Choosing a Financial Adviser
Three things every woman over 40 needs: a doctor who returns calls, a brutally frank hairdresser, and a trustworthy financial adviser. Guess which is toughest to find?
It’s not that there’s a shortage of peddlers eager to offer their two cents in exchange for yours. The number of people billing themselves as personal financial advisers more than doubled from 2000 to 2004, according to federal statistics. But a staggering number of these apparent experts are simply salespeople for insurance or brokerage firms. Or they cater to the ultrarich, charging fees that mere mortals would prefer to spend on, say, a round-the-world cruise. So, should you bother? Actually, yes.
In our 20s and 30s, managing money ranked far below landing a raise or getting a mortgage. After 40, complications like college tuition, aging parents, and upcoming retirement make us yearn for shrewd guidance. Before she turned 40, Brenda Rinard, a manager at Stanford University, was struck by the realization that she was at her peak earning powers, and that she’d probably outlive her husband. Rinard, now 44, and her husband found a financial adviser who recommended they buy a house instead of the stocks they’d earmarked. Good call: The house has nearly doubled in value; the stocks have tanked.
Everyone can benefit from a checkup, whether it’s advice on one investment or on your whole financial picture. But choose your adviser carefully. Here’s our gloss on some of the most alluring pickup lines — and the best way to respond.
1. "The first one’s free."
It works for drug dealers, and it works for some financial advisers. If you keep coming back for more, both stand to profit. But they don’t necessarily have your best interests at heart. This offer is best translated as "Let me have an hour of your precious time to make a sales pitch." If the person’s title is "financial consultant," "financial adviser," or "investment consultant," he or she is most likely a registered representative (translation: salesperson) for a brokerage whose priority is to sell stocks and earn commissions.
Likewise, a "chartered financial consultant" is an insurance agent. At a "free consultation," she may offer valuable information, but she’s likely to discover — surprise! — that you need insurance. And she may suggest policies (permanent or whole-life, the kind that include insurance and investment components) to solve almost any problem: Tax issues? This policy has tax advantages! Want to retire? This one has an annuity!
Sarah Robertson, 40, an emergency room physician in Sacramento, California, went to a free meeting with a consultant her colleagues had raved about: "He kept insisting on selling me life insurance. I kept explaining that I didn’t have kids. He just wouldn’t listen."
"How are you paid?" Brokers and insurance agents earn commissions. Financial planners can charge fees (hourly, flat, or retainer), work for commissions, or take a percentage of the assets they manage. Hybrid, or fee-based, advisers may receive both fees and commissions.
Any professional can provide good advice, and a commission-based adviser could cost less. (You pay an average of .72 percent of assets in commission-based accounts; .89 percent in fee-based accounts; 1 percent or more annually for fee-only advisers.) The real danger doesn’t lie in paying commissions or fees, but in failing to understand what might motivate an adviser’s recommendations.
2. "Let me worry for you."
Women seem especially vulnerable to this comforting line. In a study of people who bought mutual funds, for example, 32 percent of women (and 23 percent of men) said they relied solely on a professional’s recommendation, without doing any additional research, according to the Consumer Federation of America, a watchdog group.
Even with a great adviser, you need to ask questions, read up on anything recommended, and look at the level of risk. If you cede control, you’re likely to regret it.
Rhonda Shantz, 45, a marketing consultant in San Rafael, California, learned this in the most painful way. "I had this fantasy that a great financial adviser would come along," she says. She’d stay busy earning money, he’d tell her where to put it and the returns would pour in. Shantz easily found a broker to cater to these dreams and gave him discretionary authority over her portfolio — allowing him to buy and sell without her approval.
After the first year, the broker rarely checked in, simply mailing her notifications about completed stock trades. She was getting a lot of mail — but earning very little. "Now I know that you need to have a partnership with a broker," Shantz says. Her new adviser insists on meeting for a quarterly review — even when Shantz tries to plead that she’s too busy.
Ask if he’ll nag you with calls and e-mails. When you check references, ask how consistent the adviser is with follow-through.
3. "I always beat the market."
So your brother-in-law has been bragging about his money manager whose investments always beat the market. Time to sign up? Nope.
