Certified Financial Planner – CFP

What is a ‘Certified Financial Planner – CFP’

A certified financial planner (CFP) refers to the certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

BREAKING DOWN ‘Certified Financial Planner – CFP’

Those wanting to become a CFP professional must take extensive exams in the areas of financial planning, taxes, insurance, estate planning and retirement. Attaining the CFP designation takes experience and a substantial amount of work. CFP professionals must also complete continuing education programs each year to maintain their certification status. It is always good idea to ask about a professional’s educational background and references before allowing a CFP designee (or any other financial professional) to manage your money. Don’t be afraid to say “no thanks” if you feel that the person doesn’t have sufficient experience.


529 Strateges That Maximize Student Aid Options

College isn’t cheap. Anybody who is in college, was in college or is currently saving for college already knows that. What you might not know, however, is how fast the costs are rising. The accepted rule of thumb is that the cost of college increases at about twice the rate of inflation. That means that each year, you can expect to pay at least 5% more.

If you’re a parent of a future college student, you have to save now, but tucking money away in a savings account isn’t going to work. You have to invest it to stay ahead of inflation. Most people turn to a 529 savings plan to make their money grow. That will help a lot, but what parents may not know is that how they later spend the money is just as important as how they save.

In the best possible scenario, you would combine 529 funds with help from the government to cover the complete cost of college for you or your child, but government help is often income-based and that’s where handling those 529s strategically comes in.

When and How to Spend 529 Funds

Recently, a Wall Street Journal columnist advised that once a child reaches college, it might work to the family’s advantage to spend all 529 funds in the first two years in the hopes of getting financial aid in the third and fourth years – if the parents expect a high-expense or low-income year. Good advice? We decided to check it out with other experts. The variety of advice we found made it clear that parents should consult a college loan expert for the correct advice for their situation.

Cash out quickly, if you’re a student or parent. Gretchen Cliburn, CFP, Senior Managing Advisor at BKD Wealth Advisors in Springfield, MO, says, “Money held in 529 accounts owned by the student or one of their parents is considered to be parental assets on the FAFSA. If you know your education costs will exceed your 529 savings, I would recommend spending the 529 balance first before borrowing any money.”

But not if you think you might have trouble getting a loan later on. Running through 529 funds in the first two years – instead of taking advantage of available loans – can backfire, says Joseph Orsolini of College Aid Partners. “Families really need to budget out the four years of college to determine the best course of action with spending savings and borrowing. I have seen a number of families spend down their 529 accounts in the first couple of years, but later run out of money and not be able to borrow (due to bad credit) in the final years,” he warns. “These students are left without resources to finish college.”

Orsolini agrees. “Low income is a relative term for people. Dropping from $150k to $100k is a huge reduction, but in most cases it will not result in any additional financial aid,” he says. “If your child is at an elite college that matches 100% of need, it might be worth relying on this strategy, but most colleges will not increase an aid package simply for spending down your 529 fund.”

Hold back, if you’re a grandparent. There are circumstances when it might be best to refrain from using the money until the student’s later years, according to Ryan Kay, a certified financial planner. “One important aspect to remember while considering when to spend the 529 money is who owns the plan,” Kay says. “If a grandparent is the owner, for example, and he or she distributes funds from the 529 plan, the money will count as student income for next year’s FAFSA and could negatively impact the student’s ability to qualify for financial aid. So when the grandparent is the owner, often times it’s best to leave the money in the 529 plan until the student has filed the final FAFSA (January 1 of their junior year of college).”

Factor in the Tax Credit

The American Opportunity Tax Credit offers a tax credit of up to $2,500 when you have spent $4,000 on tuition, fees, textbooks and other course materials. However, it phases out at certain income levels ($180,000 for married couples filing jointly in 2015, for example). Also, you can’t use the same expenses to justify both a tax-free distribution from a 529 plan and take the tax credit – there’s no double dipping.

“The tax credit is worth more per dollar of qualified expenses than the tax-free 529 plan distribution, even considering the 10% tax penalty and ordinary income taxes on non-qualified distributions,” says Mark Kantrowitz, publisher and VP of Strategy, Cappex.com. “Families should prioritize $4,000 in tuition and textbook expenses to be paid for using cash or loans before relying on the 529 plan. Otherwise, [it’s preferable] to spend down the 529 plan balance as quickly as possible, so that the assets do not persist year after year to reduce aid eligibility by 5.64% of the asset value.”

The Bottom Line

Like most financial questions, there are a lot of what-ifs, but in general, our experts recommend other practices rather than spending all the 529 money now and betting on the future. However, for some people, they note, the strategy could represent a cost savings.


What Happens to Investors’ Money When a Hedge Fund Fails?

