A good friend who recently inherited a few million dollars asked: “Why am I scared to death?” The death that precipitated the inheritance aside, he should have been pleased with his new pile of dough. But managing a lot of money is nerve-racking, especially when it’s your own. Your own sound judgment may evaporate in the face of dollar signs, and trusted advice can be hard to find.
As one approaches retirement, the tremendous responsibility of making your money last can be daunting, as Miller’s Money subscriber Julie G. shared with me. She wrote:
“Recently I've been reading voraciously on the subject of protecting assets and money management. I'm soon going to be looking after more money than I have ever been responsible for in my life. I'm looking for specific referrals for wealth managers that share your philosophy.”
Rewind twenty-plus years and you’d find me in a similar frame of mind. I had recently remarried and was responsible for looking after my new mother-in-law’s entire nest egg. (If there’s anything scarier than screwing up your own retirement, it’s screwing up your mother-in-law’s.)
Here’s the good news for Julie: She has made the first correct move by researching qualified professional help. Several loyal subscribers have written with similar requests, and it’s about time I responded.
Duty Owed to Clients
In our February 2013 edition of Miller’s Money Forever, we detailed how to locate and interview a good financial advisor. It starts with understanding the two different levels of responsibility an advisor can owe his clients.
The first is a fiduciary responsibility. Fiduciaries are required to put their client’s interests ahead of their own. They have a duty akin to that of a lawyer to his client or a trustee to the beneficiaries of a trust.
In the financial planning world, a Certified Financial Planner (CFP) falls into this category. You can find a list of CFPs in your area or verify your planner’s certification on the CFP Board website. Associations like the National Association of Personal Financial Advisors (NAPFA) also require their members to act as fiduciaries. In addition, a Chartered Financial Consultant (ChFC) is subject to this standard; the educational requirements for becoming a ChFC are particularly rigorous.
The suitability standard is a different, lesser level of responsibility. Generally speaking, it applies to stockbrokers and others who sell investment products. They need only recommend investments suitable for their client’s willingness and ability to take on a particular level of risk.
If, for example, a stockbroker subject to the suitability standard advises an 80-year-old widow to invest in a mutual fund containing solid utility stocks, he is in the clear even if the fund charges outrageously high fees. The fund need not be the best option. Even if there are better or lower-cost alternatives available, the stockbroker has committed no foul.
Such advisors usually offer a free portfolio analysis to anyone who walks in the door. They feed some basic facts about you into their company computer and out pops a list of recommended investments. If the advisor is a stockbroker, the list will be flush with mutual funds managed by his employer. If the advisor is an insurance broker, then insurance products are the answer. To be fair, their recommendations are often on target—or at least close to it. Nevertheless, there are likely better and lower-cost options available.
Don’t let big household names draw you off track. Advisors at captive houses—large, well-known brokerage firms that manage their own mutual funds—are only subject to the suitability standard, for the most part. These people are under tremendous pressure to sell their company-sponsored products. These funds might perform well, but be very wary of a one-size-fits-all approach to money management. A good CFP can pick and choose the best investments and ideal allocation balance for you.
So, cut any advisor not subject to the fiduciary standard from your list of prospects. A professional designation requiring a fiduciary duty is a good start, but you should still perform your own due diligence. There are several sites that track broker and advisor improprieties. Here are a few places to check:
The Financial Industry Regulatory Authority (FINRA)
This organization is the same one that administers the Series 7 Exam. Its search tool lets you find out how long an advisor has been registered and if he or she has any history of incidents. It will even tell you whether or not someone has been fired. Once you’ve selected an advisor’s name, make sure to click on the detailed report link which specifies everything from a complete employment history to descriptions of specific damages and incidents.
You can also look up information about individual firms, such as their assets under management and the size of their average client.
SEC Investment Advisor Public Disclosure (IAPD)
This is another site with much of the same information as the FINRA site.
North American Securities Administrators Association (NASAA)
This site has a couple of interesting ways to find out more about offenses in your state. First, you may browse its contact list of state regulators, or you may also view its list of state enforcement websites.
Once you have a list of certified candidates in your area who have managed to keep out of trouble, it’s time to find the real experts. Education and certifications don’t mean much without real world experience. Let the hotshot fresh out of college make youthful mistakes and overcome his learning curve with some other client. Tossing the inexperienced newbies should shorten your list considerably.
Ask Direct Questions & Demand Direct Answers
Ethical, truly independent financial planners will proudly provide us with the information we need. Ask each candidate whether he or she is affiliated with an SEC-approved Registered Investment Advisor (RIA) that is not owned by a large brokerage firm, mutual fund firm or big bank. Ask which legal standard they are held to, and how they are compensated. If there is any potential conflict between how they are compensated and your needs, you need to know about it.
This next one’s important: Ask for a written proposal. Don’t fall for, “How dare you question my credentials?” You have every right to ask. It’s your money.
Hire Overqualified Professionals
The best advisors have more expertise than you might need today. Neither finances nor life are stagnant; you may eventually need help in a new area. Pick the candidate that can grow with you—that includes your advisor and whomever else they consult or work alongside.
A good financial plan is really a comprehensive, life-management plan. Your financial team should know about legal, insurance, tax or financial issues you might not consider or deem relevant to you. Ask about the team of specialists they consult when evaluating investments and long-term client goals.
Be a Fee Vigilante
Your advisor should have a system to monitor and minimize expenses, a topic I covered in Shop Smart to Cut Fees on Retirement Assets. There is no surer way to bleed your portfolio than overpaying in fees.
In my book, Retirement Reboot, I wrote about a friend who hired a top financial planning firm to look after $3 million. He quickly fired the firm. They did a good job on paper, but he had to wait 2-3 days for a return call from his account manager. Apparently, this money manager looked after several billion dollars. No wonder he was treated like an insignificant account.
You want a firm that specializes in accounts like yours. Ask how many clients they have and how your account size compares. My friend’s $3 million account was nothing to balk at, but he was a minnow in a sea of giant game fish.
Ask to see sample portfolios for clients with similar financials goals. Any advisor worth his or her weight should be able and eager to explain the asset allocation in these portfolios.
The right fit will also share your investing philosophy. Like most of our subscribers, I am very concerned about high inflation. I once asked a financial planner about inflation protection and he recommended Treasury Inflation-Protected Securities (TIPS), a strategy with which I completely disagree (you can read why by clicking here). I asked if he had any clients invested in precious metals or foreign currencies, and he said no. He was not a good fit.
When in doubt, trust your instincts and keep looking.
Delegate, But Never Abdicate
This is a Miller mantra: You can delegate some of the responsibility to a qualified professional, but you should never abdicate that responsibility… not to an adult child, not to a world-renowned expert, not to ANYONE. Another fundamental principle: Never invest in anything you do not understand or are uncomfortable with. That rule applies no matter who is handling your money.
If you hire a money manager, think of him or her as a highly skilled employee; you are their part-time employer. It is your job to oversee and manage them. You have every right—an obligation really—to ask questions and give feedback. It is your money.
Julie wrote that she had been reading voraciously about finances. That’s step one. Once you find the firm, do not stop reading and do not stop learning.
Speaking of reading… If you haven’t read the latest edition of Miller’s Money Forever, I urge you to do so today. If you’re not a premium subscriber yet, you can sign up for a trial subscription at no risk to you—and receive a complimentary copy of Retirement Reboot. We’ve introduced a cheat sheet for time-starved investors, and are continuing to expand on our Bulletproof Income strategy. Click here to sign up now.