32

Be Your Own Planner … Or Find One You Trust

The Secret, Revealed

You’ve been waiting for 31 chapters for the secret
to handling money well. Here it is: Use common
sense. The simplest choices are the best ones.
Impulse is your enemy, time your friend.

Most families don’t need professional investment advisers, especially if your assets are principally in retirement plans. Sensible management isn’t hard! To be your own guru, you need only a list of objectives, a few simple financial products, realistic investment expectations, a time frame that gives your investments time to work, and a well-tempered humbug detector to keep you from falling for rascally sales pitches. Don’t put off decisions for fear you’re not making the best choice in every circumstance. Often, there isn’t a “best” choice. Any one of several will work.

On the other hand, almost everyone can profit from a two-hour conversation with a true financial planner (see what I mean by “true” on page 1171). The planner can help you set priorities, align your spending and saving with your lifetime goals, spot things you’ve overlooked, and make other valuable suggestions.

I can think of some circumstances where a planner is a must. For example:

1. You earn good wages but cannot manage to save a dime. You need a reality check. Someone has to show you—in dollars and cents—how little you’ll have when you retire unless you shape up. Most of us shape ourselves up. If you can’t, get help.

2. You face a question that can be answered only by someone with technical expertise. For example, your company might have made you an early-retirement buyout offer and you want to examine your alternatives. Or, you’re retiring and have several choices about how to handle the money in your retirement plan. That’s a onetime decision with many tax and personal ramifications, and you want to get it right.

3. You’re following your own plan—for savings, investments, and insurance—and wonder if an expert can improve it. Arrange for a meeting at an hourly fee. Make it clear that you want to talk about strategies and concepts, not sit through a sales pitch for financial products. (You shouldn’t be with a “selling” planner in the first place.) Make no decisions until you’ve gone home and thought about it.

4. You have a substantial amount of money and lack the time, interest, and knowledge to manage it yourself.

5. You’re not interested in planning, won’t do it yourself, or are uncomfortable making decisions on your own. You start with a plan but don’t have the discipline to keep it up. Find a planner and off-load the job.

6. You’re pretending everything is fine even though you have only $5,000 in retirement savings and $25,000 in credit card debt. A planner can yank you out of denial and ease you onto a more productive path.

A talk with a planner will have one of three results: (1) You’ll find a wonderful adviser who makes suggestions you’re grateful for and whom you’ll decide to work with on a continuing basis. These will almost certainly be fee-only planners—see page 1176. (2) You’ll feel more confident that your personal decisions have generally been good ones and will continue managing your affairs yourself. You’ll incorporate some of the planner’s new ideas. (3) You’ll run into a planner who makes you doubt your competence while urging you to rely on his or her advice. Or a planner who says that you’ll do even better by buying the products (especially annuities) that he or she sells. In this last case, turn up the volume on your humbug detector. These planners earn commissions and plan to earn them from you.

Don’t go near a broker or commissioned planner if you’ve just come into a lot of money (an inheritance, an insurance settlement, a lump sum retirement payout) and don’t know what to do with it. Clients with loose cash and weak convictions are fresh meat, ready for roasting. A self-interested planner may urge you to buy high-commission investments that serve his or her objectives better than yours. Because you don’t know much about investing, you won’t know what’s going on.

Before you set foot in the office of a stockbroker, insurance agent, or financial planner, learn the basics yourself. Sock your money into bank certificates of deposit or a money market fund, then study up. Read books. Work out your priorities. Take all the time you need to understand the tried-and-true principles of successful investing. Six months, one year, the wait doesn’t matter. During that time, your money will quietly earn interest with no risk of loss and no risk of slipping into bad hands. The only expert that a novice can safely visit is a certified public accountant, for tax advice. That is, provided that the accountant doesn’t sell financial products.

When you’re ready to launch, you have two possible directions: (1) Try investing yourself, a little in this mutual fund, a little in that one (chapter 22). Give it a year, see how it feels, then invest some more. Don’t worry about “missing the market.” There’s a new market every day. Once you’ve had some experience, you might discover you like it and keep going. Or you might decide that you want professional advice. (2) Turn to an investment adviser. You now know the language. You should be able to tell the difference between good and poor advice. That’s what this long apprenticeship was for: to develop your ability to judge.

The Best Thing a True Planner Can Do for You

Help you set goals, prepare for life’s potential shocks, then align your spending, saving, and investing to get you through. Picking investments is incidental compared with the importance of creating a framework for long-term success.

Which Kind of Professional to See

See a Certified Public Accountant (CPA)—for tax planning, tax form preparation, and small-business planning advice. Enrolled agents, who are licensed to represent you before the IRS, and public accountants, also have tax practices. Some CPAs have expanded their practice into personal financial planning (page 1178), earning a personal financial specialist (PFS) designation. It’s a weaker designation than a CFP (page 1170), but the accounting profession intends to strengthen it.

See a Tax Attorney—for wills and estate planning. Any lawyer can provide an “I love you” will. That means “Everything to my spouse; if my spouse dies first, everything to the children (in trust, if they’re minors); with my spouse’s name on all beneficiary forms, such as 401(k)s and IRAs.” For anything more complicated, see an attorney who specializes in estate planning.

See a Life Insurance Agent (Preferably a Low-Load Agent) or Fee-Only Life Insurance Planner—for a life insurance policy. For low-loads, see page 371. A chartered life underwriter (CLU) knows more about insurance than the average agent. Your attorney and insurance planner should work together if you want a policy to help pay estate taxes or buy your share of a closely held business. Term insurance you can buy yourself, online.

See a Health Insurance Agent—for health insurance, disability insurance, and long-term care policies.

