In recent weeks, high profile Republican and House Speaker Paul Ryan has become an outspoken critic of the Department of Labor’s fiduciary rule.
Last week, the Dave Ramsey conflict of interest issue raised a few concerns that investors should be reminded of. First, you can’t assume an expert’s advice is always right. Second, you must know how an advisor is paid. And third, it’s important to remember that, by and large, Wall Street is a rigged game.
Presidential campaigns are rarely this entertaining. But when Donald Trump entered the ring and started swinging, things got interesting. And while financial advisors generally — and wisely — avoid political conversations with their clients, a recent poll yielded some interesting insights.
Objective financial advice is hard to find. So many “experts” have hidden agendas and profit motives. Now Dave Ramsey, who championed ‘envelope budgeting’ and ‘biblically based’ common sense personal finance, has fallen down the rabbit hole of conflict of interest. Continue reading “Dave Ramsey’s Conflict of Interest Corrupts His Financial Advice”
I was having lunch with a buddy I hadn’t seen in years. After catching up on ‘whatever happened to old what’s his name?’ the conversation naturally turned to the stock market, investing in general and retirement planning.
Hey, if you take a CFP to lunch—and you’re buying—why not get a little free advice?
He was thinking about changing financial advisors. Things were OK—he felt like the firm he was currently with did a good enough job, but they were raising their annual fees and frankly he wondered if he was still getting a good deal.
The firm he’s currently with is known for it’s home cooking: selling their own brand of under-performing mutual funds. In fact, about five years ago some employees sued the firm for stuffing it’s own 401(k) with mutual funds run by the company’s investment arm. That’s when you know a financial advisory firm has a problem: when its advisors sue it for doing a lousy job of running its own retirement plan.
I told my friend, “You should consider a robo-advisor.”
He looked at me as if I had just told him to get financial advice from a Star Wars character.
“What’s a robo-advisor?”
He almost looked like he was in pain.
So I told him. Robo-advisors are computer programs that put together an investment mix and monitor and adjust it automatically.
It’s doing what a financial advisor says he will do—but rarely actually does.
Here’s the thing. You hire a financial advisor and you think, “OK, he’ll keep an eye on things and make sure I stay on track for retirement.” But most of the time, advisors will steer you to some “model allocation program” made up of mutual funds or exchange-traded funds and charge you something along the line of a 1% management fee. And that’s in addition to the expenses built in to the funds or ETFs.
These programs are called “managed accounts” by the big investment and brokerage firms.
And that’s exactly what a robo-advisor is. A managed allocation program—without the 1% additional fee. Most of the leading robo-advisors—like Vanguard’s Personal Advisor Services or Betterment—charge 0.30% or less. And their mutual funds and ETFs have lower internal expenses than the average (or worse) mutual funds a lot of financial advisors recommend.
Vanguard claims the management fee difference alone can add over $90,000 of value to a portfolio over 20 years. Human financial advisors worry that robo-advisors will cut into their profits. And they should.
So my buddy took all this in and frankly seemed totally unimpressed. In fact, he sent me a text later asking about some investment plan that he had found online. A do-it-yourself allocation of mutual funds that he was apparently considering.
Maybe he’ll try to manage his own investments, or even stay with his current advisory firm. It doesn’t seem likely that he’ll go with the low-cost, machine-made investment option.
Perhaps I didn’t do a very good job of explaining robo-advisors to him.
So maybe he’ll offer to buy me lunch again.
All the red numbers on the stock market heat maps can be unsettling. You’ve seen this before and know it’s not time to panic. Still, you’re not paying all those fees to go it alone. Here are five things you should expect from your financial advisor in markets like this.
A phone call
We’re not talking about an email blast, blog note or Facebook post. A real-time, one-on-one phone call. All that other stuff is fine but financial advisors are calling their best clients this week, so if you don’t get a call — then you know where you stand.
You might get a call from a member of your FA’s “team,” and that’s OK too, but in times like these, it’s important to hear from whoever was in charge and sitting across the table from you when you were being pitched to open an account. If you appreciate someone personally touching base with you when the market goes south – and don’t get a call – then it might be time to consider moving your business to someone that will make you a higher priority.
Not to sell you anything
Your advisor shouldn’t be trying to sell you anything right now. If it’s such a good idea now, why didn’t you hear about it before the market plunged? And for the long-term investor, a good idea today will be a good idea six months from now.
An allocation review
Maybe you just had a year-end review to discuss tax-loss selling or to rebalance your investment mix. Doesn’t matter. What you want to know right now is, are your investments still properly positioned for the amount of risk you’re willing to take?
