Practicing Significance

Glorifying God by fulfilling your own unique purposes through the never-ending

action of acquiring, using, and sharing diverse resources.

 

 

 

                                   

 

Financial Advisors

 

 

 

“I could not comprehend how the management of money had degenerated from sound investment to trying to get the highest possible return in the shortest period.”   Benjamin Graham

 

“Smart is when you believe only half of what you hear.  Brilliant is when you know which half to believe.”    Unknown

 

“Voices are often loud, but seldom clear.”   Unknown

 

“He says things that annoy me.  He gives me good advice.”   Oscar Wilde

 

 

 

Introduction

 

A 2005 survey showed over half of Americans pay little attention to their investments, especially those investments in retirement accounts. Other surveys show individual investors tend to under perform professionals. So many people are turning to professional money managers. People receive financial advice in many ways.  “Professional” financial advice can come through qualified financial planners, stockbrokers, bankers, insurance agents, accountants, and lawyers.  “Non-professional” advice usually comes in the form of recommendations from well-meaning friends, magazines, or television shows.  This presentation will be limited to information about professional financial advisors.

 

 

Summary:

 

·        Good financial advisors can make valuable contributions to your financial well being.  Bad financial advisors can be disastrous.  The difference between good and bad is actual financial results over time, not intentions, friendships or personalities.

·        You, not your financial advisors, will enjoy or suffer the financial consequences of your choices.  Financial advisors make money either way.  Their job is to advise and inform you.  By not educating yourself or taking enough time, and by letting them make choices for you, you might be abdicating your responsibility to yourself.

 

 

What Services do Financial Advisors Provide?

 

As noted in the opening, there are numerous types of financial advisors.  The following is a very basic list of the types of advice and services they perform.  In many cases, their most valuable contribution is that they will cause you to do basic planning, make basic choices, and keep records that you could do yourself but likely won’t take the time and effort to do without their prodding.

 

·        Cause you to gather needed financial and personal data.

·        Specify in writing your financial goals and a plan to reach them.

·        Specify in writing your need to take or avoid risk.

·        Specify in writing your balance sheet and income statement.

·        Make a budget, and keep reconciling records.

·        Tax planning.

·        Education and child-related planning

·        Investment advice.

·        Insurance advice.

·        Retirement and aging planning.

·        Estate planning advice.

·        Implement and monitor your financial choices.

 

 

Who Provides Financial Advice and Services?

 

Generally, the providers of financial advice and services can be divided into three groups.  In many cases, one corporation owns companies that provide many of these:

 

1.      Direct managers and investors (these help you choose investments)

a.     Banks and their trust departments

b.    Mutual Funds

c.     Brokerage Houses (i.e. Schwab, Merrill Lynch, etc.)

d.    Insurance companies

e.     Independent money managers

2.    Those primarily selling and/or recommending specific financial products or ideas

a.     Stockbrokers

b.    Insurance agents

c.     Lawyers

d.    Accountants, CPA’s

3.     Financial planners who primarily recommend/coordinate those in 1. and 2. above and who help you strategize and plan. 

 

There is a boom in financial advisors who want to be known as “wealth managers.” These advisors typically want to work with only rich people and hope to provide services ranging from estate planning and taxes to investment management to psychological and spiritual advice. As of yet, there is no generally accepted certification for “wealth managers.”

 

 

Choosing Financial Advisors

 

Most people already use a vast array of financial advisors. For instance, even though I make most financial decisions for myself, when needed I use an estate-planning attorney, life insurance agent, a tax CPA, two stockbrokers, and a banker. In addition, my assistant and I constantly consider advice from experts and writers of magazine and newspaper articles, books, and Internet articles.

 

Information about financial matters has never been so widely available at such a low cost.  With a personal computer and the Internet, anyone can have access to an almost infinite amount of financial information and also be able to electronically invest at a very low cost.  Even so, many people are hesitant to make their own financial decisions.  This hesitation may stem from psychological issues, from an inability to feel comfortable with increasingly complex choices, or from a rational analysis of past results.  In many ways, financial planning may be like fixing a car – it used to be that most people could work on a car, but now cars are too complicated.  For whatever reason, many people are rethinking the wisdom of a do-it-yourself approach.  If you are thinking about hiring an advisor it is important to know what to look for.

 

The first step is to know what you want from an advisor.  Advisors are available to help make short-term or long-term choices, make investment choices in the stock market or other markets, make insurance choices, do tax planning, give estate planning advice and/or advise on day-to-day financial planning.  Advice is not cheap, so it is wise to know exactly what you want, then find the most qualified persons to provide it.  In some cases it will be wise to get the best expert for a specific need, such as an estate attorney to provide advice for estate planning. In other cases it may be working with a financial planner to analyze your current financial status and create a road map to reach financial goals.  Although most people spend little time on this first step, it is the most crucial.  To do this step correctly you must have a basic understanding of your financial status, financial goals, non-financial goals, and purposes in life.

