What’s in a name?

Quick quiz. Would you prefer to work with a: 1) financial planner, 2) investment planner, 3) money manager, or 4) wealth manager?

If you feel like I just asked if you like: 1) pizza, 2) pizza, 3) pizza or 4) pizza, you are not alone. The financial intermediaries who claim to be these things can’t keep it straight, so no one should expect clients to, either.

In a recent study by Cerulli Associates, Inc., 1,500 financial intermediaries were found to mis-identify themselves as something they weren’t, frequently exaggerating the services they offer.

According to the study, 59% of financial intermediaries identified themselves as financial planners–certified to work with clients in building comprehensive plans that include insurance and estate planning. Cerulli’s study, however, found that only 30% of those 59% actually fit that description.

22% of financial intermediaries called themselves investment planners, who focus on asset management, retirement and college savings plans. 56% of the survey’s respondents actually fit that description, which makes it sound like a lot of investment planners try to pull themselves off as financial planners.

11% described themselves as wealth managers, who do comprehensive planning for wealthier clients, but only 6% actually fit the description. Once again, it sounds like an inflated title is used in hopes of generating business.

It turns out that money managers, who manage and build investment portfolios (that’s what I am), were the only group that accurately described what they do. Apparently, they knew what they were and weren’t afraid to describe themselves as such.

I must admit, I’ve run into this confusion a lot with clients, prospective clients, and even friends and family. Someone asks what I do, and I describe that I manage money for people.  Then, they say, “So, you’re a financial planner,” or “So, you’re a stock broker.” I don’t blame them for the confusion, but I do blame my industry.

There are a lot of honest people in the financial services business, but it doesn’t seem like a large majority. Specifically, a culture exists that focuses on commission-based sales, and convincing people to purchase “products.” An old industry adage is that insurance products aren’t bought, they’re sold. Looking at how most financial intermediaries are compensated, you’ll see that the adage is all too true.

I’m highlighting this not just to pat myself and other money managers on the back (whoopee, I’m on Team Honest!), but to illustrate how the financial services industry seems to thrive while confusing clients.  

A helpful term to look for is fiduciary.  A fiduciary “must act for the benefit of their clients and place their clients’ interests before their own” (CFA Standards of Practice Handbook).  

When you go to a Ford dealership, you don’t expect a commission-based salesperson to recommend a Toyota, but when you are talking to a doctor, lawyer or another professional, you should expect them to treat you fairly.

When dealing with a professional, you are placing yourself in a position of trust with someone who is an expert in a field where you aren’t.  It would be unfair, and frequently illegal, if the professional used that position of trust to benefit themselves at your expense.  That is why so many legitimate professional organizations require members to adhere to a code of ethics (and will boot you if you don’t!).

When a so-called financial planner earns a 5% commission (yes, on the gross amount of the dollars you invest) because you invest in the mutual fund they recommend, that’s not adhering to a fiduciary standard.  When an insurance agent earns a 10% commission selling you a whole life insurance policy or variable annuity, it should be clear their supposed advice is tainted by a big conflict of interest.

The best way to protect yourself, whether you’re dealing with someone who claims to be fiduciary or not, is to ask how they are compensated.  That should make it clear whether they are serving themselves first, or you.

What’s in a name?  It turns out, a lot.  

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

What’s in a name?

Looking for information about picking a financial planner or investment advisor?

I’d like to recommend a good web resource for those seeking information about picking a financial planner or investment advisor: Paladin Registry.

Paladin is an information services company that provides resources and referrals for individual and institutional investors. They provide both articles and seminars for free. They also provide, for free, referrals to high quality financial professionals and firms. If you are looking for help picking an advisor or planner, this is a great place to start.

The reason why is Paladin clearly understands how most investors can get hoodwinked by salespeople who call themselves professionals. The purpose of forming Paladin was to link investors with professionals in the field who are compensated by fees instead of being compensated for selling products.

Watch one of their seminars or read one of their articles and you’ll see what I’m talking about. They are trying to inform investors about what to look for in advisors and planners. And, they’re not pulling punches in describing the way the financial services field operates. You really can get some great information and guidance on how to pick a professional who can help you.

If you do use their service to locate a professional, they don’t link you to just one professional. Instead, they generally provide 3 contacts who can help you. That way, you have alternatives to choose among.

Some full disclosure is in order here. I belong to the Paladin Registry, which means I pay to be a member and they refer qualified investors to me (as well as two other advisors). 90% of the advisors and planners who apply to the registry are turned away because they don’t meet Paladin’s high standards. I prefer to be in such good company, and gladly pay to be a member of this elite organization.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Growth vs. Value; “and another thing…”

Another thing that bugs me about the growth versus value distinction is the bad advice that a lot of so-called investment advisers and financial planners give out.

First off, around 85% of financial planners and investment advisers are commissioned-based salespeople. Asking them for advice is like asking a Ford salesman whether you should buy a Ford. You’re not going to get objective advice.

I have no problem with salespeople making a living, but I do have a problem if they don’t disclose how they’re compensated. Here’s a tip: ask any “advisor” how they are compensated and you’ll get a clear picture of whose interests they are serving.

Another problem I have with the advice given out by so-called investment advisers and financial planners is the line that “you need both growth and value investments.” The rationale goes like this: you need to diversify so you will do well regardless of whether growth or value investing is working.

My problem with this “advice” is that mixing most growth and value investments together gives you market returns. And, market returns should not cost you a 5% upfront load plus an annual active management fee of around 1% a year plus an investment advisor fee of 1% a year. Instead, you should just buy an index fund that charges 0.2% a year for market returns.

Want to know why they recommend both growth and value investments instead of an index fund? Because the index fund doesn’t pay a big fat commission for selling their product, and the growth and value mutual funds probably do.

Accepting such advice will help the salesperson make their quota, but it won’t help you reach your goals. Either buy market returns at lowest cost, or find an active manager who can beat the market after all fees.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.