Just knowing that someone is watching your holdings and making sure they’re well positioned for this market – and the next — can give you peace of mind.
If your investments are way out of whack: over-weighted in a sector or asset class — or missing positions in markets of opportunity — you’ve got to ask why. When things take a sharp turn – up or down – it’s not the time to find out that your portfolio is misallocated.
And here’s a true reality check: If you’ve insisted on maintaining some over- or under-weighted position and you’re paying the consequences now, own up to it. An FA without trading authority can only advise. If you’ve been ignoring the recommendations, commit to a plan to move to a more suitable investment mix when the time is right.
To let you talk
When markets tank, the Wall Street buzzwords start flying. Advisors bring out the best jargon and clichés — and that’s to be expected. Clichés are often born of truth; that’s why they’re clichés. But if you find yourself just listening to the same old song and dance, your advisor may be on auto pilot. Just telling every client the exact same thing.
You should be hearing a discussion about your particular holdings and goals. How the market relates to your specific situation. And yes, in times like these, often the best thing to do is nothing. But you need to know that standing pat is part of a plan, not just a pat answer.
Most of all, a good advisor will let you do most of the talking.
To set an appointment for another visit
Fine. You’ve been reassured that all is well, at least for now. Your advisor should take the next step and set an appointment for another discussion. Maybe in a month — or next quarter, it all just depends on how time-critical your financial situation is. Perhaps you’ll wait for the next scheduled account review. Whenever it is, make sure you have a firm date and time to talk again, whether it’s on the phone or in person.
That will allow you time to see how things develop and how you feel about what’s going on – beyond just today and this week or the next.
And finally, if you aren’t worried about getting a call from your advisor right now, and you’re not wringing your hands over the stock market, maybe you don’t even need a real-life financial advisor.
Asking a financial advisor about Social Security claiming strategies — or healthcare costs during retirement — and you’re likely to see a furrowed brow, followed by some snappy verbal tap dancing. And yet both matters are of primary concern for those planning for life after work.
Ron Mastrogiovanni Sr., president and CEO of HealthView services in Danvers, Massachusetts, says he “grew up” in the financial services industry and knows why advisors have traditionally dodged such questions.
“No one ever trained us on Social Security and healthcare, years ago,” Mastrogiovanni tells the Money Cynic. “Today, that’s beginning to change pretty radically.”
A 2014 survey by Practical Perspectives and GDC Research found that just 36% of financial advisors advised clients on specific Social Security claiming strategies, while a meager 13% offered recommendations on how to manage health care costs in retirement.
And yet, advisors often use Social Security as a marketing device to lure prospective clients to seminars, workshops and free consultations. Jared Weiss with the Corporation for Social Security Claiming Strategies (CSSCS) says it’s “frightening” how many financial advisors talk about Social Security while the percentage who really know anything about it “is very low.” He says pitches such as “The Seven Simple Secrets of Social Security” are common.
“I’m here to tell you that with 2,728 filing rules and what some would say [are] several hundred filing options, there’s a lot more than “Seven Simple Secrets,” Weiss tells the Money Cynic. “It’s much more complex when you start talking about spousal benefits, federal and state worker benefits, Medicare, disability, adult dependent children — there’s a whole array of complexities.”
CSSCS, founded in Plainville, Massachusetts by Cheryl Robertson, a former labor and employment attorney and insurance agent, trains advisors, CPAs and attorneys in Social Security claiming strategies.
“Consumers — investors — are basically demanding that advisors provide them with this information,” Mastrogiovanni adds. HealthView provides advisors with applications and education regarding healthcare planning, Medicare, long-term care and Social Security. “Take Social Security for instance. You optimize Social Security; you’re talking about a difference of hundreds of thousands of dollars in potential income. You’re talking a lot of dollars.”
Weiss says financial planners are finally beginning to integrate Social Security and retirement healthcare expenses into their projections. He estimates that such reports can cost clients anywhere from $100 to $700.
Excluding health care costs from retirement income planning can be an equally expensive error, Mastrogiovanni says. Many advisors recommend a replacement income formula, such as aiming for an income stream equal to 75-80% of your pre-retirement salary. Mastrogiovanni says such a strategy may cover a portion of healthcare costs in retirement but is likely to fall well short.
While healthcare costs vary by age, gender, health, income and state of residence, a recent white paper issued by HealthView projected average lifetime retirement health care premium costs for a 65-year-old healthy couple retiring this year would total $266,589. That sum considers coverage by Medicare Parts B, D, and a supplemental insurance policy.
