Financial Advice—Whom Should You Trust?

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Given the stuff I’ve encountered in the past week, you’d think I was living in Scam-a-lot. It’s been a banner week for schemes designed to hoodwink the consumer and get us all to buy questionable stuff at unquestionably high fees. It’s made me think about a few predictable trends to watch out for.

If you’re reading about it on the internet, consider the source.

This morning I had a lovely 20 minute conversation with someone representing himself as a reporter on deadline. Now, this guy sounded pretty good—had a voice better than Ron Burgundy—and told me his research staff had identified me as someone unique in the field. Well, I like compliments as much as the next victim, er, individual, and I figured the guy said he was in radio. He had a pretty good angle—asking me the type of reporter questions I always get for background.

I probably hadn’t had enough coffee yet, so it took a while for my BS detector to go off. First clue was the voice—most reporters I talk to are slurping a cup of coffee or chewing on a paperclip while they talk to me. Second clue—no key clacking in the background. Third, he just had a lot of time and most reporters are trying to get the info and get you off the phone stat. And they don’t like you all that much.

So finally, after blathering on about how great fee-only was and how I got into the business and yadda-yadda, I pulled up short when he started showing me his lovely slick website and how they were going to make two shows featuring me AND HOW I COULD APPROVE AND REVISE ALL CONTENT. Uh-oh—so I asked, “Is there a cost to this?” Guess what.

This is not journalism, where a reporter has at least some credibility and isn’t promoting industry interests. Ethical journalism still keeps a barrier between the news and the advertising. So if you’re reading some kind of advice on a website, click that “About” tab to see who these people are. Check the footnote on the page to see if they mention “securities sold”. If you’re really diligent, check out the little link (if it exists) that says “information for advisors” or “how to be selected”—it will tell you what the “experts” have paid to be included as experts.

And BTW, you won’t be hearing me on Blogtalk Radio any time soon.

If someone is in the public eye, it doesn’t mean you can trust them

I’ve written about Dave Ramsey before, but someone else walked into my office with livin’ breathin’ proof of why you should be skeptical.

I like Ramsey’s advice about getting out of debt, and his principle that you should budget for charitable contributions as well as all the junk you and I waste money on. He’s inspired a lot of people with the confidence that they can turn their lives around, and he focuses on the everyday Joe, not those “high-net-worth individuals” so beloved by the brokerage industry.

And then he turns right around and finds a way to scam those same Joes. When you click on his referrals to financial advisors, as far as I can determine every single one of them is a commissioned broker/salesperson or insurance agent, and the main screening ole Dave has done is whether the hefty check he requires has cleared the bank. So much for Dave’s “trusted providers”.

Now, I’m not totally against commissions, especially when clients can understand the product (for example, real estate purchases) or are made aware of exactly what it will cost them (a few low load type insurance providers). But you ought to know what screening, what “referral fees”, and what membership dues have been paid for your referral.

For example, I belong to the Garrett Planning Network, which has a referral service on their site. To be listed there, I have to be a CFP®, be fee-only, not accept referral fees, and half of my engagements (at least) have to be on an hourly basis (as opposed to AUM). I do pay dues to Garrett, and for that I get continuing education, industry updates, and a community of people to ask questions of.

I also belong to NAPFA, which offers referrals to people that visit their site. Again, I have to be a CFP®, be fee-only, and in NAPFA’s case, had to submit a sample client plan to be reviewed and approved. I get approximately the same benefits from them, although they also charge me for continuing education, and require that I report a minimum number of hours each two years.

My blog is sometimes re-syndicated via Garrett and NAPFA to other organizations that are supposed to promote reliable advice to consumers, such as Fee-Only Network. I do what I can to control where my information appears, but various business services often pick up my information, and I don’t have much control over that—in fact, I often do not know until I get a promo from them trying to convince me of the value of going from their basic service to “premium”. I don’t.

Especially beware of people who scream on TV or give you a limited-time offer. You should never be in a blinding hurry to invest.

If it seems too good to be true, it is

The other big beef I have with Ramsay is that he has repeatedly stated that you should be able to achieve a 12% return on your investments. Rotsaruck. Most of the people he speaks to—trying to get out of debt and accumulate initial savings—should not be investing in anything risky enough to earn that kind of annual return. Even over a very long time, that would be an unusually high return on legitimate investments.

Almost every scam I read or hear about involves someone “guaranteeing” that the investment will pay a higher than market rate. Bernie Madoff sucked people in by offering just 8%. I’d guess close to 100% of investment scams could be avoided by the people they bite if individuals were just a tiny bit more skeptical of oversized promises, and a teensy-weensy bit less greedy.

