Pity the average investor looking for the answer to the question we all face: "Will I have enough?" With millions of baby boomers now facing the challenge of retirement and the desire to maintain a hoped-for lifestyle, the search for a competent advisor who will put the interest of the investor first is not one that can be easily undertaken. Yet, the new administration's campaign to disrupt the status quo and remove the new Department of Labor regulation requiring advisors to act in the best interest of the client in regards to retirement accounts is very bad news.
Over my decades in the industry, it has become abundantly clear that most individual investors are clueless about how to go about finding a proper advisor. Although the major brokerage houses and insurance companies will happily sweet-talk you with offerings that are best positioned to improve their own bottom lines, the odds of finding the right person are not good.
In the absence of a fiduciary requirement, all that's required of the non-fiduciary financial advisor is that the product or service being offered is suitable. And, no surprise, the definition of suitability is so broad that almost anything other than the Brooklyn Bridge might be appropriate. Add a slick presentation, a big smile and lavish offices, and you have a package that has all the hallmarks of something worthy. Which is why many investors end up paying more and getting less than they should.
Not only that, but there's an alphabet-soup range of designations for financial advisors. Most are rubbish. Indeed, some are available as a low-cost purchase online to almost anyone. So when you see a long list of letters after someone's name, think of Campbell's Soup. The two that are meaningful are CFP (Certified Financial Planner) and CFA (Charter Financial Analyst). The others are either insurance salesmen or traders in snake oil. (For related reading, see: A Guide to Financial Designations.)
All of this is shocking since we all know that MD means doctor. So why not have a designation like FID for financial advisors who are fiduciaries? Wouldn't that make it easier and reduce the abuse?
Abuse by advisors has continued for years. The best of times for stockbrokers were before that dark day in 1975, when discounted commissions on stock trades began. Before that, commissions on individual trades often ran $100 or more. Fast-forward to today, when commissions are typically $10 or less regardless of how many shares are being traded, and you begin to get the picture. (For related reading, see: Investors: Don't Let Fees Reduce Your Returns.)
Want to get rid of commissions? Get a wrap account if you can afford it. Wrap accounts began to appear when brokerage houses looked for a new source of income. In the interest of providing an apparently more palatable option to investors, they developed an all-inclusive, fee-based product that provided guidance, commissions and hand-holding. The earliest of these were expensive, typically an annual fee of 3% of assets under management. So if, for example, the annual gross returns on your account were 6% a year, the brokerage house became an equal partner. As investors got smarter, wrap fees came down. Even so, they are still in the area of 1.5% today, which, in my opinion, is overpriced by a third.
But there's more. Think about mutual funds. When mutual funds first came on the scene, there were hefty sales charges, or loads, attached. Yes, they certainly were. In those days, the loads ran as high as 8%. As time passed, some came down to 5% while others came along with no sales charges. These days, funds with no sales charges are the rule, not the exception. Even so, should you choose to visit a nearby brokerage office for help, load funds will probably be on the menu.
Think about whole life insurance. That's the one where you keep paying premiums, build up cash value and provide protection for your family. What could be better? The answer: term insurance, which is considerably less expensive. Why? Because when you buy whole life, a hefty chunk of the premium goes to the salesperson as a thank you for his efforts. What's more, the buildup in cash value over time is usually less than what you could have earned in a properly created and monitored investment account.
How to protect your loved ones? Get a level term insurance policy to cover specific risks, such as college tuition and mortgage payments.
All of this gets back to the fiduciary issue. The challenge facing investors seeking guidance is difficult enough. But in all cases they need to find out exactly who they are dealing with: someone who's on their side of the table or someone who's looking for another easy mark. (For more from this author, see: The High Dividend Stock Strategy: Pros and Cons.)
To find the help you need, go to www.findanadvisor.napfa.org.
A stockbroker is someone who invests your money until it's all gone. - Woody Allen