Jack in Scituate is a 50-something friend of mine who has found himself thinking non-stop about his finances after a recent divorce, health problems and job change.
So he went out and met with a financial adviser from a brand-name brokerage company and got some advice.
And then he had second thoughts.
He hadn’t done a background check on his new adviser, hadn’t gotten a recommendation from friends or family on who he might use, hadn’t asked for references, hadn’t interviewed other candidates.
He just had a meeting, liked what he heard and signed up to follow the advice.
And then he had second thoughts about it.
Clearly, he is on the right track. He wants and needs some guidance in order to feel comfortable about his money, and good financial advice helps people achieve their financial goals.
The problem is that bad financial advice costs people big chunks of money and leaves them worse off than if they had simply done it all on their own.
Moreover, individuals are still on their own when it comes from trying to determine the quality of advice they are getting. The U.S. Department of Labor has delayed key portions of a rule that requires financial advisers to act as fiduciaries, putting the interests of their retirement account clients first. The provisions are set to begin July 1, 2019, but the process is so bogged down that no one is sure if the new rules – crafted under the Obama Administration -- actually will go through.
Meanwhile, Jack is caught in the reality that he has agreed to work with an adviser he has not fully vetted. Jack and I have known each other for years, and he knows I have written two books on selecting and working with financial advisers.
He knows his process fell way short of choosing an adviser “by the book,” but he also realized that he had gone with a firm that virtually everyone knows by name (He asked, “How bad could their planners actually be?”) and that everything in his first two meetings with the adviser seemed normal.
So, he asked, what he should look out for that would tell him – without putting everything on hold, interviewing more candidates and doing the full vetting by the book – that he has created a problem rather than found a solution.
While I’d still prefer a more thorough interview and background-check process – that would help him find an ideal adviser instead of helping him to make sure he has avoided an unlucky/untalented one -- I gave him a checklist of things that would indicate he is headed for trouble rather than a solution to his financial concerns.
A good financial planner:
-- doesn’t mind or fear a background check. Do one now (brokercheck.finra.org is a good start) and ask questions about any incident or blemish you find. If the record is clean – or if you understand any past problems and how they were resolved – it should ease your mind; if you find trouble, you can go to the office manager for that big firm’s local office and ask to be assigned to someone else.
-- tells you where their interests lie. Because of the confusion on Capitol Hill, just a few types of adviser are fiduciaries; only certified financial planners (CFPs) and registered investment advisers (RIAs) -- when they’re paid for giving financial-planning advice -- plus certified public accountants (CPAs) are obligated to put your interests ahead of theirs.
Thus, if you’re not dealing with a CFP, RIA or CPA, an adviser should tell you if they work as a fiduciary or would be willing to promise in writing to act as one.
-- doesn’t overpromise on returns. If a broker, planner or adviser only wants to discuss how they have beaten the market and can help you do it too, they’re focused on the wrong things.
Few advisers deliver market-topping returns consistently, which is good because it’s not really their job. Instead, they’re building a diversified portfolio that helps you profit during good times and hunker down through bad ones to reach your goals. You want planning prowess more than for any perceived aptitude for beating the market.
-- keeps costs down, and doesn’t pitch products that generate big commissions for himself or his firm. If, for example, you are being sold indexed annuities, variable annuities or non-traded real estate investment trusts, you are being played. If you are only being sold the house funds – even from a name-brand house – you at least want to know if the adviser is getting any extra compensation.
The average portfolio doesn’t have to be plain vanilla and boring, but better that than high-cost, high commission and hard to handle.
-- lets you know how much you’re paying. Good advisers don’t hide costs, or fool clients into thinking their services are lower than advertised or free.
Learn how your fees are calculated. A fee of “only” 0.3 percent of assets under management per quarter may sound cheap, but it amounts to 1.2 percent per year; several surveys have shown that a 1.0 percent annual advisory fee is standard on accounts worth up to $1 million (fees go down as the assets rise).
-- explains things in ways you understand. That’s not only about fees, it’s about plans and planning. Furthermore, they respond to your questions and concerns.
Jack’s big concern after our chat was that he asked the adviser for a plan that kept savings and investing simple, but was pitched a portfolio with 16 different funds in it. That might work for some people, but it could be a sign that the adviser wasn’t building a portfolio to fit the customer’s needs and desires.
Advisory relationships that build trust and deliver results make clients’ financial lives safer and easier. If trust doesn’t develop, it will add nervousness and fear to your financial future; while that won’t stop you from reaching your goals, it will make the journey less comfortable and enjoyable.
Chuck Jaffe of Cohasset is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com.Chuck Jaffe of Cohasset is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com.