First, it’s probably not true — hardly anybody beats the market consistently year in, year out. Even Warren Buffett has made bad calls. "I had this adviser who thought he always knew better than the market," says a corporate executive who lives in Los Angeles. The adviser was a longtime friend who had gone into investment work. The executive was so reluctant to fire him that she worked with him for 10 years. "My portfolio is still a lot smaller because I stayed with him. I’ll probably be paying for it for years."
Chasing the market is a classic investing mistake, made most often by men. "Most men think of investing in an adversarial way. It’s all about who has the biggest returns," says Mary Claire Allvine, a fee-only financial planner in Atlanta (and — full disclosure — my coauthor on two books). "Planning should be more holistic, about how we’re going to achieve our priorities."
Of course you want smart investments. But your adviser should be a comprehensive planner — typically a certified financial planner — who’ll create an overall strategy before recommending investments. Ask for a financial plan in writing.
4. "Let’s talk about your needs, then I can recommend suitable investments."
"Suitable" sounds safe. But in the financial world, suitable is a legal term, applying to investments that could reasonably be expected to help you meet your goals — even if it’s not the best way to meet them. For example, you want to invest for retirement, but you’ve got $30,000 of credit card debt. It might be "suitable" to invest in a mutual fund, but it’s probably in your best interest to first pay off debt. By law, many advisers wouldn’t be remiss if they recommended the mutual fund.
Diana Morrow, a marketing manager in Broomfield, Colorado, and her husband consulted an adviser, who was paid by commission, about retirement investments. He talked them into a life insurance policy with high fees, which didn’t do as well as other investments would have. Was it suitable? Sure. Her money grew — but not as much as it could have. "It wasn’t really clear until a year later that he hadn’t listened to our objectives," says Morrow, 41. They’ve since found a new adviser.
When Christine Carleton, a fee-only certified financial planner in Cincinnati, looked at one woman’s portfolio, she saw 600 trades in one year with growth of less than one percent. Investing in stock may have been suitable, but such frequent trading probably wasn’t in the investor’s best interest.
Don’t assume that working with a big, brand-name investment firm will protect you. As brokerage contracts now spell out, "Our interests may not be the same as yours." (It’s only been since January 2006 that the Securities and Exchange Commission has required that fine-print warning.)
Ask potential advisers if they will be your fiduciary. This means they must — by law and ethics codes — put your interests first. That’s a requirement for those registered with the National Association of Personal Financial Advisers and for certified financial planners who are, or are associated with, registered investment advisers.
5. "I have a great fund for you! Get in before it closes!"
If your adviser tries to whip you into a frenzy over one particular investment, chances are she has a big payment due on her second home. Good investments are not once-in-a-lifetime, jump-now deals. Good investments — stocks, bonds, or real estate — are not sexy. There’s rarely a reason to rush, because there’s always another around the corner.
Yes, it’s true, for example, that a mutual fund may close because it’s doing well. Say a fund invests only in top-notch biotech firms, making small investments in each firm to stay diversified. Soon it runs out of hot companies to support. The managers either have to invest more in each firm (potentially risky) or start investing in second-tier firms (clearly a bad idea). So they close to new investors. Their strategy is working, but it’s a sign of limited opportunity.
Good advisers know there’s no point in getting hot and bothered over one fund when there are thousands of others. Bad advisers know this too. They push you because they want their commission, they’re too lazy to find new investments or simply because the number of funds they’re allowed to consider for you is limited by their employer.
Tell any adviser who rushes you to slow down. Or simply walk away. And while you’re at it, avoid anyone who asks you to keep some great investment a secret. Hush-hush deals pose what some call a Column Six risk — the risk you’ll end up in the Wall Street Journal’s column six, which covers financial scandals.
6. "Now that you’re older, you should be more conservative."
That is true — to a point. Just as men tend to be overly aggressive with their investments, women often have the opposite problem," says Heather Hutchinson, a certified financial planner in San Francisco. Safe investments definitely have a place in your portfolio: You can guarantee a specific income, for example, with annuities, or you can invest in high-quality bonds that promise predictable returns, but do not have the same potential to grow as stocks. Such investments pose their own risks. A bond’s value could drop; an annuity’s income could be hurt by inflation.
These problems are exacerbated if a woman underestimates her life expectancy; at age 65, the average woman will live another 20 years. Good advisers help you take comfortable risks, rather than exploit your fears.
