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In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers part 1 of Chapter 12 of the 2nd edition of the book titled, “Whom To Listen Too.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help. Chapter 12 (Part 1) – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers the numerous decisions you need to make as you plan for a transition into retirement. This podcast covers the material in Chapter 12, on “Whom To Listen To”. Meaning, when you need financial advice, who can you turn to? If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. ----- Not everyone needs a financial advisor, but certainly everyone needs reliable financial advice. So where do you find it? That’s what I cover in this episode. There are three main places to find advice – the media, the product manufacturers, and the 250,000 to 350,000 people out there who go by the label “financial advisor.” I’m going to cover all three. First, the media. Early in my career in the mid 90’s, I had an experience that made me realize the impact of the media. A client called up one day, quite excited, and said, “Do you have municipal bonds?” “Yes,” I replied. “Why do you ask?” “Well,” she said, “they told me I need municipal bonds.” I was a bit confused, as I was her financial advisor, so I apprehensively said, “Do you mind telling me who ‘they’ are?” “Oh,” she said, “you know—the people on TV.” Municipal bonds provide interest that in most cases is free from federal taxes, and if the bond is issued by the state you live in, it may be free of state taxes too. That means municipal bonds can be a good choice for investors in high tax brackets who have investment money that is not inside retirement accounts. This client however, was in a low tax bracket and most of her money was inside her IRA. The TV host didn’t provide specifics—only an overview of municipal bonds and the fact that they paid tax-free interest. This woman heard “tax-free” and thought it must be something she should pursue. The media doesn’t know you. I don’t know you either. I get inquiries from strangers on a regular basis asking for advice. Most of the journalists and other media personalities I know experience the same thing. Someone emails us a few pieces of data and wants to know what to do. It’s hard, because we want to help. But we don’t want to guess. To feel comfortable giving financial advice, most of the time I need to do a thorough financial projection. To do it right, I need to know everything about someone’s financial life. Once I see the entire picture, I can answer a question about the particular puzzle piece someone is asking about. Today, the media encompasses both traditional venues, such as TV, radio and magazines, as well as numerous online mediums, like blogs and podcasts. In all forms of media, there are pay-to-play articles, spotlights and links. There is nothing wrong with the pay-to-play model, as long as it is disclosed. As a consumer, you just need to be aware that many things you see, such as certain top advisor lists, are put together because someone paid to be on the list. Many product endorsements in blogs are there because the blogger gets affiliate revenue, or advertising revenue. The other challenge with media advice is that, by nature, it is designed to be mainstream broad content. For eight years, I worked to write articles that fit within a 600-800 word count requirement. For most financial topics, you can’t cover all the rules in 600-800 words. Then I would receive emails from people letting me know which items I missed. For example, I can write about the topic of Roth IRAs and generically say that most people are better off funding after-tax Roth IRAs or 401ks instead of pre-tax IRAs, and as I write that I can instantly think of numerous exceptions. Media advice is not personal. That means you should think of it as education – but not as advice. For it to be good advice, it must be personal. By all means, use the media, books, podcasts, articles and shows as a great resource to learn from. But don’t forget that the person producing that content doesn’t know you. Next, I want to discuss the industry of financial advice. There is a big difference between a product and advice, and as a consumer, you need to be able to identify which is which. In 1995, at age 23, I started my career as a financial advisor. I studied for 60 days and passed an exam. I was granted a Series 6 securities license. I didn’t know much, and I didn’t know that I didn’t know much—but I was a financial advisor. This Series 6 license granted me the right to sell mutual funds. That meant I could legally collect a commission on sales. I went to work. I was lucky enough to have a mentor who taught me to make a financial plan for each client and then recommend products based on the results of the plan. But, I worked for a product company. My job was to sell their proprietary mutual funds and insurance products and I was paid based on what I sold. What if a client wanted advice on their 401(k) plan offered by their employer? I wasn’t supposed to provide that type of advice because it was outside the scope of the company’s offerings and outside the scope of the errors and commissions insurance. What is someone had tax questions? I was supposed to tell them to go talk to their tax advisor. As I learned more about the industry, I decided I wanted to be independent. I wanted to be able to recommend any product that fit the client’s needs. And I wanted to be able to answer questions on all aspects of their finances. Today, 25 years later, many financial advisors are still not independent. They carry an insurance license or securities license and are paid primarily to sell the products their company authorizes them to sell. What do I mean by product? I mean mutual funds, exchange-traded funds, mortgages, annuities and other insurance products. A company must produce it, make sure it complies with current laws, and then have a distribution channel to market the product. Some companies market directly to the public. Vanguard, who’s flagship product is mutual funds, comes to mind when I think of this type of distribution channel. Other companies market both to the public and through a network of advisors. Fidelity and Charles Schwab are two examples of companies who have their own products, and who distribute their products directly to the retail public as well as through a network of advisors. Then you have insurance products, which are generally marketed through a network of