Good Luck.
The Day comes that I can't beat Warren,Berk or the Indices, I'll put everything back in Funds or CDs.
All the articles written concerning credentials is for not. while the educational process is extensive there is one aspect that very few writers address. That is, the public is equally at fault for NOT BEING HONEST WITH THEMSELVES and therefore their advisors are given bad information to start with.
If you were to take a poll among CPA's, Attorneys, Financial Planners, RIAs etc. you would be amazed that the vast majority of them when comparing notes about the same client would have gaping holes in the information provided. The sad fact is people don't trust anyone and tell their advisors very little to enable a proper assessment and subsequently proper advise. There is plenty of blame to spread around.
But on the other hand, I'm quietly appalled at the lack of understanding of most people and their lack to want to study. Two of us tried to explain Series-I Savings Bonds to a relative with a decent math background a week ago. When we tried to add details she needed to know -like the interest rates change every 6 months in May and November- she kept cutting us off with, "All I want to know is..." So, when we were done, she said, "So I'll get 2.2% annual interest from an I-Series bond if I buy one right now, right?" When we said that's only the rate for the next six months and may change, she was lost.
For such people, I recommend using a financial advisor short-term to set up simple investment or cash distribution arrangements. I'm not a big fan of annuities, but one man I knew had three that made his retirement life very comfortable - and financially simple. Friends of his had been investing in Mutual Funds I'd recommended and were doing well. So he asked me about them. But when I tried to explain mutual funds - and I am a teacher and explained it in a simple, concise way he should have been able to understand - his eyes sort of glazed over and he said, "I don't think I want to have to think about all that." I told him he didn't have to: he had more income than he needed and his kids were borrowing half his cash to make mortgage payments, etc. He was better off just enjoying the income from the three annuities and putting the money in the bank.
Being a financial planner, I enjoy reading anything that elevates our profession and educates investors. This was a well done article- I especially enjoyed the part regarding discussions of costs. I do however; take issue with your number 3 "sign" where you say “Pretty much anyone can call herself a financial planner, whether or not she's had any training in the field". This perpetuates a perception that the CFP designation somehow puts anyone who has achieved this designation above reproach. I have come across many with the CFP designation who are part of the top echelon of planners, but also many who are in the bottom percentile as planners as well. I have also found that the CFP board has evolved from a financial planning only organization to a marketing and lobbying group attempting to convince the public that anyone who does not pay for their coursework and ongoing dues are somehow not competent financial planners. I have been in the industry for over 12 years and have the ability to call myself a financial planner because of my training, experience, continuing education and multiple licenses I have obtained. Obtaining the CFP designation will force me to add another layer of cost to the client to recoup the costs of my education and ongoing dues. For now, I’ll continue to lean on the teams of CFP’s that every major investment house has on staff to answer highly complex planning issues and continue to deliver the exceptional service that my clients have come to expect.
My financial adviser drives a "Beemer". This shows to me that he can make money, a good thing. The "Beemer" is parked out in back of his office. This shows to me he is smart, a good thing. His office is finely furnished and sparkling clean. This shows to me an attention to detail, a good thing. He has excellent Christmas parties and a summer pickinick to a professional baseball game. This shows to me he cares about his clients, a good thing. Any day now I expect he will get my account back to where it was
5 years ago when I gave him my "nest egg" so I will be able to retire.
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