Need help? Find an expert. Tim Plaehn is a member of our panel of experts and regular contributor. He is the editor of Dividend Hunter specializing in finding solid, dividend-paying stocks.
Knowing Tim was once a financial advisor, I leaned on him when I wrote, “How To Find A Financial Advisor To Meet YOUR Needs.”
Interest rates are so low, it is almost impossible for a financial advisor to invest their client’s money conservatively, cover their fees, and have any profit left over for the investor – the person who is taking all the risk.
Tim turned the tables and interviewed me. I received permission to share the interview. You will find my conclusion interesting.
TIM: Early in my career I worked as a financial advisor. A lot has changed. Dennis, what are the factors investors must consider if they are thinking of working with a financial advisor?
DENNIS: Good question! Many people have 401k programs. Others may have received a lump sum retirement payout. Unlike a guaranteed government pension, when they leave the workplace, they are responsible for managing their money and making it last.
There are many factors. Do I need financial guidance? What type of help do I need?
Some rely on fund managers or stockbrokers. Others use paid financial advisors. Some prefer to manage their own money and have an annual checkup; others pay ongoing fees for advisors to handle their account.
|The primary considerations are ethics and fees.|
Some advisors are duty-bound to put the interest of their clients above their own, even if it costs them commissions/fees. Others are not.
One major change since you were a financial advisor is fees. Today, fees are a HUGE consideration. On 6/15/2007 ten-year treasuries paid 5.16%. On 6/15/2020 they pay .71%. A reader lamented, “By the time I pay advisor fees and fund fees, there is nothing left over for me. I’m the one taking all the risk!”
Tim, particularly in the bond market, we see cases where investors are guided into high risk/reward bond funds so advisors can justify their fees. High risk bonds are not what I’d recommend with retirement money.
TIM: Let’s start with ethics. Please explain. Why would anyone want an advisor not duty-bound to put the client first? How do readers know the difference?
DENNIS: There are two legal thresholds of responsibility.
Fiduciary Responsibility – They must serve their client above all other interests. They are required to put your interests first, even at their own expense. They must seek out the best investment for their clients even if it pays them less commission or fees.
This is the highest standard of responsibility. Those who have Certified Financial Planner (CFP) licenses are held to this standard.
Suitability Responsibility – Advisors held to this standard may guide you to investments deemed “suitable” for your investment objectives, risk tolerance, age, net worth, etc. This is the threshold for a traditional stockbroker. The “suitability requirement” allows the broker to guide you toward funds paying higher commissions/fees even if they perform poorly.
Brokerage firms all offer a “Free Financial Analysis.” Their salespeople have fancy titles like, “senior investment specialist”. This consists of filling out a bunch of forms and feeding your information into the computer. Out pops a slick personal plan, tailored just for you. Generally, the majority of the recommendations are in their company sponsored-fee based funds, both stocks and bonds. The computer program is designed that way.
While the broker may not be paid commission, their performance is measured by how much money they can funnel into their fee-based products.
Tim, when you see these major firms offering $4.95 to zero commission to place a stock trade, they have to make their money somewhere. The top five banks/ through their brokerage arms, now control almost half the mutual funds in the nation, collecting billions in fees. It is big business.
Despite the fancy titles, brokers and fund managers are not held to the fiduciary standard. If they tell you they are, ask them to put that in writing.
|When any advisor’s compensation is based on investing your money into a specific product it creates a conflict of interest. Just say no!|
TIM: You said licensed, Certified Financial Planners are held to the Fiduciary standard. A lot of people feel that level of help is only for multi-millionaires. Is that true?
DENNIS: In a word, “kinda!”
I have a friend who sold some property and had $3 million to invest. He contracted with a big-name firm, paid them a 1% fee to manage his money. A year later he canceled the contract. I asked if they performed poorly and he said “no”. He said he would call his representative and it might take a week for a return call. He learned the rep looked after $2 billion. While $3 million is a lot for most of us, he was treated as a very small client.
