Finding a Real Cowboy

iUniverse, Inc.

Contents

Foreword.......................................................................ixAcknowledgments................................................................xiWhy Are We Doing Business This Way?............................................1Why Hiring a Financial Planner is Not Just for the Wealthy.....................8Exactly What Is a Financial Planner?...........................................16Finding a Real Cowboy..........................................................20The Fiduciary: As Good as Gold.................................................28Alphabet Soup: What Do Those Letters Really Mean?..............................39The Interview Revisited........................................................49Hire an Individual, Not a Firm.................................................55Avoiding Train Wrecks and Howling Coyotes......................................58The Roundup: Putting It All Together...........................................75Resources......................................................................79Appendix A: Financial Planner Search Matrix....................................81Appendix B: Certifications and Charters........................................84Appendix C: Designations.......................................................90Appendix D: Verification.......................................................98

Chapter One

It's not unusual for people to think financial planners are only for the wealthy, but that view is a bit lopsided. The events of 2008 and 2009 have certainly shown us how fallout from the irresponsible behavior of banks and investment firms-even those with whom we've never done business-can affect all of us, regardless of wealth.

It's tempting, and perhaps even a bit comforting, to write off such debacles as short-term hiccups, believing that eventually things will go back to normal. But when it comes to making decisions about your finances, "normal" doesn't really exist anymore. Why? Economic crises aside, think about how profoundly the overall financial landscape of our lives is changing.

Times of Change

Thirty, or even twenty, years ago, most folks could get along pretty well on their own if they just balanced the checkbook every month, minded their savings, paid the mortgage, and kept up with a company retirement plan.

That's not how things work anymore.

Even before 2007, a major shift in personal finance was underway that continues to touch nearly every household in the country: the increasing disappearance of company pension plans and the advent of 401(k)s, which employers contribute less to, mean individuals will continue to become more and more responsible for their own retirement savings. With this need for increased savings comes the responsibility for making prudent decisions regarding not only investments, but also spending and budgeting-and these are decisions that need to be made throughout your life. They can't be put off until retirement nears.

On top of that, no one knows what the future of health insurance will look like, and how much responsibility each of us will have to take for finding and paying for our own coverage. Another profound change is the rapidly evolving nature of work itself. Loyalty doesn't count for much anymore, and not many companies hand out a lot of twenty-year pins these days. Very few of us will spend our entire working lives with the same company, or even in the same type of job. Many of us will go through periods of unemployment. All of this means that traditional approaches to financial security-those established, say, fifteen, even ten years ago-may not work anymore, or at least not as well as before. It means individuals today should plan for less job security and more job change during their lives, which will make personal financial planning harder, requiring different approaches to such things as how much money to sock away for an emergency or how much debt to take on.

In addition, as bachelor's degrees become a dime a dozen, formal education is likely to become a crucial part of the modern career-person's life. So you have to prepare emotionally and financially for periods when you'll need to stop working to receive additional education and training.

Another change: while it's good news that we can all expect to live longer than previous generations, increasing life expectancies also have significant financial implications. When Social Security was established in 1935, the average life expectancy was around sixty-five years. Now it's eighty-four for men and eighty-seven for women. (And note that these are the average ages, meaning a good number of people live longer.)

These changing times, however, are not times to put your head in the sand. Instead, you must get rational about the future. Yet, remarkably, many devote less time to mapping out a financial course than to shopping for the best bargain on a flat-screen television. To boot, they base their 401(k) investment choices on advice from friends and relatives.

Don't get me wrong. I have friends. I have relatives. I have a flat-screen television. They're all useful in their own way-even the relatives! But counting on any of them for sound financial advice is often utter lunacy.

The Planner's Purpose

You now see that financial planning is not just for the wealthy or those on the cusp of retirement. Everyone can benefit. But will hiring a financial adviser make you rich? I suppose anything's possible. But if an adviser promises you that, call the police. What a planner should be able to guarantee is to help you (1) take control of your finances, (2) map out a long-term plan based in your real world, and (3) become significantly less vulnerable to the whims and schemes of the financial services industry.

Managing, and hopefully accumulating, wealth is part of the idea, of course, but solid financial planning is about things more fundamental. Personal finance can become complicated. What seems like a simple question-How can I buy a house?-can quickly turn into a Rubik's Cube of frustration as you grapple with the interlocking parts of your finances. New questions start to sprout like weeds. Can I save enough? How much is enough? What will I cut back on? Can I make enough progress? A good financial planner can help get you on the track to answering such questions, helping you integrate financial planning into your daily life so that you can see how to reach your goals and objectives. Like gaining security for your spouse and children, money for college educations, the ability to stay in the home you love, or just time-time to travel, visit a dude ranch, paint, foster rescue animals, garden, write a book, hang glide, or whatever else your heart commands.

Another less tangible, but equally important role of financial planners is helping to ensure that the way you live, how you spend your money and time, is a reflection of your values-in other words, that it embodies what is important to you. To do this, however, a planner must really listen to you, and work with you. You will need an adviser who has the experience, training, and knowledge to help you, brainstorm with you, and clearly explain the viable options that will enable you to make wise choices that reflect your values and help you achieve your goals.

In this sense, true financial planning helps you get to the crux of who you are and to live a life that is meaningful for you. It enables you to not only strive to live a better life today but also to plan for a better future.

The following list, which can be found on the CFP[R] Board Web site (www.cfp.net) outlines some big-picture ideas to keep in mind as you go forward with your financial planning.

