From time to time I watch the television program Holmes on Homes on one of the home improvement channels. The show is hosted by general contractor Mike Holmes who helps homeowners who need help with renovations gone bad. Mr. Holmes comes in and solves the problems and mistakes made by incompetent or con artist contractors. Its amazing to see what he finds wrong and the level of deception by some contractors.Sadly, I see similar mistakes and improper actions by financial sales people. Some problems may show up immediately while others can become issues in the future. Managing personal finances is complex and it is easy for bad people to take advantage of unsuspecting individuals.
Here are some of the things I have seen that need to be torn down and renovated:
- Products sold to client because the broker received more revenue.
- Client put in high fee broker account program because of account minimums.
- Using actively traded funds when historical results have shown the majority of indexes beat active managers. In 2011, 79% of large cap active managers didn't beat the S&P 500 according to Morningstar.
- Paying a combined annual fee of 4% split between the advisor and fund manager.
- "A" share mutual funds with up front commissions of 5.75%, they also hit investors with annual management fees.
- Guidance from brokers and 401(k) plans putting too much money in stocks right before retirement.
- Having the majority of client assets in individual junk bonds and calling it diversified and low risk.
- Selling structured notes to clients inside a fee-based account. This means the client pays a 2% commission up front and an annual fee on top of that.
- Annuities!
- Realistic expectations of investing
- The risks associated with buying individual stocks
- Being too conservative with the asset allocation which then guarantees the client won't reach their retirement goals.
So how do you find a reputable financial planner/advisor? Follow the same steps that you would a home contractor:
- Ask Friends for Referrals - People you respect can lead you to some different choices
- Look for Credentials - Certified Financial Planner (CFP), works for Registered Investment Advisor firm
- Interview Candidates - Meet with 2 or 3 planners; find someone who listens; gives advice and doesn't sell products
- History/Experience - Being a CFP requires 3 years of working experience.
A quality financial planner will take the time to understand your vision, offer advice that is in your best interest and help you construct a solid, well built plan to last a lifetime.