See a Stockbroker—for help with buying stock, bonds, and mutual funds. (Although there are better ways. See page 793.) Many brokerage firms will also find you an investment adviser (typically for sums of $25,000 and up). The fee will be stiffer than if you went to a fee-only financial planner. Note that most brokers nowadays call themselves financial consultants, financial advisers, financial analysts, or vice presidents. They’re all still stockbrokers, and their business is selling. They’re not true planners or investment advisers.

See a Registered Investment Adviser (RIA)—for managing a large sum of money. Independent advisers set minimums in the $250,000 to $1 million range. They’re fiduciaries, meaning that they have to put the interests of their clients ahead of their own. They also have to be registered with the state or the Securities and Exchange Commission and make a variety of disclosures—see page 1183.)

Titles such as “investment consultant” or “wealth manager” are self-awarded. Anyone can use them, whether they have expertise or not. I’d assume not. For personal money management, stick with RIAs. Anyone who charges you for investment advice and isn’t an RIA could be breaking the law.

For an excellent explanation of the difference between brokers, advisers, and financial planners, including their services and differing legal obligations to customers, get the free brochure “Cutting Through the Confusion” on the Web site run by the North American Securities Administrators Association (www.nasaa.org). Click on Investor Education, then on Financial Education Resources.

See a “Planner”? No. Anyone can claim to be a financial planner. There are no rules. When scouting for a true planner, you’re seeking specific professional and educational credentials. Plain old financial planners, without those credentials, are imposters.

See a Certified Financial Planner (CFP)—for advice on how your finances fit together: budgeting, saving, taxes, insurance, investing, college accounts, and retirement planning. There are two types of CFPs:

1. CFPs who sell financial products and charge commissions. They’re qualified planners. But because they have to sell to make a living, their advice is inevitably biased, even if they don’t mean it to be. They don’t have a lot of time to spend on issues such as budgeting, getting out of debt, and retirement savings such as 401(k)s, which don’t require you to buy something from them.

2. CFPs who sell no products and charge only fees. To my mind, these are the true planners. They engage you in personal discussions that help you sort out your priorities, align your budget with your goals, and arrive at a financial plan that works. Many fee-only planners are also Registered Investment Advisers and will manage your money, if that’s what you want. Usually they invest it in low-cost, no-load mutual funds or exchange-traded funds. To qualify for money management services, you’ll probably need an investment account in the $50,000 to $200,000 range, although some planners accept less. In a full-service shop, you’ll also find accountants and tax attorneys, and will be given leads to insurance professionals.

See a Bank Trust Department—for handling a large trust for dependents after your death. Some trust departments have stellar investment records; others are mediocre and with customer service I’d call languid at best. Look for a bank that provides full reports of its investment performance (many of them don’t), and look at a sample before signing up. You want to see your trust’s percentage gain or loss compared with standard stock and bond indexes. Minimum trust: in the $200,000 to $500,000 range, depending on the institution. Big brokerage firms handle trust business too.

See the Web Sites of the Major No-Load Mutual Fund Groups—for useful consumer advice about allocating assets and making long-term investment decisions. They often have newsletters explaining different kinds of investments and helping do-it-yourselfers with college or retirement planning. You’ll also find excellent materials at www.morningstar.com.

I have mixed feelings about the retirement-planning calculators available on the Web. You enter certain financial data and the calculators purport to tell you how much more you ought to be saving for your retirement. Their weaknesses are obvious. Some ask for data that are hard to get (if you have a pension, do you know how much it will pay when you retire?). Some ask for too little data to give you a meaningful result. You have to make loads of assumptions (What’s the likely future inflation rate? How fast will your salary increase? What will you spend in retirement?)—as if you knew. A 1 percent change in your forecasted investment returns could add or subtract $200,000 from your projected retirement assets. What good is that? A couple of years ago, Kiplinger’s Personal Finance magazine put a simple case through five prominent online calculators: a married couple, with a simple savings plan, wondered how much retirement income they could expect their growing nest egg to deliver. The answers differed wildly.

On the other hand, using an online calculator shows a commitment to finding out what you’re going to need to retire on. The answers may be different, but they give you a general sense of whether or not you have enough. Usually you don’t, and the numbers you see are a wake-up call. Research has shown that people who use these calculators save more money than people who don’t.

Should I See a “Senior Specialist”?

No, no, no! State regulators warn that “senior specialists,” “senior advisers,” or “retirement advisers” have little expertise beyond marketing and selling. They probably earned their so-called credentials by taking a weekend course. They’re trained to appeal to older people who might be susceptible to pitches for equity-indexed annuities, variable annuities, living trusts, and other products that pay high commissions. Typically, they’ll advertise an “educational” seminar, with a name such as Senior Financial Survival Seminar or Senior Financial Safety Workshop. You’ll get a free lunch and lectures from “experts” who claim to have nothing to sell. But of course they do. They’ll offer to review your investments or estate plan “free,” then advise you to switch into the products they offer. Don’t do it! Throw away almost every business card that suggests you’re dealing with someone especially trained to understand the kinds of investments older people need. For warnings from regulators on free-lunch seminars and the typical investments sold there, see the pages for individual investors at www.nasaa.org and www.sec.gov.

I said throw away almost every business card. There’s one legitimate program that actually gives advisers some expertise. It’s the Chartered Advisor for Senior Living (CASL) designation, offered by the American College in Bryn Mawr, Pennsylvania. Students cover various types of issues that older people face, including family relationships, investments, retirement income planning, estate planning, and health insurance. I wouldn’t rely on only a CASL for senior planning, but a CASL plus a CFP would make your adviser well informed. The same warning applies to CASL planners as apply to CFPs: look for a fee-only planner, not one who sells products.