William Ackman and David Berkowitz formed hedge fund Gotham Partners LP in 1993 and established its offices in New York City. The two former classmates from Harvard Business School initially did well and took the fund from its startup value of $30 million to $300 million by making a range of diversified investments. However, the partners then began to pursue a different path and acquired a number of private companies, as well as thinly traded public ones. In 1997, Gotham bought Gotham Golf, a golf course operator that continued to get into more and more debt. To address this issue, Ackman tried to merge the failing company with First Union Real Estate Equity and Mortgage, which had a lot of cash on its balance sheet. After obstacles to the merger arose, and with the fund’s other investments being illiquid, investors in Gotham Partners began asking for their money back. As a result, Ackman and Berkowitz had to close the hedge fund down.

In contrast with mutual fund managers, hedge fund managers typically have freedom to select their funds’ holdings as they wish, and investors receive only limited disclosures concerning those holdings. Illiquid instruments such as mining rights agreements, industrial and real estate contracts often appear in hedge fund portfolios, in addition to more liquid stocks and bonds. Other speculative and frequently illiquid investments like credit default swaps may also be held by hedge funds. The degree of illiquidity in a fund’s portfolio is a significant factor in determining the fund’s risk of ruin.

Requests for Redemptions

The less successful a hedge fund is, the more likely investors are to request redemptions to get their money at risk back. Funds may have to sell some of their asset portfolio to satisfy redemptions. The problem here is that illiquid assets are harder, and usually take more time, to convert to cash. Because the financial viability of a fund may be threatened if too many investors ask for redemptions at one time, hedge funds typically impose restrictions on redemptions, known as gates. An example of a gate is a lock-up period. Normally, investors may request redemptions four times a year on a quarterly basis. Many funds require advance notice of a number of months before a redemption will be made.

Stocks and bonds, generally the most liquid part of a fund’s portfolio, may quickly drop in value in the event of a market downturn. At such times, illiquid and speculative investments fall in value even faster because investors flee from risk. Liquidating assets in a downturn would greatly disadvantage a fund, and therefore funds often retain the prerogative to suspend redemptions in economic down cycles. Investors then cannot access their cash in time of greatest need.

In-Kind Asset Distribution and Dissolution

Many hedge funds offer superior redemption rights to lead investors, allowing them to redeem with less notice than other investors. Under fund partnership agreements, managers may be allowed to segregate some assets from the right to redeem. These agreements typically apply to hard-to-value assets. There may be provisions in such agreements that permit the manager to distribute assets in-kind to investors, especially with regard to illiquid assets.

Despite these considerations and the conditions imposed by fund partnership agreements, it’s important to recognize that there is a tipping point that, when reached through a sufficiently large number of simultaneous redemption requests, renders fund operations impossible. Confronted with a flood of redemption requests, a fund manager may decide upon complete dissolution of the fund and liquidation of all its assets. This is the situation in which Gotham Partners found itself. Investors should then be informed that they will be cashed out over a reasonable time period. When an investor decides that his money has not been returned on a sufficiently timely basis or to an acceptable extent, he may seek recourse through the courts. The terms and conditions of the fund’s partnership agreement and the value of the fund’s remaining assets are critical elements in the resolution of such a legal action.


3 High-Paying Academic Jobs With Good Pensions

It pays to stay in school, especially when you are doing the teaching. Faculty and staff at accredited U.S. universities are among the handful of remaining American workers who still receive excellent pensions along with high base pay. In fact, pay and benefits for academic posts grew during the most recent recession. The reasons for this are clear; it is difficult to open an accredited school, so university posts are limited. Meanwhile, pent-up demand for college degrees means schools can charge high tuition costs and pay attractive salaries without losing students.

Average salaries for certain teaching or administrative positions exceed $100,000 per year. The highest earners are paid millions of dollars, and sometimes for just nine months of work. You often need to clear a high threshold to get one of these spots; most of these jobs require advanced degrees and years of quality work in the field, plus the right connections.

Law Teachers, Postsecondary

Legal training is in a transitory period. After decades of swollen ranks, enrollment in law schools plummeted after the Great Recession. Bar exam pass rates also fell, and many J.D.-awarded graduates find themselves without direction in crowded specialties. Fortunately for law professors, these troubles seem to stop short of academic posts.

Median wage rates for tenured American instructors exceed $140,000 per year, plus another 5% in pension contributions. This is by far the highest-paying teaching field, edging out engineers and business management by more than $20,000 on average. The top 25% of law professors averaged $216,465 during 2015. The top 10% averaged over $270,000, a rate reached by just 0.1% of non-law professors.

Senior-Level Administrative Staff

College administrative expenses grew by 60% between 1993 and 2009, according to Department of Education figures. That rate relaxed a little between 2010 and 2015, but there is no question that bloated administrations are partially to blame for rising tuition rates. While this is bad news for student loans, it is likely very good news for college administrative jobs, the most lucrative of which earn above $200,000 per year.