If total health care costs were factored in — including dental, vision, co-pays, and all out-of-pocket expenses — the couple’s costs would increase to $394,954, the report said. For a 55-year-old couple retiring in 10 years, total lifetime healthcare costs were estimated to be $463,849. HealthView projects that for a couple retiring this year, total healthcare costs would consume about two-thirds of their lifetime Social Security benefits.
However, finding an advisor that not only talks a good game but is proficient in Social Security strategies or retirement healthcare costs is not an easy task. Weiss says his firm offers a “Certified in Social Security Claiming Strategies” (CSSCS) designation to help consumers identify practitioners.
The National Social Security Association, another for-profit firm offering similar education services, also sponsors a Social Security focused designation, the National Social Security Advisor (NSSA).
Both credentials are recognized by FINRA, the self-regulatory agency of the U.S. securities industry though that does not constitute an endorsement by the regulator. Other designations may also integrate Social Security claiming strategies into their curriculum but aren’t specifically certifying Social Security expertise.
Asking your advisor straight out if they have the resources and knowledge to offer advice on healthcare costs in retirement and Social Security is the most direct route to finding competent guidance, both consultants say.
If the advisor answers no, Mastrogiovanni says that’s when a consumer has some tough decisions to make regarding that advisor’s future role in their retirement planning.
Originally published on TheStreet
There are two questions you can ask a financial advisor that will cause them to pull out the old Capezios and launch into a spirited tap dance. One is, “are you putting my interests first, above those of you and your firm?” That’s the ever-important fiduciary care inquiry, but we’ve covered that before.
The other question advisors will often choke a reply to: “Is this how you invest your money?”
Oh boy, look at his face turn beet red. Somebody, quick! Get this guy a glass of water!
The answer you want to hear is, “Of course. In fact, here is a listing of my current positions as well as a breakdown of the allocation of my personal holdings. I’ve excluded current values because my family deserves the same privacy yours does, but you can see I practice what I preach.”
Fade to black, happy music swells to a crescendo, roll credits. Dream sequence over.
What you likely won’t hear is what that financial consultant might be thinking to himself:
- Yeah, right. I’m 10 years out of college, still loaded down with student loans, my wife just had another baby and we’re in debt up to my receding hairline.
- I wouldn’t pay the fees on this pig with lipstick even if I were as dumb as you.
- Absolutely. I’m willing to put all of my investments into leveraged and inverse ETFs that reset daily. And I always place an insurance bet in blackjack, too.
- Oh sure, I buy back-loaded mutual funds. And my mountain bike has training wheels.
- Buy a variable annuity? Me? Heck yeah! With the commission I make on these things I’d buy a dozen of them if compliance would let me.
- Are you kidding? All my money is in real estate.
- The last stock I bought was WorldCom, but that’s me – not you.
- I just got hired here, straight out of college. I’ve got 60 bucks in the bank and $2 on me. I wish I could put $2 million in a fee-based account that charges 2%.
- Listen, if I knew the secret to investing I would have retired 20 years ago.
Even if you do receive an honest and suitable answer that bolsters the trust you have for your financial advisor – and especially if you’re a senior investor whose very lifestyle depends on ethical advice — you may want to bring out the heavy artillery and ask this follow-up question:
Is this how you would invest for your mother?
[Related — Stock Brokers: An Endangered Species?]
You trust your financial planner to be honest, knowledgeable and prudent, but financial setbacks can affect anyone – even the wisest among us. What if your financial advisor files for bankruptcy? Would that impact your view of their advice?
Periodically, the Certified Financial Planner Board of Standards releases a list of CFP professionals who have declared personal bankruptcy within the last five years. The planners are not subject to disciplinary action and the CFP Board does not investigate the filings.
“The CFP Board verifies the bankruptcy and notes the bankruptcy filing on the CFP professional’s public profile, which is available through the search functions on CFP Board’s website,” a statement with the disclosure says. “The release of the information does not constitute discipline of these individuals and is provided only for the purpose of providing consumers with adequate information to make an informed decision with regard to engaging a CFP professional to assist with financial decisions.”
Michael Shaw, managing director for Professional Standards for the CFP Board reiterated the policy in a statement to MainStreet. “CFP Board believes its approach of publicly disclosing the names of CFP professionals who have filed for bankruptcy protection allows consumers to make a fully informed decision when choosing to work with [a] CFP professional.”
But not all financial planners agree with the disclosure standards. In an anonymous comment to an article addressing the matter on the Financial Advisor magazine website, a writer took stringent issue with the policy.