Other Financial Designations

There are hundreds of letters that financial advisers can put next to their names, many of them worthless. If you wonder about what stands behind a particular designation, go to www.finra.org and click on “Investor Information,” then on “Professional Designations.” You’ll see who awards the title and how much study it takes. If you can’t find it at FINRA, look it up on the Web. If the adviser can get a designation with just a few days of study—say, 30 hours—what does it say for his or her expertise? Not much. All it does is create apparently credible business cards for a hustler with something to sell.

What About “The Plan”?

Among most financial planners, The Plan is out of style. In theory, it’s your starting point: a comprehensive tome—part customized, part boilerplate—that analyzes everything you’ve done so far and points to additions and changes that you ought to make. In professional hands, true plans cost a lot of money—typically $2,000 to $6,000. Clients haven’t wanted to pay.

So most plans today amount to sales tools, promoted by stockbrokers, insurance agents, and planners who primarily sell products. The cost: anywhere from $250 to $2,500. You fill in a questionnaire about your finances. Back comes a computer-generated program, in hard covers, telling you what you lack. The analysis may well produce some good ideas. On the other hand, GIGO often rules: garbage in, garbage out. The program is designed to sell, not to explore alternatives. The questionnaire might not even consider your best investment options—for example, adding more money to your tax-deferred 401(k). The planner would rather you spent the money on products he or she has for sale.

As an experiment, I once purchased three of these commercial plans. My question to each salesperson was “Can I afford to retire?” The plans came up with radically different answers and were short of true planning ideas except for investments I should add. Those investments would have led me wrong.

What if you pay $1,500 for what turns out to be an unsuitable plan? Some clients execute it anyway because they don’t want to “waste” the money they’ve already spent. That attitude plays into the planner’s hands, who’s ready to sell you products on the spot. I say: walk away. You’re lucky that you’ve lost only the fee you paid up front and not all the rest of the money that might have followed.

When you work with a genuine planner, not a salesperson in disguise, a plan will evolve. Initially, you might get a miniplan addressing the question you came to ask—for example, “Am I saving enough for retirement?” or “What should I do with the money I’ve inherited?” If you keep working with that planner, you’ll gradually address other issues, and a full-fledged blueprint will emerge. It won’t be a plan in hard covers, it will be a comprehensive strategy for reaching your personal goals.

Goals-Based Planning

All planning should be based on what you want out of life. Start with your goals: a sufficient retirement income, college for your children, getting out of debt, a nice vacation every year, leaving a legacy for your heirs. A good planner will look at your current and projected income and assets, apply it to your goals, and see if your current savings are enough. If not, the discussions begin. What matters most? What could you downgrade? How much more could you save? Note that nothing involves buying financial products! This is entirely a mind game. You have to understand, deep in your soul, how your spending and saving affect what you’ll be able to do. You might even call this budget-based planning. Having money tomorrow depends on what you spend today.

If you’re doing your own planning, get out your trusty yellow pad. You’ll find plenty of guidelines in the earlier chapters of this book. Define your financial objectives and estimate how much money you’ll need for each. Set out a strategy for debt repayment and how you’re going to raise your retirement savings. Implement your investment program with suitable mutual funds. It’s important to write everything down. In your head, a plan is only a vague hope that things will turn out well. On paper, it’s an action project that can be tested against your progress every year.

To help you with retirement saving, you’ll find plenty of calculators on the Web. They’ll give you a general idea of how much you should save to reach the retirement income you want or at what age your savings will run out if you don’t improve. None will give you exactly the same answer; some are wide of the mark. Nevertheless, if they all say that you’ll be flat broke somewhere between ages 71 and 76, you’ll know what to do: work longer (if you can), save more, and plan to spend less after you retire.

What Matters Most When You’re Looking for a Financial Planner?

You might expect me to say empathy, expertise, clear thinking, ability to explain, patience, delicacy in dealing with family issues, understanding your particular goals and financial position, investment smarts, honesty, responsiveness, and fidelity to the Boy Scout and Girl Scout oaths. Yes, you want every one of those things. But first and foremost, you want a planner who charges no sales commissions, only fees—that is, a fee-only planner. You pay for advice and perhaps money management, not for financial products.

Planners who charge commissions can make their living only if they sell you products. No matter how nice, no matter how smart, no matter that he or she is your friend, neighbor, or cousin, commissioned planners have to put their own interests first. They think, sincerely, that the stuff they sell is exactly what you need. How else would you expect them to think? But what you need is unbiased advice, and commissioned planners can’t give it. Nor do they have the time to help you sort out your priorities and think your way through family issues. They have to sell.

So when you’re shopping for a planner, ask how he or she is paid. If the answer is “I’m paid by fees” (because that’s what people want), you have to unwind the answer. There’s a big difference between fee and fee only. Here are the five ways advisers are generally paid.

1. Commission only. These planners don’t make a cent unless they sell you something that carries a sales commission. They lean toward high-commission products, which presents a tremendous conflict of interest. You might not be able to see the commission because it’s hidden in the product’s fees (for example, inside your annual cost of a variable annuity). But trust me, the fees are there. If the planners say, “You pay nothing, I’m paid by the annuity company,” laugh. Of course you pay.

2. Fee and commission, also called fee based. This is probably the most common arrangement. The planner charges a fee for certain services—for example, for drawing a simple plan or overseeing your investments—and also earns commissions on any products you buy. If commissions are deducted from the fee, the arrangement is called fee offset.

But make no mistake about it: sales commissions are the driving force and produce the same biases you see in commission-only planners. About half the planners disclose their commissions to clients, according to a study by the Securities and Exchange Commission. The rest leave you in the dark unless you press for information.

You can get good advice from a competent fee-and-commission planner, but it always comes with something to buy. In judging any proposed investment, keep in mind that it serves the planner’s needs, probably ahead of yours. A bias toward high-commission products, such as variable annuities, is easy to spot. So is the bias away from investments that don’t yield commissions, such as putting more money into your 401(k). More subtle is the bias to sell you something, anything, in cases where nothing but good advice would have served.