The College and University Professional Association for Human Resources conducted a higher education salary survey for the 2015-2016 school year from over 1,100 reporting institutions. It identified dozens of administrative positions with median pay above $100,000 per year and intact benefits. The average provost, for example, brought home $193,136 and a comfortable 4.6% pension rate. College chief financial officers (CFOs) averaged $175,000.

Specialized deans were among the most compensated. The typical dean of agriculture made $251,000. The salary was $210,000 for architecture, $231,000 for computer and information services, $217,000 for forestry and environmental studies, $312,000 for law, $337,000 for dentistry and an estimated $500,000 for medicine.

Even non-deans reported excellent salaries, and frequently pension contributions above 4% of base pay. A position entitled chief diversity officer had a median pay above $120,000 per year. Chief library officers earned just under $100,000, and the chief campus major gifts administrators earned above $104,000.

Engineering Teachers, Postsecondary

It is generally a good idea to study engineering. Every year, engineering dominates the top 10 paying majors for American graduates. It is also a good idea to return to school and teach engineering students. This is true for computer engineers, chemical engineers, mechanical engineers, electrical engineers and petroleum engineers. The median pay for generic engineering professors is approximately $120,000, but specialists at engineering schools can do much better.

For example, the average effective annual salary reported for professors at the Colorado School of Mines during the 2013-2014 school year was $177,588. This was more than twice the average salary for all American professors in 2015-2016. The top-paying schools in America, for engineering or otherwise, include Dartmouth, Boston College, Georgetown, Duke, Princeton, MIT, Penn, Yale, Columbia, NYU, Harvard and the University of Chicago.


6 Questions to Ask a Financial Advisor

Finding a financial advisor who is right for you is an important process. A good financial advisor is there to prevent you from making decisions that would have a negative, unintended impact on you. Who wouldn’t love to have a financial coach to keep you on track to achieve your financial goals?

Just like with any working relationship, it’s a good idea to interview advisors until you find the one who is the best fit for you, your life, and your financial goals. Since you are entrusting your financial well-being to someone, you should get to know them and their financial planning and investing philosophy before committing to a long-term relationship.

As you may have heard the Department of Labor (DoL) has just released its new fiduciary rule in its final form. We previously wrote about the reasons why someone would oppose this rule considering it was created to improve financial transparency and eliminate conflicted advice from advisors. While this rule would still allow advisors to keep their “conflicted” commissions in some instances, it would require advisors to act as fiduciaries (a.k.a. “best interests contract”) when handling client’s retirement accounts.

We have long been proponents of more transparency and conflict-free advice and feel this is a step in the right direction.

So how does this affect your search for the right financial advisor? Here are 6 questions to ask to help you in your search.

1. Are You a Fiduciary? (Are You Always a Fiduciary?)

As we mentioned earlier, this new rule will only require financial advisors to act as a fiduciary for client’s retirement accounts. A fiduciary is regulated by federal law and must adhere to strict standards. They must act in the client’s best interest, in good faith, and they must provide full disclosure regarding fees, compensation, and any current or potential conflicts of interest.

Until now, broker-dealers, insurance salesman, bank and financial company representatives, and others were only required to follow a Suitability Standard. That means they only had to provide recommendations that are “suitable” for a client – based on age or aversion to risk for example – but this may or may not be in that client’s best interest.

The brokerage industry, as you can probably imagine, and all those who earn their compensation from commissions are strongly against these new rules.

Even with this new law passed, we feel it is important to make sure your advisor is acting as a fiduciary when dealing with any of your finances, not just retirement accounts.

2. What is Your Fee Structure? (Difference Between Fee-Only, Fee-Based and Commission)

Advisors throw out terms like “fee-based” and consumers assume that is the same as “fee-only.” Being “fee-only,” as Sherman Wealth Management is, means that a firm is paid exclusively by its clients, meaning it is conflict-free. A “fee-only” firm does not get commissions from the investments or products it recommend. It does not get bonuses based on how many clients it gets to invest in company products. Many “fee-only” firms are paid an hourly or quarterly fee by their clients, as we are.

Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you.

Do not assume that an advisor is following a fiduciary standard with their compensation now. The new rules will not be enforced until 2018. Ask your financial advisor to clearly specify their fees. With many layers of diversification that can be applied to your portfolio, you want to be aware of whether you are exposed to up-front charges, back-end fees, expense ratios, and/or whether a percentage of your returns will be deducted.

3. Why Are They Right for You?

A financial advisor should be able to tell you their strengths and what sets them apart. Some advisors will advise on investments while others specialize in comprehensive financial planning. While you may think all advisors are the same, and it certainly may seem like that on the surface, by now you should be seeing that is not the case.

Ask how involved they are with their client’s portfolios. Are they hands-on in their approach? How available are they for their clients’ needs?

Do they serve a wide-range of clients, from young first-timers who are just getting started with investing and financial planning, to experienced savers, to high-net-worth investors who are well on their way to financial independence?

In today’s world you don’t just want a trusted advisor, you want instant access to your accounts and the progress you are making. Does they advisor you’re considering utilize the latest in financial services technology tools?