either captive or independent agents, or through brokers who also carry an insurance license. As an independent advisor, I receive solicitations almost daily from product manufacturers. I find many of them offensive. For example, although it has been almost 15 years since I have carried an insurance license, I routinely receive email offers explaining how I can make $50,000 or more in commissions next month by putting clients in the latest annuity offering. It is hard for me to believe that that the advisors out there who respond to these offers have their clients’ best interest in mind. In addition to products such as mutual funds and mortgages, you have service packages to choose from. For example, there are now online firms called RoboAdvisors who offer a platform where the investments are selected and managed for you for a fee. This service package is for investment advice. I like these service packages and I think they are better than product-oriented sales people. Yet, investment advice should not to be confused with holistic financial planning. A service that manages a portfolio for you is not the same as a financial planner who looks at your household finances and gives advice on all aspects of your balance sheet. Many financial advisors—and the media—place far too much emphasis on product selection and investment advice and far too little emphasis on financial planning. Think of it this way; you would probably find it odd if you went to the doctor, told them your symptoms, and without any examination they began to write you a prescription. This situation happens regularly with the delivery of financial advice. I hear war stories from consumers who come in to interview us. They tell me about advisors who began the conversation by touting their investment prowess, or talking about a variable annuity that can somehow both grow and protect your money at the same time. These advisors start off by talking about products instead of starting with a household view of the client’s finances. Financial planning is about how much you save, what types of accounts you contribute to, how you track your expenses and net worth, and how to set yourself up for success no matter what happens with the economy or the stock market. There is not a product out there that can solve a financial planning problem. Just as you can’t take a drug that overcomes the effect of a lifestyle of no exercise and unhealthy eating, you can’t find a magic investment answer to a habit of not planning and not updating your plan on a regular basis. Your key take-away is do not confuse a product recommendation with advice. If you can recognize the difference, you’ll be well on your way to being able to know who to pay attention to, and who to ignore. That brings us to the last topic, which is do you need a financial advisor, and if so, how do you find the right one for you? I am clearly biased when it comes to this topic. I am a financial advisor, and I own a firm that delivers financial advisory services. Thus, I would like to share someone else’s thoughts on this question. I’m fan of the online advice website Oblivious Investor (www.obliviousinvestor.com), written by Mike Piper. Mike also has a series of short cliff-note like books on various financial topics. In his book titled Can I Retire?, Mike states that “… most investors do not need a financial advisor if they’re willing to take the time to learn all the ins and outs.” But he adds that “as an investor gets closer to retirement the usefulness of an advisor increases dramatically.” I agree with this. Not everyone needs an advisor. If they are willing to learn all the ins and outs. Yet, as you near retirement you have a series of permanent and often irreversible decisions to make. Most people can benefit from expert advice at this phase. Smart advice can provide results that are measurable in dollars and priceless in terms of how comfortable you feel as you transition into retirement. So, where do you find the right advisor? I’m going to walk you through the main criteria to consider. I’ll cover how advisors are licensed and regulated, how they are compensated, and what credentials to look for. First, regulations. There are two organizations that regulate the financial advice industry. One is FINRA, which is an abbreviation for the Financial Industry Regulatory Authority. When you carry a securities license you are regulated by FINRA. A securities license legally allows you to collect a commission from a transaction. I started my career with oversight from this organization. Then there is the SEC which stands for the Securities and Exchange Commission. When you are an investment advisor who charges a fee for advice – a fee that is not dependent on the sale of a specific product, and you have over $100 million of assets that you manage, then you are regulated by the SEC. If you are a smaller firm with less than $100 million then you are regulated by your state securities commission instead of the SEC. You can be regulated by both FINRA and the SEC. In technical language this is referred to as a “hybrid advisor”. In my mid-career years, I worked at a CPA firm and we carried securities licenses, insurance licenses and were able to charge a fee for investment advice. We were regulated by FINRA, our states’ insurance office, and our state’s securities division. Now my firm is only regulated by the SEC. We carry no securities or insurance licenses. We cannot be compensated from the sale of a product. We fall under the rules of the Investment Advisor Act of 1940, which means as a matter of law, we have a fiduciary duty to our clients. As it stands today in 2019, the majority of advisors are still not fiduciaries. I advise people to seek financial advice from someone who is a fiduciary and will acknowledge that they have a legal duty to provide advice in their client’s best interest. The simplest way to find advisors that meet this standard is to find advisors who are regulated by the SEC or their state, but not by FINRA. You can also visit an organization called NAPFA, the National Association of Personal Financial Advisors, and use their search for an advisor feature. All advisors who are members of this organization are fee-only advisors who have a fiduciary duty to their clients.The way someone is regulated also has a relationship to how they are compensated, which is the next key thing to consider when hiring someone. I’ll cover four of the most common compensation structures. First, commissions. Under a commission structure, when