Some fee-based planners are in transition to a fee-only practice. They work in independent shops, not big brokerage houses. You can spot them by their interest in genuine planning—paying attention to your spending, saving, employee benefits, and personal goals. Even so, you’re better off waiting until they finally cut the cord to sales commissions.

3. Fee-based managed accounts. I list these separately because they masquerade as fee only. A stockbroker oversees your account and makes recommendations while separate investment advisers manage your money. You pay a fixed percentage of assets. The total cost typically comes to 2 to 3 percent, and you get no additional financial planning services. What stops this arrangement from being fee only is that the broker can sell you commissioned products on the side—for example, variable annuities and unit trusts. Pass this arrangement by.

4. Salary and bonus (or commission). This is typical for planners who work at banks. They may also act as agents for insurance companies. In either case, they generally sell commissionable mutual funds and tax-deferred annuities and have the same biases as any other planners whose income depends on how much they sell.

5. Fee only. These planners charge only for their advice, accepting no other form of remuneration. Their fee structures vary—hourly charges, monthly or quarterly retainers, fees per job, or a percentage of the money they have under management. Typical money management fee: 1 percent (less for large portfolios). Some planners combine retainers with money management fees in the 0.3 percent range. Either way, the products that fee-only planners sell are entirely no-load—meaning that no sales commissions are attached. Of all the financial consulting arrangements, this is the cleanest.

Fee-only planners have conflicts of interest too. Say, for example, that you’re leaving your job and have money invested in the company’s 401(k). You can leave it there or roll it into an Individual Retirement Account. Often, it’s best to leave the money where it is. But if the planner can persuade you to switch to the IRA, he or she will probably get the money to manage, at a fee of perhaps 1 percent a year. Or say that you’re thinking of using a chunk of cash to pay down your mortgage. The planner might advise you to leave the money in your managed investment account, where, again, it will throw off a 1 percent fee. In the case of the mortgage prepayment, the planner’s advice might be right financially. A true planner, however, should consider whether you’d be happier owning your home free and clear. You have to be on your toes when evaluating any planner’s advice.

Some fee-only planners, especially certified public accountants, provide no ongoing help. They give you advice, then turn you loose. That’s not too helpful unless you can implement the plan yourself. Otherwise you’ll pay double: once for the plan and again for the services of a stockbroker or insurance agent (who might change the plan and charge you commissions of their own).

Incidentally, fees charged for tax and investment advice can be written off on your income tax return. They’re part of that bagful of miscellaneous expenses that are deductible to the extent that they exceed 2 percent of your adjusted gross income. Sales commissions, however, are not deductible up front; they’re used to reduce your taxable profits when you sell.

Which type of planner is more expensive: one who charges sales commissions or one who charges fees? On the surface, fee-only planners seem more expensive. You pay more for The Plan, if you want one—maybe up to $6,000. You pay hourly fees for analysis and advice (usually in the $75 to $200 range) or maybe quarterly retainers. You’re charged a fixed percentage of any money the planner manages for you. So you’re always getting bills. What you don’t pay, however, is sales commissions. Any products that the planner buys will be no-load (no sales charge).

By contrast, fee-and-commission planners might charge $250 to $1,500 for The Plan, if you want one. That’s often the only payment you will make out-of-pocket. The rest of the planner’s compensation is indirect, from up-front sales charges or annual charges subtracted from your investments. Because you don’t write separate checks to pay the commissions, you may not realize how large they are or how much you pay. Usually it’s a lot.

Ask any planner you work with how much his or her services will cost. Fee-only planners will have brochures listing their prices. If the planner will manage your money, add the cost of the types of investments he or she recommends—for example, the annual fees charged by the mutual funds the planner chooses. The planner’s fee plus the fees embedded in your investments are your total cost.

It’s harder to suss out what a commissioned planner costs. There’s the gross commission, of course—the total commission, shared by the planner and his or her firm. If you’re buying stocks, the commission will show on your confirmation form. Next, you pay any listed fees. There are also the annual fees embedded in the financial products you buy—for example, in your mutual funds, unit trusts, or variable annuities. The planner’s commission might come out of your investment up front or might be paid out of those product fees. It’s not easy to excavate the fees. Your planner should give you a written list, including the commissions earned. Some planners try to put you off by saying, “I don’t ask how much money you earn.” That’s totally irrelevant. You’re asking for the price you’re paying for products and services. You should know what you’re being charged, including commissions, just as you’d expect to know the cost of anything else you buy. When you add up the price of dealing with commissioned planners, you may well find that they’re more expensive than planners who charge only fees. They’re especially expensive if they sell you products you don’t need.

Don’t let a commission- or fee-based planner tell you that his or her services are free or that there’s no commission on a particular product. Nothing is free, even services that look free. If you want financial advice, you’ll have to pay for it. Different systems of payment carry different incentives. Commissions encourage planners to sell whether you need the product or not. Fees encourage planners to be good enough to persuade you that their advice has value.