Don’t buy because someone wraps themselves in religion

See especially Dave Ramsay, above. Or the person who trades on belonging to your church, or religion, or alumni association or is your cousin. Not that you shouldn’t have something in common with your advisor, but you should check to make sure they’re competent, credentialed, and reputable as well. In the case of relatives especially you shouldn’t invest because you feel sorry for them just starting out. Every broker is trained to lean on family and friends first to harvest low hanging fruit. And how bad are you going to feel at family gatherings after your relative has lost all your money? Can you ever fire him? Better just to give him a few hundred bucks–it’ll be cheaper in the long run.

Know what you’re paying

Have I said this enough? Well, if Dave Ramsey sent you to some guy who sold you an annuity where 70% of your quarterly investments were going to pay the quarterly fees, would you be in my office wondering how to get out of this “wealth-building” investment? True story.

Even people who ought to be on your side can give crummy advice

Another true one—client met with a plan advisor from his company’s new retirement plan provider. “Advisor” recommended some excellent, low cost mutual funds—ones I often recommend as part of a portfolio. “Advisor” told client these funds were doing great right now. True. However, client already has plenty of money in these asset classes, and when an asset class is “hot”, you ought to be buying the opposite. Buying the “hot” asset class or fund means it’s already run up in value, and you will be buying at the peak of the market.  Buy LOW, SELL high. But most people end up doing the opposite, and with “professional” advice.

So, that’s the blowback for the past week. I await with bated breath what new scams lie ahead. Meanwhile, I’ll continue to recommend boring. And prudent. And understandable. And sleep at night.


IRAs, Roths, and the AARP

Three-legged joined stool

One of the benefits of reaching 50 is that you get to join AARP. No, I’m not talking about the endless promos you will then begin to receive for dubious insurance, but their magazine and Bulletin, which offer some of the most sensible consumer financial and health advice around. Even if you’re not over 50, it’s worth taking a look at the September Bulletin’s Retirement Guide, which offers an excellent primer on most of the issues. I do have a few comments on their Step 4: Avoid a Nasty Tax Surprise.

It’s a pretty good discussion of the benefits of choosing a Roth or Roth 401k over contributing to a Traditional IRA or a regular 401k. I heartily agree that retirees can find themselves in quite a predicament when they discover that their required minimum distributions (RMD) from the regular 401k or Trad IRA don’t come free—you’re going to pay ordinary income tax on that, and the RMD even has the possibility to kick you up into a higher tax bracket. So that withdrawal is definitely not going to be all spendable income, ouch.

Honestly, I’ve only recommended a client favor contributing to a Trad IRA once this year. In nearly every other circumstance, the better choice is a Roth (and Roth 401k, if your company offers it). Ask yourself:

  1. Is your income over $60K (single) or $95K (couple)? You’re probably not going to get the deduction anyway. You can contribute to a Roth without phase-out until $114K (single) or $181K (couple). (Regular 401k limits apply to Roth 401ks.)
  2. Do you think taxes are going down? Most people, according to the article, stay in the same tax bracket when they retire. But it’s probably a safe bet that taxes will be higher in 10, 20, or 30 years so you’ll be paying more on that Trad IRA/401k, plus being taxed fully on increases produced by the investment.
  3. Does the deduction really help that much? Here, probably the answer is yes in the 401k and no for the Trad IRA. So split it up.
  4. Could you withdraw money in such a way that in at least some years your taxable income will be low enough so that you won’t pay tax on your Social Security benefits? This is a pretty complex question, so you probably need to give me a call to work through that possibility.
  5. Any chance you won’t need all your possible income at 70, or maybe at all? With no RMD, you can leave that money invested to grow longer, or leave it to your heirs. Or take it all out at once if you need to pay for long-term care, without incurring more income taxes.

Although the article suggests that you should be at least ten years from retirement to select a Roth, I’m not so sure. Some of these reasons make a Roth desirable even for people much closer to retirement, and in the case of some earners, worthwhile because of the income eligibility limits on the Trad IRA. If you didn’t save from your very first job, and are trying to power-save now, a Roth might still be the right answer.

The old concept of the three legged retirement stool is one I love: no matter a little shortfall or instability in one area, the whole can provide a steady seat.