The relationship with your financial advisor is an important one. You need to feel comfortable working with them.

4. What is Your Investment Philosophy?

Every financial advisor has a specific approach to planning and investing. Some advisors prefer trying to time the market and actively manage funds versus passive investments. Others may seek to gain high returns and make riskier investments. Your goals and risk tolerance need to align with the advisor’s philosophy.

When anyone invests money, they are doing so with the hopes of growing it faster than inflation. While some traditional investment managers not only want to generate a profitable return, they aim to beat the market by taking advantage of pricing discrepancies and attempting to time the market and predict the future. Some investment companies offer “one-size-fits-all” investment management solutions that only take into account your age and income.

Others, like us, believe an individual’s best chance at building wealth through the capital markets is to avoid common behavioral biases in the beginning and utilize a well thought out, disciplined, and long-term approach to investing. We believe that the best financial advisors create a well-diversified, customized portfolio that focuses on tax efficiency, cost effectiveness, and risk management. Read more about how we do this.

Make it a top priority to understand the strategy your advisor uses and that you are comfortable with it.

5. How Personalized Are Your Recommendations for Your Clients?

It is important that your financial advisor tailors your financial plan to your specific goals. Your retirement plan and investment strategy should be customized to take into account your risk tolerance, age, income, net-worth, and other factors specific to your situation. There should not be a one-size-fits-all approach to managing your money.

Some traditional brokers and insurance companies are so big that it becomes impossible for them to give you a truly individualized experience. They have a corporate agenda that they must follow and it can restrict the service they provide to you.

Look for a firm that will help you build a strong foundation and grow with them, not by profiting off good or bad trades. This kind of partnership affords your advisor the opportunity to create individual strategies and plans that are uniquely suited to each client, not just a cookie-cutter plan based on age, income, or broadly assessed risk tolerance.

6. Do You Have Any Asset or Revenue Minimums?

Some have argued that the proposed DOL rule will end up hurting the small investor because larger institutions will not be willing to serve small accounts. This logic is fundamentally backward and flawed, as those clients were never on their radar to begin with. In fact, the ability for these large institutions to generate commissions and thus charge more to these small investor clients have driven that business, without regard to the best interests of the individual investor.

For example, in a company statement quoted by Janet Levaux in Think Advisor, Wells Fargo, the most valuable financial institution in the world according to the Wall Street Journal, said that in 2016, “bonuses will be awarded to FAs with 75% of their client households at $250,000.”

Wells Fargo isn’t the only large institution effectively ignoring Millennials and other smaller and entry-level clients. Most of the corporate institutions prefer high-net-worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades.

The complaints against the new DOL rule have nothing to do with protecting the little guy. Rather, the complaints are driven by the desire of commission-based large institutions, insurance companies and broker-dealers who are trying to protect their ability to generate commissions and charge clients unnecessary fees.

Make sure you understand your advisor’s motivations. If they don’t want you, why should you want them?

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.


The Advantages of Automating Your Financial Life

Most net savers — a rare but dignified bunch — tend to have similar financial habits. A person in this group typically spends less than she makes, lets money accumulate in a checking account, and then wonders what she should do with the excess. If the stock market is trending down she thinks, “I’ll wait for it to go lower before getting in.” If it’s going up she thinks, “I’m just going to wait for a pull back before I invest.” This leads to atrophy until one day she gets bored, realizes the cash balance is too high and determines to put excess funds into the first thing that strikes her fancy. That could mean paying down debt, investing, or turning on HGTV and figuring out how she is going to flip properties.

Most investors would be better served by automating the process, or creating a strategy that divides the anticipated savings between cash accounts, retirement accounts, taxable accounts and debt payments and then setting the monthly transfers to each one on autopilot.

Eliminating Emotion and Atrophy

The first step is to create a budget and determine how much excess is available every month. Websites and applications like Mint.com are completely free and make this process incredibly easy. They allow consumers to aggregate their financial lives in one place. Combining the transactional data from bank accounts, credit cards, student loans, car loans, mortgages, and investment accounts provides the user with a clear picture of her net worth and cash flow broken down by category.

Second, once a budget is created and the anticipated excess savings is earmarked, it’s imperative to determine how much should be added to each account. It’s important to remember that not all accounts are created equal. For example, maxing out a Roth IRA is a terrific idea for long-term money, however, if the funds are going to be needed in the near future, a cash account may be a better choice.

Third, if the plan involves paying off debts, determine the order in which the loans should be paid off. The goal should always be to pay down the highest interest loans first, adjusting for any tax deductions. If the plan involves investing, determine the appropriate long-term allocation. The overall mix between stocks, bonds, cash, and alternative investments should account for the investor’s age, goals, and risk tolerance. (Every investor has a different set of goals, risk tolerance and tax situation — discuss your plan with your financial professional before making any investment decisions.)