Six Places to Look When Shopping for a Fee-Only Planner

image National Association of Personal Financial Advisors (www.napfa.org), about 1,270 planners in all states. To see if there are any near you, go to its Web site and type in your zip code. When names pop up, click on their profiles, where they announce their specialties. Some look for clients of high net worth. Others say they serve “middle income client needs.” If you don’t see the “middle income” phrase, e-mail local planners, explain the services you want, and ask if they offer advice by the hour or by the job. Some take hourly clients without advertising it. You can also get names of fee-only planners by mail. Call NAPFA at 800-366-2732.

image Garrett Planning Network, a group of about 300 planners in 41 states. Look for their names at www.garrettplanningnetwork.com. They work on an hourly basis, with no minimum required. Fees range widely—at this writing, the majority charge $180 to $210 an hour. Middle-class clients are their specialty.

image Alliance of Cambridge Advisors, a group of about 145 planners in 33 states, also specializing in middle-class clients. Look for their names at www.cambridgeadvisors.com. They usually charge annual retainers covering all their services, although some of them might give you a onetime financial tune-up for a fee.

image Personal Financial Planning Center (www.pfp.aicpa.org), the site for certified public accountants who are personal financial specialists. Enter your zip code to get the names of local planners. Click on their names to see if they charge only fees. A few of these planners sell products on commission, so ask about it.

image Certified Financial Planner Board of Standards (www.cfp.net). Click on “Search for a Certified Financial Planner” to find CFPs in your area. Some will be “fee based” or “fee offset,” others are “fee only.” Go to their Web sites to find the true, fee-only planners.

image Financial Planning Association. The majority of these planners charge commissions, but the group includes some fee-only planners too. Go to Planner-Search at www.fpanet.org, search for local names, and inspect their listings. Those who advertise as “fee based” or “fee offset” charge commissions. You want the planners who are “fee only.”

Most fee-only planners offer a get-acquainted session free. If you engage one, you’ll sign a contract specifying what services the fee covers and how long the contract will last. If the planner is an investment adviser and will manage your money, decide whether it’s to be on a discretionary basis. Discretionary means that the adviser makes the investment decisions, keeping you informed. Nondiscretionary means that you have to approve every transaction before it’s made.

There aren’t enough fee-only planners to help everyone who wants one, especially people with incomes and assets in the middle range. As a result, many middle earners wind up, by default, with stockbrokers or with fee-based planners who can charge commissions. Before taking this step, however, consider managing your investments yourself, following the principles in chapter 22 on mutual funds. It’s easier than you think.

Alternatively, consider the retirement investment services offered by the major no-load mutual funds. They look at your assets and savings rate and give you a retirement investment plan. Here are three: T. Rowe Price (www.troweprice.com), an advisory planning service for $250, with regular checkups. You need at least $100,000, and it doesn’t have to be in T. Rowe Price mutual funds. The Vanguard Group (www.vanguard.com), a financial planning service for Vanguard clients. Cost: $1,000 if you have less than $100,000 in Vanguard funds, $250 if you invest up to $500,000, and nothing for higher amounts. Fidelity Investments (www.fidelity.com), a portfolio advisory service for clients with $50,000 and up. You pay 1.1 percent of assets; less, if you have $200,000 or more. All three services come with monitoring or with regular checkups.

If you decide that you’d rather work with a fee-based adviser, be armed against the sales pitches. Stick with mutual funds, not individual stocks (page 713); avoid variable annuities (page 1084) and unit trusts (page 958); maximize your 401(k) investments before putting money into products that the planner sells (even though the planner claims that his or her products are better); and keep your investments simple. Be sure that the adviser takes you through the full planning checklist: setting goals, budgeting for debt reduction, maximizing your employee benefits, deciding how much term life insurance to buy, considering long-term care insurance, and reminding you to sign a will and a health care proxy. If your planner doesn’t want to spend much time on anything other than investments, you’re in the wrong place. Find someone else.

Whomever you work with, accept only advice that makes sense to you. If you’re not sure about any of the investments or ideas the planner presents, you have only to mumble and hesitate until the session is over. Don’t say yes when you’re undecided. Never say yes under pressure, even of the most jovial sort. If you think you’d like to work with a particular planner but are a cautious type, start small. Add to your investment as you gain confidence in the planner’s MO. If you don’t gain confidence, quit.

Eighteen Ways of Looking for a Planner

There’s no easy way to find a good planner. As in any other field, competence ranges from brilliant to dim. You can probably spot the dim, but working with mediocrities is risky too. They may steer you wrong because they don’t see all the angles of the questions you pose or understand the risks in some of the products they sell so enthusiastically.

Here are some ways to find a planner—a fee-only planner—who’s really good:

1. Turn back to page 807, where I list ways of finding a stockbroker. Most of those rules will also help you find a good financial planner, so I won’t repeat them here. The Certified Financial Planner Board of Standards also has some tips. Gather your initial list of fee-only names from the Web sites that I’ve recommended and from friends or professional acquaintances such as accountants. Remind them that you want fee-only advisers, not those who are fee based.

2. Call or e-mail the people on your list, telling them why you’re seeking help and what services you need. For money management, ask about the minimum account requirement. If there seems to be a fit, ask for written material about the firm, including the state or federal ADV (that’s the background check for investment advisers—page 1183). Read it before deciding to set up an interview.

3. In the written material, check out the planner’s educational background. Here’s what you want to see:

• Higher education. A college degree is a reasonable proxy for a mind that can tackle complex issues.

• Evidence of planning expertise. Look for the certified financial planner designation (CFP), awarded by the Certified Financial Planner Board of Standards to planners who have met its requirements and passed its test. The personal financial specialist designation (PFS) is given by the American Institute of Certified Financial Planners. The criteria are minimal, but the AICPA plans to beef it up. A number of colleges and universities, such as Texas Tech University in Lubbock, Texas, give financial planning degrees. The American College in Bryn Mawr, Pennsylvania, gives a chartered financial consultant designation, or ChFC. It identifies insurance agents who have studied financial planning with an emphasis on using life insurance products.

All these diplomas attest that the planner has passed a number of exams in areas such as goal setting, taxes, insurance, investments, and estate planning. But degrees and certificates are only a starting point. They don’t say whether a particular planner is any good.

