Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest.
A while back, I wrote an article describing an utterly painful meeting my wife and I had with a financial advisor. That meeting was painful. It simply accelerated my souring on financial advisors, based on a long run of experiences where I was essentially treated as a “mark” for commissions and sales.
Yet, there are times when a trustable financial advisor can be really useful: when we stumble into a windfall, for example. With so many salesmen out there (and a few purely incompetent folk, too), how can we find people that we can actually trust with our money?
That’s the topic of this book by Bonnie Kirchner. Kirchner is a CFP (Certified Financial Planner), so I was admittedly wary about this book, but I was pleasantly surprised by the fact that the first two-thirds of the book consists of reasons why you don’t need a planner, a very long collection of warning signs of poor financial planning, and techniques for grilling potential financial planners. Who Can You Trust With Your Money? really hammers away at some of the more shark-like elements of the financial planning world.
Let’s dig in and see what the book has to say.
1 | Recent Investment Scams
Yes, we all know about the Bernie Madoff scam. Why did it happen? Well, in the end, you’re simply trusting someone with your money. Madoff put off tons of warning signs to the people who were giving him money, but they weren’t really paying attention to them. A really interesting choice to open the book with a cautionary tale like this.
2 | What Is Financial Planning?
Why do you even need a planner to begin with? Kirchner lays out some of the reasons you might need a planner in this chapter: dealing with a windfall, retirement planning, and so on. My general feeling is that most people are better off if they genuinely try to manage their money on their own and should rely on a financial planner if and only if their own efforts somehow fail. For most issues, financial planning isn’t very difficult at all, just a bit intimidating.
3 | The Meaning Behind Advisor Designations and Licenses
This chapter is a solid reference of the acronym soup that financial advisors use to identify their qualifications. There are literally dozens of acronyms that advisors throw behind their names, and Kirchner defines them all here. It’s useful in a dual sense – not only can you look up acronyms here, but you can also read the definitions to help you determine which qualifications would be important to you if you were seeking a planner.
4 | Advisor Compensation
How do they make money? Commissions and fees are the two main avenues used. While Kirchner doesn’t specifically say it (she seems to try to stick to being neutral here), the case in favor of fee-based advisors and against commission-based ones is fairly self-evident. The commission based ones make their money by selling you a product, while the fee based ones make their money by giving you advice. Who do you want as an advisor?
5 | Deciphering Fee Structures
Kirchner’s key advice here is to make sure that your advisor’s compensation and fee structure are absolutely clear and specified up front in writing. Ask for this from your advisor – and if they won’t give it to you, there’s something amiss. When you do have that document, make sure you understand every item in it. The fees charged to you directly take away from your investments, after all.
6 | Finding Additional Fees
Of course, almost all advisors will try to insert “additional” fees into your account for such things as transactions or annual maintenance or for a special kind of account. This chapter lists what’s typical and what isn’t for such fees. This was the only chapter that raised vague alarm bells for me, but I cross-referenced the information here with other sources and not only was Kirchner pretty spot-on, she was actually a bit below some of the other estimates I found.
7 | Financial Products and Advisor Compensation
Ever wondered exactly how much compensation commission-based planners earn for various activities and services “sold” to you? Kirchner provides a rough list of the approximate earnings planners receive from various items. It’s something of an eye-opener and it also explains why such individuals will work for a long time to make one sale – that one sale can make ‘em a mint!
8 | Statements, Communications, and the “Dreaded” Prospectus
Yes, you’re going to get statements, communications, and prospectuses in the mail. Kirchner encourages people to, at minimum, read the statements they receive and any other communications as well, and ask their advisor for summaries of the prospectuses. The best tip was the suggestion that you should shred anything with your account information on it or other personal data instead of just throwing it away, because that type of material is ripe for identity theft.
9 | The Roles of Various Financial Institutions
Whenever you enter into some sort of financial arrangement with an advisor, you’re not just entering into an arrangement with that advisor, you’re also entering into arrangements with whatever companies and investments houses and other organizations the advisor is pointing you towards. Thus, you should also invest the time and effort to research those organizations as well and make sure they’re up to your standards.
