But a quiet counterrevolution is underway. Many of us are feeling oppressed by so much choice. We’re drowning in an excess of financial products, cross-talking gurus, look-alike mutual funds and useless financial data. As one frustrated reader writes, “the more I learn, the less I know.” You can practically hear the cries of surrender in the air. Help! Help!
I predict that the do-it-yourself generation will turn to financial advisers, big time. Two life events will drive the change: inheriting money (how to invest it?) and pre-retirement planning (how to make my savings and investments last?). It’s one thing to make your own money decisions at 32, when the sums are small. It’s quite another at 52, when you’re looking at the biggest single check you’ll ever get in your life.
Employees with 401(k)s aren’t even do-it-yourselfers, in the classic sense. They’ve lived their investment lives in a protected world where none of the available choices are truly bad. When they leave the job, they’ll be looking for someone else to help keep their money safe.
Lion’s share: Financial planners are going to pick up the lion’s share of this business. Among pre-retirees, they’re already the adviser of choice, according to the Forum for Investor Advice in Bethesda, Md. Stockbrokers are a distant second.
Most financial-planning firms run a traditional business, focused on selling products and earning sales commissions. (You know the kind I’m talking about. They assume you need a variable annuity, unless you can prove otherwise.) But the future lies with firms that are good enough to sell pure advice, for a fee. “Every major financial firm is trying to figure out how to do this,” says Louis Harvey, head of Dalbar, a Boston-based consulting firm.
A couple of decades ago, it wasn’t cost-effective to offer sophisticated advice to the middle class. It took too much time to develop and monitor personal plans, and people couldn’t pay enough.
Technology has changed all that. Today, planning firms can draw on a wealth of low-cost tools and services for the routine work–say, preparing reports, allocating assets and calculating insurance needs. That frees up the planners to handle more clients. They need quality time for probing the spongy issues, like goals and family dynamics, as well as debating tax and strategic moves.
Anyone can pass out a business card that says “financial planner,” “financial adviser” or “retirement specialist.” You want the card to say CFP, meaning Certified Financial Planner. CFPs have passed a rigorous course that covers all aspects of personal finance. They’re also required to keep their education up to date. As with any professional, there’s no guarantee. But at least you know the planner has been soundly trained.
To start your search for a planner, ask for references from friends at work. Many CFPs specialize in certain professions–say, doctors, small-business owners or government employees. They’ll be well-versed in the questions you’re most likely to have.
No rookies: Stay away from rookies, even those who come highly recommended. I know that everyone has to start somewhere, but you don’t want them practicing on your retirement fund. Five years’ experience is minimal; 10 years is better.
If you can’t get good personal references, try the International Association for Financial Planning (800-945-IAFP or www.planningpaysoff.org) or the Institute of Certified Financial Planners (www.icfp.org). Either group will send you a short list of local planners to interview. Some of these planners live on the commissions they earn by selling products; others emphasize money management for a fee–typically, 1 percent of assets, annually.
Two referral sources screen planners and charge them a listing fee: (1) AdvisorSource, for clients with at least $100,000 to invest. It’s run by the brokerage firm Charles Schwab (800-979-9004). You’ll talk first to a staffer about your needs; then you’ll be assigned to a planner who might be suitable. (2) A new Web service from Dalbar (www.therightadvisor.com). Here, you fill in a short questionnaire and are matched, electronically, with planners who’ve said that they want clients just like you.
You should talk with two or three planners, to see if you’re comfortable with the way they work. Ask them each for both parts of their ADV form, says Cynthia Conger, of the Arkansas Financial Group in Little Rock. Those are government forms for registered investment advisors. Part II discloses their background, business methods, types of compensation and conflicts of interest, Part I notes any disciplinary problems and customer complaints.
On compensation, planners fall into one of two groups:
Planners come in all shades: brilliant, good, mediocre, dim and dangerous. Work with them, but keep your humbug detector up.
