The Right Design for Your Financial Plans

Cover of "The Spirit Catches You and You ...

Cover via Amazon

One of the real delights of having a kid in college is the terrific books they bring home. Much as I lament the lack of survey courses, and the fact that students can get out of college almost completely ignorant of the Western Canon (don’t stone me), some profs manage to force them to read haunting, thoughtful pieces that will follow them through life.

Recently, dearest daughter brought home The Spirit Catches You and You Fall Down. a study of the terrible collision between Western medicine and a Hmong refugee family over the treatment of their severely epileptic child. Anne Fadiman, the author, knows a thing or two about writing—she won a National Book Critics Circle Award  for the book, and she probably imbibed literature with her pablum, her father being Clifton Fadiman, the famous editor and author of the Lifetime Reading Plan. (Footnote: we used his wonderful book as a guide while homeschooling, so DD did get some smidgen of aforesaid Canon).

Spirit is so thought provoking and spellbinding that not only did it keep me up nights but two weeks after finishing it I’m still thinking about it every day. I’m not giving away anything to say that it’s all a horrific train wreck. If you’ve ever had experience with serious illness, you will find yourself identifying mightily with the Hmong family, and if you’ve ever dealt with annoying clients or even a recalcitrant child, you’ll feel for the doctors, too.

One of the most interesting questions the book raises is oh-so-relevant for financial planning—is perfect compliance with a plan necessary? or is there some lesser change that would work nearly as well? Is the correct answer always the one justified by numbers (and science) or are our beliefs and feelings (aka behavioral finance) just as compelling and important? Is there any middle way?

No, yes, no, yes, yes. We financial planners like the certainty and precision of numbers, so much so that we even believe them ourselves. If our projections say your money will last your lifetime, and you can spend exactly $84,237 per year (pick a number), we breathe a sigh of relief, print out the report, have a reassuring client meeting, and off you go. But change the assumptions, the conditions, or the faith of the people involved, and maybe the medicine doesn’t work quite so precisely. It’s critically important to recognize that the best prescription is dependent on certain conditions, but must be tweaked for individual circumstances, personality, and life situation.

Of course, the best plan won’t work if you don’t carry it out. But as Lia’s doctors found out, the plan won’t work if your beliefs, abilities, and commitment disrupt it. I see this so often when people come to me with some robo-advice that proves they can never retire or afford college for their children. Faced with the model that says they must save umpteen thousand dollars, they get terrified and give up (and don’t take the medicine). But even less than perfect action can be life-saving. If you have only managed to save $20,000, or $10,000, or $5,000 (instead of $250,000) for college, more power to you! Believe me, you won’t be sorry to have it.

Other perennial questions—should I pay off the house or invest the money? Should I take the lump sum or the pension?—depend as much on what will bring you peace of mind as on what the numbers might indicate. These are questions that must be sorted through with an advisor who tries to get to know you, not just someone who will crunch numbers.

If you leave an advisor’s office (including mine) with a plan for investments and it turns out to require changes that you put off, and put off, and put off…then maybe the plan, while excellent, is simply not the right design for you. Moving in the right direction is better than doing nothing at all, and revisions should be made until you feel confident that you can proceed.

One of the horrible truths the book demonstrates is that not speaking the language can result in devastating  and costly consequences. In financial planning, too, advisors and the industry can speak a foreign and fatally confusing language. Witness the firestorm over fiduciary, which is a difficult word meaning only that the advisor must act in the client’s best interest. Why on earth would this be controversial, and why would the brokerage industry be conducting a bombing campaign to scare the individual investor into believing that this is somehow an evil requirement cooked up by the Obama administration? Because their bull (er, ox) might be gored and they might not be able to make usurious profits on the backs of people whose lack of industry comprehension they exploit. Or the confusion over fee-based (brokerage jargon that means we’ll collect a commission and charge you) vs. fee-only (which means we’ll charge you by the hour or based on assets managed). Fee-based is a subterfuge to confuse you and make you think you’re getting a better, and honest, deal. The brokerage industry is counting on the fact that most people won’t understand the difference, and that they’ll look like they’re wearing the white hats, too. They’re not.

If you don’t understand what an advisor is saying, how that advisor is being paid, why they are recommending what they are, and how they arrived at those conclusions, don’t stop until you do. Even the best doctors make mistakes, and learn from them, but patient, and client, input can have better outcomes if the plan fits well. And sometimes the questioning can produce a thoughtful change in tactics, one which might save the future.

How to choose a financial adviser

Simple, but not easy. Anyone and their brother can call themselves a financial adviser, advisor, planner, investment specialist, wealth manager, etc. And let me tell you that you would be shocked by the brouhaha in financial trade journals over whether or not advisors should have to be compelled (!!) to adhere to a fiduciary standard. A fiduciary standard simply means that the advisor is legally obligated to put YOUR best interests first, rather than, say, the product that pays him the best commission, wins him the free vacation contest, or allows him to meet his sales quota and keep his job.  People who are not fiduciaries are SALESPEOPLE and, uh, maybe what they’re peddling to you is somewhere in the realm of possibly being remotely suitable for you. If you hear any of the following terms, hold onto your shirt and wallet and run: non-traded REITs, master limited partnerships, most annuities, whole life, hedge funds—wait, the list is getting a little long.

 

But don’t take my word for it. Gregory Karp, who writes a column called Spending Smart for the Chicago Tribune, recently had an excellent article about how to choose an advisor. You can read it for yourself.  I couldn’t have said it better myself, and I welcome anyone who wants to quiz me on any or all of his criteria. I particularly like that he highlighted the difference between fee-based (you’re talking to a broker/salesperson who is getting a fee AND commissions), and fee-only (you’re paying solely for advice, which should be free of owing any commissions or referral fees to anyone).

 

My only complaint about the article is that the Trib tends to bury consumer financial articles in the business section, where the people that need to see it often don’t. If only we could get this information into the features section, next to the gardening, decorating, recipes, and parenting advice.

 

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.