• No kidding around. If the business card says “Financial Planner,” look for the CFP designation. If it’s not there, you could be dealing with anyone: a stockbroker in hiding, an insurance agent with pretensions. You can tell who they are by the products they advise you to buy. People calling themselves “retirement planners” are often insurance agents. “Financial consultant,” “financial adviser,” and “registered representative” mean stockbroker. None of these salespeople is a planner in the sense you seek. Dump a “senior specialist” (page 1172) fast.

4. Decide on two or three planners to speak with in person. The opening interview should be free. Take a financial statement with you, showing your assets and liabilities, to give the planner a general idea of what he or she will have to do.

5. Ask about the planner’s professional background. The basics should have been in the written material, but ask about previous employers and occupations. You want someone who has been practicing financial planning for 10 years or more, preferably at the same firm. Skip any new kids on the block, including career switchers who have been practicing for only a couple of years. They may turn out to be wonderful, but you want them to practice their new profession on someone else. Also skip any planner who has hopped around from firm to firm.

6. Ask what kinds of clients the planner has. Firms often specialize: in doctors, entrepreneurs, entertainers, teachers, or young, upper-middle-income families. The more experience the planner has with people like you, the better.

7. What are the planner’s special areas of expertise? Which lawyers, accountants, or other specialists are on tap?

8. Does the planner sell financial products? (You trolled for fee-only planners, but check.) Does he earn referral fees for recommending you to particular specialists, such as insurance agents (fee-only planners shouldn’t). Is she involved in any other financial businesses, such as real estate, that she might recommend to you? You want to avoid planners with conflicts of interest.

9. Think about what the planner asks you. He or she should inquire not only into your finances but also your family, feelings about money, general knowledge of investments, personal goals, and way of life. If you’re married, your spouse should attend at least the initial meeting, and the planner should elicit his or her feelings too. Planners who don’t seem interested in you won’t give you the best advice. You might take a list of objectives to the initial meeting and ask how the planner would approach them, one by one.

10. Think about how the planner answers the questions you pose. Does he or she seem open, straightforward, comfortable with issues, friendly, willing to explain? If the chemistry isn’t right, the relationship won’t work, no matter how bright the planner is. If you have any reservations, raise them on the spot, to see what the planner has to say.

11. Ask for professional references: lawyers, bankers, accountants. If you’re refused, take your business elsewhere. Call each reference, ask what the relationship is, how long they’ve worked with the planner, and whether they can recommend him or her. Professionals don’t put their names on the line for bad guys (unless, of course, the professionals are bad guys too).

12. Ask for the names of three clients you can speak with who have been with the planner for at least three years. Don’t take no for an answer. When offered the names, don’t fail to call. Ask how the planner is to work with, any problems they see, and how much better off they are thanks to what the planner did. In my experience, calls like these are incredibly useful. The clients are usually very fair in assessing the service they’ve been getting. (That is, unless you’re with a sleazy operator, in which case the “clients” will be relatives. Your gut will probably tell you that something’s wrong.)

13. If the planner will manage your money, discuss investment philosophy and approach. What kinds of investments does he like, and what might be his strategy for you? Also look at the performance reports that clients get. They should show the period’s total, annualized return, net of all fees and expenses, compared with several standard indexes: Standard & Poor’s 500 stock index, the Russell 2000 index of smaller stocks, the EAFE index of international stocks, Barclays Capital U.S. Aggregate Bond Index, 90-day Treasury bills, and consumer price inflation. That helps you keep track of your progress relative to the rest of the world. It also tells you how well the planner is performing relative to your goals.

14. Ask if the planner will acknowledge, in writing, if his or her relationship with you is one of a fiduciary. A fiduciary is an adviser required by law to put your interests first. Requiring this in writing will eliminate most questionable planners.

15. Ask the planner, “How are you paid?” This question is critical. The planner should hand over a schedule that discloses his or her compensation in full.

16. Find out how you can terminate the relationship. You should be free to quit at any time, with nothing owed beyond the end of the current month.

17. Don’t pick a planner just because he or she is quoted in the newspapers. Reporters are looking for colorful quotes and comments and rarely check on whether the planners are any good. Courting the press is one way that planners advertise.

18. Don’t pick a planner just because he or she gives investment seminars. That’s advertising too. A San Francisco planner, Lawrence Krause, once told his trade secrets to the magazine CALUnderwriter: “You don’t have to know as much as you think you have to know in running a seminar. All you have to know is more than your audience, and your audience doesn’t know your subject. … You also have to remember that you’re not there to educate. You’re there to sell. The purpose of a seminar is twofold: one, to confuse your audience; and two, to create dependence. … As long as you are going to confuse them, do a good job of it. Then you ask for the order, so that they’ll come to see you afterward.”

Now you know.

The Background Check

Financial planners who handle investments have to register with the law as investment advisers. Here are the rules and what you can find out:

image Investment advisory firms that handle $25 million or more in assets have to register with the Securities and Exchange Commission (SEC).

image Firms that handle less than $25 million register with the states.

image Individual advisers (investment adviser representatives, or IARs) are regulated by the states, including those working for the larger firms.

image The investment advisory firm has to make various disclosures. Firms filing with the SEC fill in Form ADV (for “adviser”), parts 1 and 2.

Part 1 is for the regulators. It includes various disciplinary actions taken against the firm or its individual investment advisers.

Part 2 is for the public. It lists the firm’s services and investment methods, the education and business backgrounds of the principals, whether the adviser conducts other types of financial businesses, and the way customers are charged. (Here’s where you’ll see if an adviser claiming to be fee only actually sells products on commission.) New customers have to be given a copy of the ADV part 2 or a brochure containing the same information. Ongoing clients have to be offered an updated copy every year. At this writing, the SEC has proposed expanding part 2 to include legal or disciplinary actions against the advisers, including, possibly, arbitrations and settlements of claims.

