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Eight years ago, my wife and I received $5,000 worth of professional financial advice – for free. All we had to do was share our money problems with everyone in Miami.
My local newspaper, The Miami Herald, ran a monthly series in 2004 called “Money Makeover.” If you agreed to talk on the record about how much you earned and spent and saved, The Herald hooked you up with a pricey financial adviser. Since I cared more about a good deal than bad publicity, I jumped at the chance. My wife, however, required some convincing.
“How much are we going to reveal?” she asked.
“Everything,” I said. “But who cares? We’ll get professional advice we’d never be able to afford.”
My wife relented, and the reporter introduced us to Elizabeth, a fee-only financial adviser who usually charged $5,000 or 1 percent of your assets, whichever was greater.
Frankly, we didn’t get the great advice I thought we would. Sure, Elizabeth reviewed every aspect of our financial life: budgets, investments, taxes, insurance, and retirement. But it turns out she’s not unique, nor was her advice.
There are more than 200,000 financial advisers in the United States, according to government estimates. Some are “fee-based,” meaning they charge by the hour, while others work on commission. But neither fee method guarantees sound advice.
Money Talks News founder Stacy Johnson spent more than 10 years working as a financial adviser for three big Wall Street firms. In the video below, he offers some advice on how to find the right advice. Check it out, then read on for more…
Stacy’s advice really hit home with me, because I’ve made every mistake he warned about. Here’s how not to seek financial advice…
1. Don’t ask for referrals and references
Before our newspaper adventure, my wife and I had only one encounter with a financial planner. He was an accountant my brother knew. He convinced me to buy two annuities, and because I didn’t ask the right questions – or really, any questions – I signed on the dotted line.
A few years later, Elizabeth told me (and the reporter) that this was a boneheaded move. As The Miami Herald noted (and everyone in Miami read about)…
Elizabeth observed that these were unsuitable investments because of the high annual fees and expenses. What’s more, Michael would have to pay $12,000 in penalties and surrender fees if he withdrew the money. Michael hasn’t decided on whether to pay that cost to get out of the annuities.
If I knew about Stacy’s advice back then, I would’ve done two things: First, I would’ve gotten more referrals than just my younger brother. And second, I would’ve asked for a couple of references once I was sitting in front of the person.
When I related this story to Stacy, he said, “When a plumber pulls into your driveway, it’s reasonable to assume they know something about plumbing. That’s not a good assumption when it comes to financial advice. Financial advisers run the gamut from solid and smart to liars and thieves. Blindly trust one at your peril.”
Oh, and I did pay nearly $12,000 to get out of those annuities and into investments that have made me much more since, and for much less in fees.
2. Ignore how they get paid
The guy who sold me those annuities? He worked on commission. That means he could earn more money depending on what he sold me. So he was motivated to push me into investments that made him money, rather than made me money. And that’s not just my opinion. “Advisors are prejudiced towards investment strategies that maximize fees and, in turn, their personal payout,” The Huffington Post reported last week, citing a report from the National Bureau of Economic Research.
It’s also Stacy’s opinion. He really hates advisers who earn commissions. When one Money Talks News reader asked, Should I Become a Financial Advisor?, Stacy wrote…
While “investment advisers” do learn a lot about stocks, bonds, commodities, etc., their job is more selling than advising. During my first interview at E.F. Hutton, the manager literally said, “I’d rather have a used car salesman sitting across the desk from me right now than a CPA.” Something to keep in mind the next time you’re sitting across the desk from an “adviser,” especially if they work on commission.
Elizabeth, on the other hand, was “fee only.” That meant her clients paid her directly and she earned no commissions. That made her more objective, but also more expensive. If you decide to go that route, choose a fee-only adviser associated with the National Association of Personal Financial Advisors. The NAPFA search tool can help you find an adviser near you, with specialized knowledge you care about.
And despite the fact that the adviser I used had a $5,000 minimum, you should never have to pay that much. “That would be a fair price – if this were rocket science or brain surgery,” Stacy says. “It’s not even close. You can, and should, learn as much as you can yourself.”
3. Forget about credentials
I never asked if the guy who sold me those annuities was registered with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). I didn’t check to see if he was a CFP (certified financial planner), CPA/PFS (certified public accountant/personal financial specialist), or ChFC (chartered financial consultant).
I didn’t know I could check his FINRA registration through the site’s BrokerCheck, or that I could learn about any past troubles at the FINRA disciplinary action database. I didn’t know that advisers can be registered with my state regulator, and that specific credentials and disciplinary history are available online with the Certified Financial Planner Board and the American Institute of CPAs.
4. Fail to communicate
The most important quality in a financial adviser is the hardest to quantify: How do you feel about the person? As Stacy mentioned in the video, you need to be comfortable. Since any honest adviser will give you a free consultation, that’s a perfect time for a gut check.
That guy who sold me those annuities? I was uneasy, but I thought I was supposed to feel that way. It wasn’t until my wife and I sat across a conference table with Elizabeth that I realized how reassured I was about her straightforward advice and no-nonsense manner. (I hate sales pitches and fake smiles, and Elizabeth didn’t give me either.)
At the time, I was really happy with the advice she gave me. But I later learned something disturbing from reading sites like Money Talks News: Much of Elizabeth’s $5,000 advice is available for free online!