Annuities can make sense as part of a retirement portfolio. Say you’ve stashed away $500,000. You could invest it in the market, gritting your teeth through the ups and downs. Or you could buy an annuity and get a guaranteed income for life — with tax advantages, to boot. But some annuities have downsides, such as high "surrender charges" if you cash out early.
Ask your adviser to run several retirement scenarios showing the impact of inflation and different life spans. If she jumps in with a canned answer before you’ve fully explored the issues, find a new adviser. If you choose a conservative investment, be sure you understand the fine print.
7. "I usually work with wealthier clients, but I’ll make an exception for you."
Sounds good, as if you’re going to get advice given only to the most exclusive investors. But being small potatoes can set you up for neglect. Beth Jordan, 42, a PR manager in Phoenix, saw this situation unfold. She went cold to a big brokerage house, which matched her up with a broker she initially liked. But after arranging some investments, he ignored her money. When the market faltered in the late 1990s, the adviser was too busy bailing out bigger clients to help Jordan adjust her approach.
Thank the adviser for her interest — and then look for someone who wants to focus on people in your income bracket. Not only will such an adviser be more attentive, but she’ll be more fluent with the issues you face.
8. "Your friend referred you; you know you can trust me."
If friends and family really knew what was best, blind dates would have better odds. Conventional wisdom says that personal references are the best place to start. But most people don’t really know how their adviser stacks up compared with others.
When Minda Cutcher, a manager in San Jose, California, got married in her early 40s, she transferred most of her assets from her longtime financial adviser to an acquaintance of her husband’s. "They played racquetball together," says Cutcher, now 50. "He hadn’t been in business long, and my husband wanted to help him out." Unfortunately, the new adviser was more conservative than Cutcher’s old adviser. He put much of their money into certificates of deposit, locking it up at rates that were below market. Cutcher finally returned to her old adviser, but some of her funds are still in those CDs.
Be prepared to grill potential advisers; use the checklists at napfa.org. And go online to see advisers’ track records. Ask only the most money-savvy people you know — say, CPAs or estate-planning attorneys — for recommendations.
9. "Let’s start with just one portion of your investments."
It may work to have an adviser handle just one part of your assets. But only if you first get a plan from a comprehensive financial planner. And don’t give your adviser incomplete information. You could be setting him up to fail.
Find a financial planner you trust, and tell all. Your adviser has to know everything — even about the cash you hide from your husband — to write a solid plan that will help you reach your goals.
What Financial Titles Mean
Line up a bunch of business cards from financial advisers, and you’ll see an apparently random jumble of words, followed by baffling acronyms. But if you want trustworthy advice, you can’t just ignore the alphabet soup. Here’s a cheat sheet.
Financial adviser, planner, investment consultant, analyst, wealth manager: Generic terms, not official or regulated titles. No training or experience required; anyone can hang out these shingles. Typically works for a brokerage house and earns commissions.
Broker or broker-dealer: Legal term for anyone licensed by the National Association of Securities Dealers (NASD) to buy and sell securities (stocks, bonds, mutual funds) on commission. At brokerages, officially referred to as "registered representatives."
Insurance agent or broker: A "captive" agent works for a single company and sells only its products. Independent agents can comparison shop among insurance companies to find you the best deal.
Chartered financial consultant (ChFC): An insurance agent with extra credit. A ChFC has at least three years of experience and has passed an exam on financial-planning basics, such as taxes, investment, and estate planning. (For information, go to chfc-clu.com.)
Certified financial planner (CFP): A planner with at least three years of experience who has passed an exam issued by the Certified Financial Planner Board of Standards. Subject to disciplinary process if they violate ethics code. (For information, go to cfp.net.)
Fee-only planners: Earn an hourly or flat fee or a percentage of the assets they manage for you. Never paid on commission. Go to napfa.org (National Association of Personal Financial Advisors). Hybrid or fee-based may earn both fees and commissions.
Useful Web Sites
Consumer Federation of America. Click on "Publications" to download a brochure, "Cutting Through the Confusion."
U.S. Securities and Exchange Commission. Information aimed at investors.
The National Association of Securities Dealers. Explains 60-plus financial designations and provides information on complaint processes and on individuals’ or firms’ track records.
Christine Larson is the coauthor of The 7 Most Important Money Decisions You’ll Ever Make.
Originally published in MORE magazine, November 2006 as "Decoding the Sweet Talk."