“As someone who had been a CFP since 1986, I was stunned when the CFP Board came out with their “publicize” position on bankruptcy,” wrote ‘FormerCFP’. “As a successful professional, I was bled to death by three Florida family law attorneys in a 4 1/2 year divorce that cost me over $800,000 and forced me to file bankruptcy to keep me from being incarcerated (the laws in New Jersey and other states are equally abusive).”
The writer claimed the personal bankruptcy was not pertinent to their financial practice.
“None of this had any impact on my clients or my profession,” ‘FormerCFP’ added. “Shame on you, CFP Board. You’ve overstepped your authority and the original purpose of the organization by doing this. I’d eliminate any action involving bankruptcies that can be tied to excessive medical bills or divorce proceedings. It’s just not relevant to the certification.”
Some 42 certificants are listed on the CFP website’s latest report as having filed for bankruptcy since 2008.
But Andrew Wang, a portfolio manager and registered investment adviser in Mendham, N.J., believes the disclosure is not only proper, but necessary.
“Because most CFP professionals fall under the jurisdiction of the Financial Industry Regulatory Authority (FINRA) and/or the U.S. Securities and Exchange Commission (SEC), consumers can and should perform a free search for their advisor at BrokerCheck. Bankruptcy judgments within the past 10 years are reportable events and will be reflected in the advisor’s regulatory filings,” Wang told MainStreet.
“In my opinion, consumers deserve to know whether their financial adviser has filed for personal bankruptcy. Any blemish on an advisor’s record should be taken seriously because it has been reported that brokers have been able to successfully expunge black marks from their public records at an alarmingly high rate,” Wang adds.
Leanne Kramer is a Certified Financial Planner in Olympia, Wash., and believes advisor credibility begins with being able to honestly say ‘I walk my financial talk.’
“In my opinion, a personal bankruptcy does not inspire confidence in the professional who is planning and managing the most important aspect of a client’s life,” Kramer says. “We are financial planners. We say ‘live beneath your means, have emergency savings, have minimal debt, manage your risk, invest wisely.’ If we are following our own advice, we should have a plan in place to weather many of the major life events. Isn’t that what we tell our clients to do?”
The CFP board says all disclosures regarding a bankruptcy filed by a CFP professional will remain on the website for 10 years from when the CFP professional disclosed the bankruptcy to the CFP Board or the date the CFP Board became aware of the bankruptcy, whichever is earlier.
Additional information regarding individual bankruptcy filings is available at the U.S. Court’s Public Access to Court Electronic Records (“PACER”) website, which requires registration and payment of a fee.
Many advisors, and clients alike, are fascinated by engineered investments. The process of taking a conventional security and manufacturing a black box investment lures those of us seeking a “secret sauce” for profits. One such class of geared investments, leveraged and inverse exchange-traded funds, is once again garnering regulatory attention and stiff fines.
St. Louis-based Stifel Financial Corporation has been ordered by FINRA to pay more than $1 million in fines and restitution for unsuitable sales of the non-traditional ETFs.
“The complexity of leveraged and inverse exchange-traded products makes it essential for securities firms and their representatives to understand these products before recommending them to their customers,” says Brad Bennett, FINRA executive vice president and chief of enforcement. “Firms must also conduct reasonable due diligence on these and other complex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors.”
In an industry that constantly preaches a long-term view, most alternative ETFs have a one-day investment objective. Being designed to provide a multiple of a benchmark’s performance – or in the case of an inverse ETF, the opposite of its return – geared ETFs “reset” daily.
FINRA says that between January 2009 and June 2013, Stifel brokers “did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs” but nevertheless recommended the products to clients.
“Customers with conservative investment objectives who bought one or more non-traditional ETFs based on recommendations made by the firms’ representatives, and who held those investments for longer periods of time, experienced net losses,” FINRA claims.
Paul Justice, an analyst with Morningstar, the mutual fund research company, wrote in a 2009 report, “Very bad things not only can happen whenever you hold these ETFs longer than their indicated compounding period (typically one day for stock-based ETFs), you are almost mathematically guaranteed to get a return that is not double that of the index.”
ProShares, which bills itself as the “alternative ETF company,” advises investors to monitor such investments “as frequently as daily.”
Direxion, another provider of black box ETFs, advises investors that “in volatile markets, the pursuit of daily investment targets will typically have a negative impact on the performance for periods longer than a single day.”
In May of 2012, FINRA slapped sanctions on Citigroup, Morgan Stanley, UBS and Wells Fargo totaling more than $9.1 million for selling geared ETFs “without reasonable supervision and for not having a reasonable basis for recommending the securities.”
Financial advisors that have recommended leveraged and inverse ETFs to conservative investors are ripe for regulatory picking.