you buy an investment or insurance product, your financial advisor receives a commission for the sale of that product. Advisors who are compensated by commissions may have a limited set of investment products to choose from. I have met advisors under this model who sell only variable annuities, only mutual funds, or only life insurance. They know their products inside and out, but all too often, they have limited knowledge of the choices available outside of their product line. If you have already determined the type of investment product you need, the right commissioned advisor may be a great resource to help you sift through the choices in that product line, but they may not be the best resource in helping you design your overall plan. Next, there is hourly pricing. With an hourly pricing structure, you are paying for your advisor’s time. Most advisors who charge hourly will provide you an up-front estimate of the amount of time it may take. With hourly pricing, much like that of an attorney or CPA, rates vary with the experience level of the advisor. Average rates range from about $100 to $300 an hour. I used to offer a la carte financial advice where someone would pay an hourly rate and I’d assist with whatever project they asked for. Why did I stop doing this? I found that when looking at only a piece of someone’s finances I couldn’t feel confident I was giving the right answer. For some folks, hourly pricing is a perfect fit. An organization called Garret Planning Network offers a great search feature where you can locate hourly planners. If you want portfolio advice on an hourly basis, check out RickFerri.com. Rick is a Chartered Financial Analyst who offers customized investment advice on an hourly, as-needed basis. Next, you have financial planning fees. Some advisors charge per financial plan. They quote you a specific price that covers a set of services. Pricing may range from $1,000 to $15,000 for a written plan, recommendations, and a defined number of meetings. Typically, you get what you pay for, so if the plan is free, watch out. The plan pricing is often customized to the complexity of your situation. And last, there is one of the most common structures, which is charging a percentage of assets managed. Under this method of compensation, an advisor will handle the opening and management of accounts and may also offer financial-planning advice along with investment advice. Pricing ranges from about 0.5% to 2% per year. Usually the more assets you have, the lower the rate. Many advisors have minimum account sizes. You can ask an advisor what their minimum is before you meet. There can be a vast difference in services offered for exactly the same rate. For example, brokers may put you in a fee-based account model where investments are managed by software. They may charge 1.5% a year and yet not be able to offer any tax planning advice. At my firm, for a lower rate, we do far more than put you in an account model and rebalance once a year. We update your financial plan, provide advice on accounts outside our management, run an annual tax projection, and match your investment needs to your retirement cash flow needs. It takes far more hours than most people think. And, we keep people from making horrible mistakes with their money. Not everyone is cut out to do their own financial planning and investing. For those who aren’t, 1% is a great value. As you age, you must also consider your spouse. You may be well qualified to manage your finances and investments on your own, but whose hands might your spouse end up in when you’re gone? It may be better for you to select the appropriate firm now rather than leave such a thing up to chance. The last thing I want to cover is credentials. As of 2017, a research firm named Cerulli Associates estimates there are about 311,000 financial advisors in the United States. About 82,000 have a Certified Financial Planner designation. To make sure your advisor has the basic education, what I might call a bachelor’s degree in financial planning, choose someone with the CFP® designation. Another similar designation that qualifies someone is the PFS or Personal Financial Specialist designation which can only be acquired by a CPA. By hiring a CFP or PFS you can be confident that your advisor has the needed education in the basic financial concepts they must know. I started my career without any credentials and without any education in financial planning. I was earnest, believable, and genuine. I had never owned a home, didn’t know anything about taxes, and had no perspective on what a bear market would look like. Yet I was a financial advisor. I believe a lot of advisors are like I was when I started my career: well-intentioned. However, that doesn’t mean they know what they are doing. At my firm we work as a team, so planners who are younger in their careers work side by side with someone more experienced. You’ll have to determine how much experience you think is appropriate. I recommend a minimum of five years. You’ll also have to determine if you have other advanced needs. If you need an advisor who is a specialist, then look for additional designations. At Sensible Money, we are retirement income specialists. We carry an RMA or Retirement Management Advisor designation, which I equate to getting a master’s degree in the distribution phase. The focus of an RMA is on decumulation planning. If you want an investment specialist, look for a CFA, or Chartered Financial Analyst. You most often see this designation among people who manage institutional money such as for mutual funds or pension funds. You may want a CFA, or want to work with a firm that has a CFA as part of their team, if you have advanced investment-management needs—for example, you may own a big chunk of employer stock, are an officer of a publicly traded company, or have inherited complex investments. When it comes to hiring an advisor, lay out what you are looking for in terms of how the advisor is regulated, compensated, and what credentials they carry. Then only interview those who fit your criteria. That wraps it up for the first part of Chapter 12 on “Whom to Listen To”. I will be recording additional content from Chapter 12 on “Interviewing Advisors” and on one of the most important topics I can think of - “Avoiding Fraud.” ----- Thank you for taking the time to listen today. Visit amazon.com to get a copy Control Your Retirement Destiny in either electronic or hard copy format. You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.