Today some CFP’s charge as little as .5%. A $500,000 account pays them $2500/year. Many CFP’s will buy thousands of shares of a stock and put a slice into several of their accounts; batching their clients.
Beware of the financial planner who feeds the data to a mutual fund house’s computer and puts client’s money in fee-based funds. Today it’s tough to invest conservatively, pay two sets of fees and have any profit left for the investor.
Why pay a money manager to be a middle-man? If you want to invest in mutual funds, take your information to the mutual fund house yourself.
However, …there are other options which avoid ongoing advisor fees. One reader wrote he pays for an “annual checkup.” The CFP helps him allocate his portfolio and rebalance. He handles all the investments himself trading online.
Another reader took it one step further, paying a little more for quarterly meeting and telephone access.
Quality help is available, and affordable. Investors must be very specific as to what they need and then find quality help to do it their way.
TIM: I can understand why people would seek professional counsel. I have several licenses, have been in the business a long time, but I am always using my peers’ insights…and vice versa.
You mentioned the checkup, where the investor selects the investments and makes the trades. That can be pretty scary for a lot of people.
DENNIS: That’s true. Several of our ROMEO (Retired Old Men Eating Out) club members did very well financially, running a dry-cleaning store, VP of sales in a big company, etc. They were terrific wealth generators, but they did not have experience/knowledge about wealth preservation.
Regardless of how they earned their money, they have a new job – managing their nest egg – we are all money managers now. You may delegate, but never abdicate the responsibility for looking after your life savings.
It becomes an educational challenge. While the financial industry wants to make it look complicated, it is not rocket science.
Step one is understanding different types of investments, and then picking good ones. There are plenty of financial newsletters available…the key is picking the good ones.
If you want to save some fees, look at the funds top holdings and consider just buying the stocks individually.
I printed out a couple of your letters for my son. I explained the need for true educators. The editor wants the reader to know as much about the industry and investment as possible. Beware of newsletters that do a one or two paragraph recommendation write up. “Trust me” is not why you should buy any recommendation.
Good editors invest right along with the readers. If they are not putting their money where their mouth is, I’m leery.
Good, experienced financial editors generally specialize in one type of investment, which makes them experts. However, you don’t want to put all your eggs in any one basket. They should help guide their readers and make sure that does not happen.
Tie that together with an annual checkup, where some reasonable balance is obtained and the individual investor is much better off.
TIM: One final question. And thank you for taking your time for our readers education. Are you a CFP?
DENNIS: My pleasure Tim. No to your question; nor do we recommend any financial advisor firm. Unfortunately, much of the so-called educational material about financial advisors is written by firms wanting to manage your money, or collect a nice referral fee.
Our mission is just like yours – education.
Dennis here. I’ve come to a conclusion. Using a qualified financial advisor for annual checkups is a terrific option. Those who don’t want to hire a CFP should consider combining an annual checkup and using quality, unbiased newsletters to find good investments. There is NO conflict of interest.
Tim’s specialty is quality dividend-paying stocks, providing excellent, safe income for his readers.
His focus is on helping you to create a sustainable monthly income with reliable high-yield dividend stocks. Even if you have very little to get started with.
While Tim’s system works for just about everyone it’s perfect for those who feel like they might need a bit more income during retirement.
Tim has made a generous offer to help you get started.
I’ve recently published an in-depth guide, “How To Find A Financial Advisor To Meet YOUR Needs.”
The report is designed to help you determine your real needs and avoid costly mistakes.
For a very limited time it’s available to you at 20% off the normal retail price.
To make this deal even better, Tim is generously offering a FREE three-month subscription to his Dividend Hunter newsletter when you get my report.
Don’t take this lightly, Tim has never offered a free subscription – not even a trial subscription – to The Dividend Hunter but he’s offering it to you this one time.