  1. Regular taxable investments—at least right now, tax savvy allocation can produce taxation at the capital gains rate rather than at the usually higher ordinary income rate
  2. Pensions, Social Security, and other guaranteed income, so you have a solid floor.
  3. Retirement funds—nice if you can manipulate them so that they’re all tax-free coming out (pay attention, those not yet old enough to join AARP). Older workers—don’t beat yourself up! Roths have only been available since 1997.

No, you’re probably not going to be able to dodge the tax man entirely, but paying attention to tax requirements and thoughtful asset location can loosen his hoary grip.

Antiques Roadshow & investments

Vintage Jewelry

Sure, I love it. So much so that when Antiques Roadshow announced that it was going to be in Chicago for the first time in years, I applied for the ticket lottery immediately. They had 19,000 applications for 6,000 tickets, so I was thrilled when we won two tickets.

If you’re a fan, you probably find it at least as addictive as chocolate truffles. Watching other people live at the show, I spent a lot of time wondering just what the show offers. Everyone hopes they’ll pick something from a trash bin that turns out to be worth six figures, and we saw one or two folks who looked like they were being pulled aside for the big reveal.  However, given the lines we saw for painting appraisal, and the absolutely horrible paint-by-numbers art being carried in, I can tell you without a doubt that most of us have absolutely no taste in or knowledge of art. Really, I don’t think I could bear to be an appraiser on that beat, the stuff was so horrible. It must be a thrill to their eyes, too, when they finally spot something good. So, my first lesson is that if you’re going to hang it on a wall, make sure it’s something that has meaning for you, because value is questionable at best.

My second lesson while there is that not only do we probably have little idea of the value of collectibles or much ability to judge such value, but dealers don’t really have a clue, either. You probably know that if you’ve watched many Antiques Roadshow broadcasts, and see the terrible prior advice people have been given, but this time it’s personal. I brought a set of jewelry to be evaluated, which I bought at a reputable antiques show (the Winnetka Antiques Fair) from a reputable and long established dealer. Not one single thing I was told about the jewelry when I purchased it was accurate, at least according to the Roadshow appraiser. It wasn’t the karat weight I’d been told (14kt vs. 15kt.) it wasn’t from the era it had been labeled (U.S. Civil War vs. 1870s), and it wasn’t made where I was told (Italy, vs. England). The only “fact” that slightly mattered to me was that it wasn’t Civil-War era, as I was heavily interested in Civil War re-enacting at the time and that was the “fact” that thrilled me into purchasing the piece.

The third lesson I learned is that the demographic of viewers appears to be baby-boomer or older. Everyone is hoping that something from their early life, or that they inherited, has value. It’s a way of recouping your youth through your possessions—and finding that the changes over time that you see in yourself (perhaps losses) can be redeemed by the increased value of things that once had very low prices. Perhaps it’s innate in us that we want to have something of value that we can pass on to our children.

My biggest fear was that the jewelry would turn out to be worth less than what I paid for it, so it was a great relief to find out that it was worth about 60% more than its original price tag. But I have to confess, one of the games I play when watching the show is, “was it a good investment?”  And mostly, I have to answer no. I purchased this jewelry in 2000. If I’d have plunked my money into, say, the fairly conservative Vanguard Wellington fund instead, I’d have a nearly 200% return for the period. Plus, I wouldn’t have paid to insure it for the last 14 years (although I would have had to pay taxes on the Wellington dividends). You can play this game too—listen to how long the person has owned the object, take the amount they paid, and double it for every 10 years of ownership. If they’re not doing at least that well, financially at least they’d have been better off investing it in a balanced fund portfolio. But truthfully, it was much more thrilling at the time to own the jewelry than it would have been to put the same amount into a mutual fund. Fourteen years later, I’m not so sure. I’ve probably worn the darn thing 3 or 4 times.

Then, there are the things that don’t hold their value—most recently, antique dolls and furniture. You may not buy these things strictly as an investment, but you should be very, very careful that you pay on the low side of whatever the current market value is, be able to judge quality pretty well, and be willing to hold the object for as long as it takes for the category to rebound. And be sure it’s insured and properly cared for in the meantime. Probably, don’t own cats or have small children.

The final ouch! is the taxes on collectibles. I have to believe that a fair portion of those who get a big pleasant surprise are thinking about contacting their friendly local auction house.  I have never seen this mentioned on the show, but if your tax bracket is above 15% on ordinary income, you’re going to be hit with a 28% capital gains tax on the gain you make from the sale (most other long term investments are taxed at no more than 15% currently). Maybe your kids actually do want to inherit that ugly picture.