 

The second step is to sort through available financial advisors using such criteria as: geographical location, experience with dealing with clients like you, independence from specific financial firms, and past results.  Do not impute certain qualities to potential financial advisors.  For instance, being nice, dressing well or attending your church does not necessarily mean that the advisor will be good for you.  In fact, there has been a rise in affinity fraud because many people want to believe, “Who can you trust more than the person who sits in the pew with you every Sunday?”  For instance, being a woman or a man does not mean more or less qualified; or someone with twenty years of experience is not necessarily competent.  It would be a good idea to interview several advisors before making final choices.  It will be tempting to short-circuit this process because it is time consuming, unpleasant, and many advisors are very persuasive.

 

The third step is to understand the compensation structure of the financial advisor.  Fees to financial advisors come in many ways: a percentage for assets under control, fees when products are purchased or sold, hourly fees, commissions or rebates from financial institutions, or other commissions.  Do not deal with a financial advisor who is not completely forthcoming and honest about all of their compensation components.  If you ever find out you have been intentionally misled or misinformed, change advisors immediately. 

 

Fourth, completely analyze any conflicts of interests that will arise.  For instance, if your advisor works for a stock brokerage company, the advice will likely be slanted toward products offered by or known by that company.  If your advisor works on a commission basis, advice might be slanted toward doing many transactions, easy and quick transactions, or types of transactions with higher commissions.  It will likely be impossible to avoid all conflicts of interest, but identifying and avoiding them ahead of time will reduce the ill effects to a minimum.  It might even be wise to call the Securities Division of your state government and ask an investigator about any disciplinary record of the advisor.  It is not necessarily a conflict of interest that a financial advisor will want to increase his compensation by providing a wide range of services.  It is up to you to limit the compensation and services to the ones you actually want.  Furthermore, it is up to you to decide whether to have an active relationship, a one-time relationship, or a long-term relationship.   These choices will be easier if you know what you want before entering into a relationship.

 

Fifth, realize that even the best plans can go awry.  Professional advisors can provide help, experience, and confidence in building and monitoring investments, but they cannot guarantee financial results.   It is your money and your life plans, and in the end you will reap the rewards or pay the penalties, not the advisor.  Review the Practicing Significance lesson on Investing to make sure you are using all the appropriate methods of limiting your risks.

 

 

Certain Types of Advisors

 

There are at least thirty organizations that offer some kind of designation for investment advisors and financial planners.  The following is a very brief summary of some of the most common.

 

·        Certified Financial Planner (CFP): signifies expertise in a range of areas including investments, insurance, estate planning, and budgeting.  Requires three years of practical experience, passing exams, and adhering to a code of ethics.  Probably the most widely recognized of the industry designations for financial planners.

·        Chartered Financial Analyst (CFA): signifies expertise in stocks, bonds, options and other financial instruments.

·        Chartered Life Underwriter (CLU): is the designation of choice for most insurance professionals.  It signifies expertise in certain insurance products

·        Certified Public Accountant (CPA): signifies expertise in accounting.  CPA’s who specialize in financial planning may also have the additional designation of AICPA-PFS. 

 

 

Conclusion

 

Good financial advisors can make valuable contributions to your financial well-being.  Bad financial advisors can be disastrous.  The difference between good and bad is actual financial results over time, not intentions, friendships or personalities.   You will enjoy or suffer the financial consequences of your choices, not your financial advisors.  Financial advisors make money either way.  Their job is to advise you, not make choices for you.

 

 

Additional Resources

 

Financial Planning Association  800-647-6340, www.fpanet.org

Fee only financial planners – National Association of Personal Financial Advisors 888-333-6659, www.napfa.org

CFP Board of Standards, 888-237-6275, www.cfp-board.org click on Consumers

National Endowment for Financial Education 800-220-1200.

Christian Financial Planners Institute www.christianfpi.org.

The Right Way to Hire Financial Help, by Charles Jaffe  

                  

 

 

DISCLAIMER:  The content presented herein is presented as general information and is not intended to be a comprehensive overview of all of your financial options.  Nor is it meant to imply any endorsement of any type of financial plan, product or service.  Investing and spending money is a complicated and serious process that is constantly affected by conditions in the marketplace and changes in tax law and government policies.  There is no guarantee that an investment product bought today will perform the same from year to year.  You should research your choices as thoroughly as possible and, when in doubt, consult a trusted professional advisor.