The firms also file a Schedule D for each individual adviser, giving the details of his or her disciplinary history, if any: criminal charges, civil actions, and regulatory proceedings. The firm doesn’t have to give you the Schedule D. By law, it has to tell you only about any disciplinary actions taken against your adviser. But I wouldn’t do business with a firm that didn’t release its Schedule Ds.

The states have an equivalent ADV form with similar disclosures for the firms and advisers they regulate. They require advisers to demonstrate some minimal knowledge, such as an acquaintance with state and federal securities laws. The states may also have some operating requirements, such as bonding, minimum amounts of net capital, and rules on maintaining books and records. Their disclosures include arbitration claims against advisers in excess of $2,500.

You don’t have to wait for an adviser to give you his or her ADV. You can find it yourself at the Investment Adviser Public Disclosure Web site. Go to www.adviserinfo.sec.gov. Click on “Investment Adviser Search” and enter the adviser’s name. You’ll get the full ADV, including part 1, with the disciplinary infractions, and Schedule D. The site covers advisers registered with the states as well as with the SEC.

Check what’s checkable on the ADV (education, prior employment), to see if the planner is on the square. The regulators have no idea whether these documents tell the truth.

If the adviser has no ADV and is giving you investment advice, he or she may be breaking the law. That’s not someone you should be working with.

image The ADVs let you look up the firm but not the background of the individual adviser, who is known as an Investment Adviser Representative. If it’s a small shop where the adviser is the firm, the ADV covers what you want to know. If you want to check the background of an adviser in a larger firm, check the CRD (below) or ask your state securities commission for a report. To find the commission, call the North American Securities Administrators Association (202-737-0900), or go to www.nasaa.org and click on “Contact Your Regulator.” Some states are responsive, others slo-o-o-o-w.

image If your adviser is an employee of a brokerage firm, he or she should have a record at the Central Registration Depository (CRD—page 817; go to www.brokercheck.finra.org). It will show the planner’s past employment, where he or she is registered to sell securities, certain customer complaints, and infractions of various sorts. One hitch: firms don’t always forward customer complaints to the CRD, as the rules require. If you make a complaint, send a copy to your state securities commission and to the Financial Industry Regulatory Authority (www.finra.org). They’ll see that it’s filed properly.

image The black holes. There are three: (1) States may not have the budget or the will to enforce their own securities laws. (2) When a state licenses an adviser, it may not check to see if he or she has a disciplinary record in another state. (3) A state may not respond to your request for background information on a particular adviser.

When a Planner Does You Wrong

In the largely unregulated industry of financial planning, no formal body sets the rules and punishes rule breakers. You can file a complaint about CFPs at the Certified Financial Planner Board of Standards (www.cfp.net, or 800-487-1497) or complain to the Financial Planning, Association in Atlanta (www.fpanet.org, or 800-322-4237). But all they can do is yank the offender’s professional certification or membership—hardly an onerous penalty, since he or she can go on practicing without it. If your planner is a member of an exchange, you can go to arbitration (page 828—see if arbitration is part of your customer agreement). Here’s a sampling of the complaints typically brought against financial planners:

If you think you have grounds for a legal complaint against your planner, start by trying to work out a settlement. Sometimes a letter from a lawyer helps. If you’re stonewalled, complain to the appropriate state regulator. For recalcitrant investment advisers, stockbrokers, or insurance agents who sell variable annuities or variable life, call your state’s securities commission (find it at www.nasaa.org, 202-737-0900). For other insurance agents, call the state insurance commission (find it through www.naic.org). Occasionally they can help.

If your loss is large, you might be able to bring a lawsuit. More likely, your planner will have required you to sign an arbitration agreement, which generally requires your case to be heard in a forum dictated by the securities industry (page 824). To find a lawyer, contact the Public Investors Arbitration Bar Association (www.piaba.org, or 886-621-7484, in Norman, Oklahoma) or the National Association of Consumer Advocates (www.naca.net, or 202-452-1989, in Washington, D.C.).

Do You Need an Independent Investment Adviser?

A few sessions with a fee-only financial planner will benefit almost anyone. The planner can steer you toward mutual funds and asset allocations that are appropriate for your age and circumstances. With that advice, plus the explanations in this book’s investment and retirement plan chapters, you can probably manage your IRA or 401(k) yourself. There’s no need to pay extra for continuing investment advice.

There are some circumstances, however, when having a personal investment adviser makes sense. For example:

image You have a truly large pot of money—say, $10 million and up—and want someone to think continuously about how it should be deployed.

image You have only a modest pot of money but don’t have the time to think about it yourself. Or you’re all thumbs with money and not interested in learning.

image You face a lot of family complications, such as stepchildren, mixed inheritances, and some unfriendly family dynamics. You need a good planning mind to lead you through the minefields.

When looking for an investment adviser, consider fee-only financial planners with large amounts of money under management, or bank or brokerage house wealth management departments. As always, compare costs. Some banks and brokers hit you with fees at every turn, including fees for investing in their own high-cost mutual funds (or pooled trust funds, which amount to the same thing). Keep a close watch on how the account is handled. A bank trust officer can churn an account just as easily as a stockbroker can—perhaps more easily, if the account belongs to an orphan or to someone who’s old and no longer paying a lot of attention.

To Protect Yourself

When doing business with a planner or investment adviser, proceed in the same orderly way that you would with a stockbroker (page 810), with written goals, notes of conversations, and so on. In a confrontation, you might find that the planner kept his or her own notes, which a court or arbitration board might consider more credible than your memory.

If the planner tells you that a specific investment carries little risk, ask for a letter confirming it. This sort of paper trail supports a winning claim. It may also encourage your planner to proceed with caution and exactitude. If your planner makes a move that differs from what you thought you’d agreed on, telephone immediately. If you don’t like the explanation, send a letter reiterating how you want your money handled.