Fourth, the most important part is establishing automatic transfers that will take place every month. Automatic bill payment solutions provided by lenders and ACH transactions facilitated between banks and investment companies make the process seamless. When the cash goes into a debt account, consumers need to make sure it’s being used to pay down principal rather than prepay interest. When the cash goes into an investment account, consumers need to make sure it’s being invested according to the prescribed allocation.

It’s as easy as that. Technology simplifies the automation process and does consumers the favor of taking emotion out of the equation. Studies have shown people make terrible financial decisions when they are emotional or when they overthink things. When left to their own devices, people tend to poorly time the stock market, buy expensive things they can’t afford or invest in their friends’ doomed-to-fail startups. Additionally, money invested more frequently compounds faster. As an example, after 30 years, assuming a return of 6%, a person that added $1,000 to her account every month would have earned about $56,000 more than the person that contributed $12,000 once at the end of every year.


how To Find A New Financial Advisor Who’s Right For You

What would you do if your personal physician or long-time lawyer unexpectedly died? Or announced his or her plans to retire? Or upped and moved far away?

A seismic change like this can be difficult to deal with. Such a disruption may cause you to re-think your priorities and force you to find a suitable replacement. We place so much trust in close advisors that we can sometimes take a professional relationship for granted … until it is gone. With family, professional and health concerns often uppermost in mind, it pays to have someone you can count on for wisdom and caution minding your money.

Finding a new financial advisor is actually a two-step process. First, you need to locate prospective candidates, either through referrals or by perhaps by happening upon someone online, via a magazine or a television program. Secondly, you need to determine whether an individual can satisfy your requirements. “Most investors care the most about two things,” said David Marotta, of Marotta Wealth Management in Charlottesville, Va. “They want their portfolio’s value to go up and they want to get a call back from their advisor within 24 hours.”

If you’re dealing with a large financial institution, you likely would have been assigned a qualified junior advisor to work alongside your financial consultant. “If the financial consultant is employed in a regional or national advisory or brokerage firm, such as Merrill Lynch, Morgan Stanley, Fidelity etc., then the firm will assign the client and accounts to a new advisor,” said Anton Bayer, the CEO of Up Capital Management in Granite Bay, Ca.

“If the financial consultant is independent with licensed associates or partners, or affiliated with a broker dealer, then typically the associates, partners or broker dealer assign a new financial consultant,” Bayer added. “The least favorable scenario is if the financial consultant is a small independent advisor with no partners or licensed associates and not affiliated with a broker dealer. Then it is possible there is no succession plan for the client. In this situation, the assets remain with the custodian but no financial consultant is responsible for the accounts. The client will need to appoint a new financial consultant or transfer the account to a new financial consultant.”

Whether you’re searching for an advisor or evaluating a new one assigned to you, treat it as if you’re vetting a new employee. You need to be assured about the new consultant’s style of investing and doing business, in terms of the investment strategy, regularity of calls, texts or emails to keep you in the loop.

These folks work for you – not the other way around.

Finding the Best Advisor for You

As with other major decisions, it is often best to rely on sage advice from friends, relatives and colleagues who can give you the benefit of their wisdom and experience.

“Getting a recommendation on a financial advisor from a friend helps you build confidence in the decision,” said Marotta. “A personal recommendation can also help because it could weed out who you shouldn’t go to,” Marotta said. “Friends will tell you honestly, ‘He’s OK – but not great.’ They can give you specific advice about whether an advisor will return your calls promptly and what kind of service you can expect.”

You can also find an advisor by visiting the National Association of Personal Finance Advisors (NAPFA) website. The site allows you to search for advisors in your area or track down a specific individual.

It can be rather daunting to decide who might be the best person to help you manage your money. Michael Solari, of Solari Financial Planning in Bedford, N.H., suggests seven basic, getting-started questions:

  • What are the fees to manage assets?
  • What is your investment philosophy?
  • Have you ever been cited by a professional or regulatory governing body for disciplinary reasons?
  • Do you provide financial planning advice and manage investments?
  • Will you be working with me directly or will I be working with other associates?
  • How often do you provide checkups/reviews?
  • What is your succession plan?

Picking the right advisor often hinges on your investment needs. “There are a couple kinds of people,” said Dena Minning, who manages $16 million for Personal Asset Management in Treasure Island, Fla. “Those that know what they want, like and need and those who don’t know. For the first kind of person, they would necessarily be knowledgeable about what investments were good and may typically just have been using the advisor as a sounding board and to place trades or search for ideas.”

Minning stresses that trust is the key concept in any kind of relationship. “For the investors who don’t know what they want or need, it is critical to have an advisor they can trust. And, to completely trust an advisor, the investor should insist on having an advisor who commits to acting in a legally binding, fiduciary capacity. That means the advisor commits to putting the investors’ needs before their own.”