10 | Understanding What You Need
Now that you’ve been given fifty reasons to be wary and careful about a financial advisor, Kirchner moves on to the next step: why do you actually even need one at all? What you should do is sit down, spend some time truly assessing your needs and doing some homework on your own, and come up with a plan. What parts can you execute on your own? Dig deep and see if you can fulfill and master your own needs. If there are parts you can’t do, that’s the time to turn to a planner.
11 | Choosing Advisors to Consider
How do you choose an advisor? Kirchner recommends hitting your social network, including your lawyer and any other professionals you work with, like tax preparers. You should also ask anyone you interview what their opinions are of other specific financial planners, as that’ll give you insight into both the person being asked and the person being asked about.
12 | Choosing Candidates to Interview
Using your social network (and internet searching) will probably turn up a long list of potential candidates. Do your homework online about them and see what you can learn. Strive to tear the list down to just three candidates so that the interview process isn’t overwhelming.
13 | Interviewing Candidates
You have three promising candidates. The next step is to interview each of them. Set up a meeting with each one and come prepared to ask a set of questions of each of the candidates (so you can compare their answers later on). Kirchner provides a long list of potential questions here, along with suggestions on what materials you should bring to the initial interview.
14 | Spotting Red Flags: Advisors to Avoid
What’s a bad sign? Lack of organization. A temper. A tendency towards negativity. Pressure tactics. Avoiding providing you with the information you request. Kirchner has a long list of additional red flags that point toward a pretty poor planner.
15 | The Rules of Engagement
How much control over your accounts and other information do you want the advisor to have? Kirchner goes through lots of options here. My tendency is to give them minimal control – in the absolute worst case, I’d want to have final approval over anything that happened with an account that had my name on it.
16 | Maintenance of the Advisor-Client Relationship
You should also be clear on what your respective roles are. Do you want your advisor actively involved in watching all of your accounts and alerting you to any changes (potentially expensive) or do you want to do such direct management yourself, calling on your advisor when you need help (less expensive)? Different people have different needs in this area. I’m a hands-on kind of guy, so I’d lean towards the latter option.
17 | Activity
One big thing to watch out for is excessive activity in your account, especially activity you didn’t directly approve of. Lots of activity in an account is often a sign that an advisor is racking up commissions (at your expense, usually) and this might have serious tax and earnings implications for you.
18 | Accessibility
Can you get ahold of your advisor when you need them? Make sure you know clearly what the advisor’s communication policy is. Can they be reached during office hours, period, and you’re out of luck if they’re traveling? Or do they have a much more open policy? Obviously, the more open the policy, the better.
19 | The Dysfunctional Relationship
What do you do when the relationship starts to sour? Your best bet is to quickly move on to another advisor, but sometimes you may observe unethical or illegal activities. If that’s the case, Kirchner has suggestions on how to properly report such activities.
20 | Criminal Versus Non-Criminal Behavior
What exactly constitutes criminal behavior? Kirchner has a long list of red flags here, but the most common thread between them is that your advisor is trying to encourage you to use an investment scheme that isn’t clearly explained and documented. Such situations usually merit immediate, serious attention, because they’re often warning signs of something gone deeply awry, perhaps illegal.
21 | Filing a Complaint
If you do find something that you suspect of being unethical, you shouldn’t go to the police. Instead, go to the professional governing bodies for assistance. Quite often, activities that are cloudy are merely unethical or ill-advised but not illegal. Still, if you believe your financial advisor is engaged in such activities, I’d move on ASAP.
Is Who Can You Trust With Your Money? Worth Reading?
I really didn’t expect this book to have any hard advice on financial planners – after all, Bonnie Kirchner IS a CFP. Yet most of this book hammers the financial planning industry. I was impressed with the thorough nature that Kirchner applies to prospective financial planners. She clearly has no tolerance for skullduggery.
And you shouldn’t either. It’s your money, after all.
If you’re even considering getting a financial planner for any reason, Who Can You Trust With Your Money? is worth a serious read. Kirchner does a great job of digging through the grey areas of the financial planning industry and pours a lot of sunshine on the subject, which is incredibly useful for people trying to make up their minds about financial planners. Lots of advice and a no-nonsese attitude is perfect for this topic, and that’s just what Kirchner provides.