Yes, but … how do you avoid a crook like Bernie Madoff?

Madoff fooled the experts based on his sterling reputation, haughty selfconfidence, trappings of wealth, and apparent ability to magic money out of the market year after year. The story of his $65 billion fraud is especially scary for individuals who understand how easily they, too, could have been taken in. They ask, “Who is it possible to trust?”

The answer is, “Trust no one.” Instead, set up your account so that the manager can’t get his or her hands on it.

Here’s the single best question to ask any would-be financial adviser: “When I send you money to invest, whose name do I put on the check?” If the manager answers, “Make out the check to my firm” or a firm that the manager controls, walk away. The manager should not—repeat, not—hold the money that he or she is investing for you. Your account should be held by an independent custodian, such as State Street, TD Ameritrade, or some other third party. That’s the name you should put on the check.

Why? Because it’s the custodian’s job to know where your money is at all times. Independent custodians hold your securities, collect interest and dividends, process trades, send you the confirmations of trades, receive any money you send into the account, disburse money at your direction, and compute your quarterly reports. They don’t make any investment decisions. Your money manager tells the custodian what to buy and sell. But thanks to this separate relationship, your cash never passes through the manager’s hands.

If you allow the manager to hold custody of the accounts, he or she has free rein. No one is there to check whether transactions actually went through or what the prices were. The manager might hire a respectable accounting firm to handle the annual audit, but the accountant will work with the data the manager produces. Auditors normally don’t dig into whether the data were created honestly.

Some legitimate money managers insist on taking custody of your funds themselves because it simplifies reporting. An example might be a fund of hedge funds. But frankly, you don’t need those kinds of expensive investments anyway. Plenty of dependable managers work only with independent custodians. That’s the pool to fish in when you’re trolling for investment help.

One warning: In the Madoff case, some banks signed on as custodians and then hired Bernie’s firm as subcustodian. As a result, investors got their reports from Madoff rather than from the bank itself. If you see that happening with a custodian you hired, pull out immediately. Something smells.

The second best way of avoiding fraud is to disbelieve any manager who claims to earn steady or high market returns in good years and bad. No one does that. Even if God had been investing, he’d have lost money in the Flood!

Finally, be careful of someone who sells investments within your specific religious or ethnic group. Mormons have fallen for schemes pressed by fellow church members in the belief that a coreligionist wouldn’t lie. Bernie Madoff looted the Jewish community. In my old hometown, a smart, preppy hedge fund guy hoodwinked college pension fund managers, maybe because they all wore bow ties. Never assume that a money manager must be okay because he or she is just like you.

I’ll say it again—ensure that your account resides in the hands of an independent custodian. That’s foolproof protection against a Bernie clone.

Aunt Jane’s Last Recipe: A Do-It-Yourself Financial Plan

Over the next eight weeks, take the following nine steps to success:

1. Make a List of Specific Objectives

The list might read: “A college education for Emily and Joe, a down payment on a house, graduate school for Lydia, hockey camp for Josh next year, Temma’s wedding, two weeks in France year after next, a retirement income worth $60,000 a year in today’s dollars, pretax.” Put down exactly what you want. Your objectives will change as your life does, but you should always know what you’re working toward.

2. Draw Up a Spending Plan

This isn’t a big deal. You’ve known about budgets all your life, and, if you’ve forgotten, there’s always chapter 8.

3. Calculate What You Need to Save

This isn’t a big deal either, once you’ve specified what you’re aiming for. Ask yourself, “How much will each objective cost?” and “When am I going to need the money?” Then point your savings toward those goals. Plot short-term savings in your head. You want to go to France year after next? Take this year’s price, divide by 24, and put away that much per month. Nothing complicated about it. Use Web calculators to estimate what you need to save for longer-term goals.

You’ll have to coordinate your savings with your spending plan, which is the hard part. But if you didn’t intend to try, you never would have bought this book. (You say your mother bought this book for you? Oh, well. Try anyway.)

4. Secure What You Have

This is your safety net: life, health, disability, homeowners insurance, and auto insurance. I’ve steered you toward inexpensive coverage, where it exists. Do-it-yourselfers can buy some policies on the Web.

5. Develop a Risk Plan

Decide on a prudent level of investment risk for someone of your age, goals, and circumstances. On this point, chapter 21 will help.

6. Follow Through with an Investment Plan

You will do splendidly with a few no-load mutual funds, chosen yourself and held long term, plus some Treasury securities, tax-exempts, or certificates of deposit.

7. Minimize Your Taxes

For savings, use a tax-deferred retirement plan (chapter 29) and, if you’re in a high bracket, municipal bonds. What could be easier? If you have a high net worth, however, you’ll have to deal with estate taxes, trusts, executive compensation contracts, and all the other tax entanglements that wealth is heir to. That’s when you need professional help—and only the most experienced planners will do. Your outriders will include a clutch of specialized professionals: tax lawyer, accountant, actuary, investment adviser.

8. Maximize Your Retirement Plan

For how much to save, see chapter 29. When you actually retire, ask a fee-only planner about the best way to take withdrawals from your retirement plan. You can’t afford to make mistakes. Chapter 30 gives you a look at the landscape. The planner can spell out the tax and investment implications of your various choices, and project a spending and investment plan to carry you through the rest of your life.

9. Get a Financial Checkup

Ask a fee-only planner to take a look at what you’re doing and make suggestions.

That’s it! The planning process from first sharpened pencil to final phone call. A project that you can handle, step by step, just by applying some basic, down-home common sense.

For generations, most Americans have managed their own money and done a pretty good job of it. You still can. The trick is to turn your back on today’s insanely complex financial marketplace and buy the simple things that you can handle yourself. Trust me on this one. In the world of money, one or two clear and strong ideas, persisted in, will make you richer in the end.