This is an important point. Someone who smells a commission from your earnings will try to sweet-talk you into becoming his or her client. One way to test this person’s level of integrity is to examine his or her credentials, even going beyond the standard academic achievements. For instance, Minning said that she belongs to a group of advisors called The Committee for a Fiduciary Standard, which commits, in writing, “to ensure that any financial reform regarding the fiduciary standard, 1) meets the requirements of the authentic fiduciary standard, as presently established in the Investment Advisers Act of 1940, and 2) covers all professionals who provide investment and financial advice or who hold themselves out as providing financial or investment advice, without exceptions and without exemptions.”

Before you do business, you can do a simple Google search of the advisor’s name and add a heading such as “legal actions” or “disciplinary hearings” to see if this person has had any formal problems.

“Another advantage that the novice investor should insist upon would be to have a fee-only advisor,” Minning said. “This is what NAPFA advisors are. Fee-only ensures that the compensation of the advisor will not drive the investment solution, since fee-only advisors get paid the same amount regardless of what they recommend. Fee-based and commission-based advisors can and do get paid dramatically different amounts, depending on the investments they choose for their clients. And, that fact alone is most responsible for people being sold bad investments.”

Competence is also crucial. To measure that, examine his or her devotion to the craft of providing investment counsel. Advanced-education degrees and citations are a good start. For financial planning, does your candidate have a Certified Financial Planner (CFP) certification? For tax advice, how about Certified Public Accounting (CPA) expertise? And for insurance and estate-planning matters, has your advisor attained mastery as a Chartered Life Underwriter (CLU)?

What professional services does your advisor offer you to help make decisions about your investments? Some advisors make available their partners, as a way of providing additional expert advice. “We have a full-time analyst who is intimately familiar with the portfolio allocations and securities and discusses these subjects with the clients as well,” said Susan Spraker, founder and chief executive of Spraker Wealth Management Inc.

A financial consultant who has a specific area of knowledge can be a comfort when a specific question arises. “This is one of the reasons we believe that firms with multiple advisors do better for their clients,” said Marotta. “It also allows advisors to specialize so that if you get a junior advisor they are the best at their specialty.”

The Bottom Line

It can be a jolt when a long-time financial consultant leaves your sphere, because he or she has retired, passed away or been fired from his or her investment firm. One thing for sure: You shouldn’t make a snap decision or jump to a hasty conclusion. Just as you wouldn’t take medical advice from a complete stranger or grant power of attorney to someone with shady credentials, you’d be reckless to allow an unproven stranger to have an influence on your finances.


Fee-Only Financial Advisors: What You Need To Know

The financial press has in large part touted the merits of working with a financial advisor who is compensated only by the fees he or she charges directly to clients and not via the sale of financial products. To be clear on terms, an advisor who is compensated only by fees is fee-only. These fees might be hourly, a flat retainer or be based on a percentage of your investment assets.

Fee-based or fee and commission advisors generally are compensated via both fees for advice and commissions on the sale of financial products that may be used to implement their advice. Commissioned advisors are paid solely by the commissions earned from selling various financial and insurance products.

Pros of Using a Fee-only Advisor

One of the major benefits of selecting a fee-only advisor is a freedom from the inherent conflict of interest that can arise when a significant portion of the advisor’s income comes from selling financial products. The concern you should have as a potential client is whether or not the advisor is recommending a certain financial product because it enhances his/her bottom line and if the products recommended are truly in your best interest. Related to this: In some cases some registered reps and others who earn all or part of their compensation via commission may be required to favor products offered by their employer. These products may or may not be the best vehicles for your situation.

Another benefit of using fee-only financial advisors is the opportunity for them to offer an objective second opinion of your situation. This is especially true if the advisor works with clients on an hourly, as-needed basis or perhaps will do a financial plan or financial review for a fixed project fee. Services here can range from addressing a specific financial question to a review of your investment portfolio to a full-blown financial plan.

Cons of Using a Fee-only Advisor

While I am admittedly biased towards fee-only financial advisors, I don’t really see any cons as such. However, a fee-only advisor is not the right solution for everyone and fee-only advisors are hardly perfect. I do want to point out some of the things investors should be on the lookout for when hiring a fee-only advisor, or any financial advisor for that matter.

No form of advisor compensation is totally conflict-free. If you’re working with an advisor who is compensated via a percentage of the investment assets under management can you always be sure that his or her advice is not tilted towards keeping as much of your money under advisement as possible? For example, if you were to ask about withdrawing say $200,000 from your investment accounts to pay off your mortgage can you be sure the advisor’s advice against doing this wasn’t somehow motivated by the potential lost revenue?

Another issue to consider is that a desirable compensation structure like fee-only does not ensure that the advisor is competent. Just like any other professional, such as a lawyer or an accountant, the knowledge and experience of fee-only financial advisors will vary. Some advisors simply are more knowledgeable than others. Additionally some advisors may be better suited to working with clients with your unique needs than others. For example a fee-only advisor who specializes in working with teachers and government employees nearing retirement probably would not be the best advisor for a high-earning 30-something professional in the private sector.

Some fee-only advisors may only deal with clients with a minimum level of assets to invest, or charge a minimum fee that equates to that asset level. This may exclude a number of investors with smaller portfolios who need advice. You will want to understand issues like this in doing your search for a fee-only advisor.

How to Find a Fee-only Advisor

The National Association of Personal Financial Advisors (NAPFA) is the largest professional organization of fee-only financial advisors in the country. It has a find an advisor link on its website. You can search by zip code and then further by area of specialization. Note that NAPFA members run the gamut from solo practitioners to larger multi-advisor firms. Additionally, NAPFA members offer a wide range of service options including hourly as-needed services, ongoing investment and portfolio advice, and almost everything in between. Here is a link to an excellent guide to selecting an advisor that NAPFA offers.

The Garrett Planning Network is another organization of fee-only financial planners who mostly focus on providing hourly advice. There is a degree of overlap in the membership of the Garrett Planning Network and NAPFA. It also has a find an advisor function.

The accounting profession also has a financial planning designation for CPAs called the PFS (Personal Financial Specialist). Please note that while many holders of the PFS designation are fee-only this is not a requirement. You will need to ask these folks how they are compensated; here is a link to find a local PFS holder.

The CFP Board also has a directory of financial advisors who hold the CFP designation. Again, being a CFP does not mean the advisor is fee only. The CFP Board recently has revised its compensation classifications to include fee-only, fee and commission, and commission. There has been some controversy surrounding its definition of fee-only so again investors using this database need to ask and be diligent in investigating advisors found here to ensure they are fee-only. Here is a link to the CFP Board’s find a financial planner section of their site.

The Bottom Line

Choosing a financial advisor to help your with your unique financial needs is not an easy task. You will want to look at a prospective advisor’s experience, education and training, and you will want to understand the types of clients he or she generally works with. Additionally, you will want to understand how the advisor would be compensated for working with you. Compensation arising from sales commissions on financial products could cause advisors to recommend products mandated by their employer and/or products generating the highest commissions for the advisor. These products might not always be the best fit for your situation even if they meet the standard of suitability. While fees for advice are more visible, commissions may be harder to ascertain. Make no mistake, the commissions paid to a financial advisor come out of your pocket in the form of higher expenses and lower returns. Fee-only is not a perfect arrangement, but it is generally a bit more transparent and might be a good fit for you.


Why Financial Advisors Need To Earn The CFP Mark

The financial planning profession is rapidly expanding in many directions. The complexities of managing one’s money in the modern marketplace have led to a mushrooming demand for financial education and advice that shows no sign of slowing, and many consumers look for the CFP® designation when they choose their advisor. This credential stands as proof that the advisor has met rigorous academic and ethical requirements and has the necessary expertise to help clients meet their financial goals.

The Way It Was
For much of the 20th century, investors who needed financial products and advice were serviced by bankers, stockbrokers, insurance agents and accountants. Most of the sophisticated products and services that existed then were available only to wealthy clients, and the lower and middle classes were left with a choice of individual stocks, bonds, cash value life insurance, and CDS and savings accounts as investment vehicles.

There was also little or no coordination among professionals regarding the proper integration of insurance, investment and income taxes, and the financial industry was almost completely driven by sales. Many financial professionals simply hawked their specific product or service irrespective of the actual needs or circumstances of the consumer, and the concept of unbiased financial advice or education was unheard of.

Financial regulatory authorities at that time focused chiefly on outright fraud and wrongdoing within a given field, such as embezzlement or direct manipulation of the price of a security. The only real ethical criteria that most retail advisors had to meet at that time was a suitability standard, which merely required that a given transaction or investment had to be suitable for the customer. But this rule failed to protect customers from indirect negative repercussions that could result from many of these transactions, such as the unnecessary taxation of a transaction that could have been avoided if it had been structured differently. A higher standard of practice in the industry was clearly needed.

Birth of a Profession
The financial planning profession as we know it today was spawned just prior to one of one of the worst bear markets in U.S. history. A group of 13 financial professionals gathered in Chicago on Dec. 12, 1969, to discuss the growing public need for comprehensive, unbiased advice and planning that encompassed all areas of personal finance. This meeting led to the creation of the International Association of Financial Planners (IAFP) and the College for Financial Planning in Denver.

Three years later, the first group of students enrolled at the college to study the newly-created curriculum for the CFP certification. This group of graduates then formed the Institute of Certified Financial Planners in 1973. The college went on to produce a new graduating class of CFP® certificants each year, but as time went on it became apparent that the college was not able to function effectively as a governing body for the designation.

The Certified Financial Planner Board of Standards was created in 1985, in order to fulfill this function, and now retains governing and issuing authority over the mark and its certificants. In 2008, the board significantly upgraded its Standards of Professional Conduct and mandated that all certificants meet the fiduciary standard of responsibility in their practices.

Benefits of the CFP® Mark
Financial advisors who carry the CFP® credential today can expect to receive continual endorsements from the major news outlets. The financial media has encouraged consumers to seek out assistance from CFP® practitioners for the past several years, and the CFP® Board has also launched a full-scale multimedia public awareness campaign designed to promote the designation to the public at large.

The CFP® mark is the only financial credential that enjoys trademark protection and requires its certificants to adhere to a fiduciary code of ethics. This distinction provides tangible reassurance to clients that an advisor who carries this mark is required to act in their best interests at all times. The educational and experience requirements of the CFP® mark have also translated into a more satisfied clientele. A poll conducted by the CFP Board revealed that 87% of clients who hire CFP® certificants for advisors are very satisfied with their planners, compared to only 72% of those who hired advisors without this mark. The validity of the CFP® mark was even upheld by a Supreme Court decision in 1994 that forced a state board of accountancy to allow one of its members to advertise this mark after she earned it.

Carrying the CFP® mark can also provide more practical benefits for many advisors. Certificants have access to a marketing toolkit that is available on the CFP® Board website. This kit contains a wealth of resources including publications from the CFP® Board, a social media guide and a separate toolkit for their public awareness campaign that includes TV, print and banner ads, sample client letters and the results of the 2012 Household Financial Planning Survey.

The CFP® Board has also published statistics indicating that CFP® certificants earn up to 40% more than their non-credentialed counterparts. In fact, a 2008 survey revealed that the average annual earnings for those who either work for large firms or have their own practices typically ranged from $110,000 to $160,000.

There are also a number of states that exempt Investment Advisor Representatives (IARs) from having to register as such at the state level if their CFP® credentials are in good standing. This exemption can save advisors the hassle and expense of obtaining a Series 65 license in order to do business in that state.

The Bottom Line
The majority of American families and individuals do not have any type of comprehensive financial plan. The increasing demand for unbiased and competent advice in this area represents an enormous opportunity for those who carry the CFP® mark, as they are typically able to provide a level of professionalism that is difficult for their competition to duplicate. Although it is not the only respected financial planning credential in the industry, it is perhaps the most widely recognized by the media


How Much is a Financial Planner Worth?

A financial plan is a comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. The CFP® Board of Standards explains financial planning as six-step process:

  1. Establishing and defining the relationship with the client
  2. Gathering client data
  3. Analyzing and evaluating the client’s financial status
  4. Developing and presenting financial planning recommendations
  5. Implementing the financial planning recommendations
  6. Monitoring

How Much is a Financial Planner Worth?

If you work with a financial planner you will incur fees/expenses. Keep in mind, if you do not work with a planner you still incur fees. But is working with a planner worthwhile?

Vanguard, which is the world’s largest mutual fund company and is known for catering to “do it yourself” investors, admits that working with a financial advisor pays off. The conclusion of Vanguard’s study, “Quantifying Vanguard Advisor’s Alpha” is that working with an advisor increases client’s investment returns by 3%.

This study mentions there are five ways financial advisors produce extra returns for their clients. The most significant value-added component is behavioral coaching. Said another way, the discipline and guidance of an advisor produces an extra 1% to 2% in net return. You may be saying 2% is not much. To put it in perspective, 2% of $250,000 is $5,000 and compounded over five years is $276,020.20. If you were working with an advisor providing 5% in net return your total value would be $319,070.39 compounded over five years.

A good advisor emphasizes the importance of behavioral coaching because investors are emotional. Too many investors chase returns and make irrational decisions which bring down investment returns. In my previous article, “There is a Better Way! – Why No One Talks About the Stock Market the Right Way,” explains how our tactical portfolio management process is based on time-tested evidence and analysis and not emotions.

The importance of sticking to a regular investment plan is critical for our clients to achieve their financial goals. If clients focus on the long-term and are consistent to a steady investment plan their return is increased up to 1.5%. Our planning process is built upon the client understanding that they have a plan is place to protect their investment portfolio and grow it at the same time.

Vanguard’s study also mentions that another 0.45% can be generated in returns when fees are reduced. Vanguard is known for its low fees and of the five major components on how an advisor can improve a client’s financial life fees/expenses rank fourth on the list. In other words, low fees are not that important in order to achieve an investor’s financial goals. Fees are only an issue in the absence of value. Therefore, investors do not need to make their investment decisions based on fees. Expenses need to be fair and just for the client and there needs to be investment value to the assessed fee. However, the driving force in order for clients to achieve their goals is a disciplined and time tested approach to investment management.

Vanguard’s study does not address the additional services we offer. For example, I refer clients to a competent CPA/accountant for tax planning advice and/or an estate planning attorney for proper legacy planning. How much more value does this bring to a client’s financial situation? Well above 3%, stated within Vanguard’s article. The Proverb which states: “Without counsel plans fail, but with many advisors they succeed” is true to this day.