Best Practices When Approaching Financial Planning

Set measurable goals. Understand the effect your financial decisions have on other financial issues. Reevaluate your financial plan periodically. Start now; don't assume financial planning is for when you get older. Start with what you've got; don't assume financial planning is only for the wealthy. Take charge; you are in control of the financial planning engagement. Don't confuse financial planning with investing. Don't expect unrealistic returns on investments. Don't wait until a money crisis to begin financial planning. Look at the big picture; financial planning is more than just retirement planning or tax planning.

Why the Big Picture Matters

We're all in different financial situations-no two scenarios are exactly the same. That's what makes true financial planning difficult, and why a "cookie cutter" approach, such as relying on friends or canned advice, just doesn't work. True financial planning requires critical thinking, because straightforward, "right" answers can be hard to come by.

Relativity is one big reason why you need to look at financial decisions in context with your particular situation; that is, why you shouldn't do something just because your brother-in-law or coworker advises it. What may be good for them (if, indeed, it is) is not necessarily the right course for you. Relativity is the idea that the more important a particular piece of your financial situation is relative to your overall financial situation, the more important it becomes to get competent, professional, unbiased advice.

Understanding relativity is one way to get a handle on what is important and to highlight where you should expend time and effort. For example, consider the varied financial scenarios of these two couples:

Couple 1-They have two children, $80,000 total income, and a net worth of $120,000. They are considering the purchase of a $350,000 home.

Couple 2-No children, $400,000 total income, and a net worth of $2,300,000. They are considering the purchase of a $500,000 vacation home in the mountains.

The choice that Couple 1 is making relative to their overall financial situation is much more important than the decision being made by the second couple. Why? The first couple is considering the purchase of a home that costs nearly three times their current net worth and over four times their annual income, and it is going to be their primary (and only) residence. The second couple is considering a purchase of about one-fifth their net worth, and only 1.25 times their annual income, on a secondary home. With just a general look, we can see the first couple does not have the same "luxury" of making a wrong decision as does the second.

Now let's take a closer look. The first couple has several things going on. First, can they afford to purchase a $350,000 home? If they can, how should it be financed? Their decision could impact their financial situation and life for the next thirty years. Should they get an adjustable-rate mortgage? After all, they'd heard horror stories-people with such mortgages getting squeezed out of their homes through foreclosure. But the problem there might have been the biased advice of mortgage brokers who were driven by greed. Such brokers, who are not fiduciaries and who do not disclose how much they may be making on a particular deal, are salespeople. Their goal is to sell you the mortgage and make their cut; they do not care how relative this one transaction is to your overall financial situation, and they certainly don't care whether you can make payments a year or two from now should the rate adjust upward. Therefore, Couple 1 should seek outside advice that is as unbiased and professional as possible, in the same way that they might seek a second opinion before undergoing a major surgery.

Major financial decisions should not be taken lightly, and the more dollars involved relative to your net worth, the more homework you should do. The cost to you if you don't do this upfront homework is additional costs down the road. Unfortunately, for some, that cost has been foreclosure.

The Big-Picture Matrix

Here is a rough guideline for using relativity to help you know when it is imperative that you spend more time on a particular financial decision:

If your decision involves more than 10 percent of your net worth, you should seek competent advice. If the decision involves more than 25 percent of your net worth, you may also want to get a second opinion.

For example, if you are purchasing a home, chances are this involves more than 25 percent of your net worth. So even if you are already working with an agent who is providing financing advice, make sure you also get an objective second opinion. Many individuals who overreached and purchased more home than they could afford would have been well served with such prior advice.

Relativity can also apply to the time frame in which financing may occur. For example, if you anticipate retiring at age sixty-five, and you have a life expectancy of age ninety-five, you are dealing with a thirty-year retirement period. So any decisions about your retirement will be extremely important. In other words, investing in your 401(k) based on what the group of coworkers at the water cooler suggests may not be the best idea. (Remember that everyone at the cooler has a different financial situation; some may have investments elsewhere that you know nothing about.)

Long-term loans, such as a home mortgage, are another area where the decision you make is subject to affecting your life for an extended period.

Now put together a long time frame and an expense greater than 50 percent of your total net worth, and you have a major decision.

Chapter Two

The answer to this question is not comforting: there is no universal definition. There's no required degree, license, or rulebook that delineates who can rightly be called a financial planner. In fact, according to industry research and the Financial Planning Coalition (comprised of the Certified Financial Board of Standards, Financial Planning Association, and National Association of Personal Financial Advisers), well over 300,000 people in this country present themselves as some species of "financial planner." If you wish, you can become one tomorrow. Just have some business cards printed and go for it.

So loosely defined is the financial planning moniker that the Financial Industry Regulatory Authority, which regulates stockbrokers, has this warning on its Web site: "[B]e aware that Financial Analyst, Financial Adviser, Financial Consultant, Financial Planner, Investment Consultant, or Wealth Manager are generic terms or job titles, and may be used by investment professionals who may not hold any specific designation." In other words, there are no standards. Let me repeat that-no standards.

Some quick history helps explain the ambiguity. Financial planning, as a distinct field, is still relatively new. Before the Internet, banks, investment houses, brokers, and financial firms had a virtual monopoly on financial information. If you wanted a stock quote, a research report, or a company's earnings record, you pretty much just had to call one of these places and ask. The first rumblings of "financial planning" began in the era of high personal income taxes in the 1970s, with the emergence of tax shelters. It was during this time-when the highest federal marginal tax bracket was 70 percent-that so-called financial planners sold shares of limited partnerships to rich folks who needed losses to lower their tax bills.

Congress didn't warm to the idea of people deliberately losing money to duck taxes, however, so it changed the rules in a way that brought the activity to an abrupt halt. Despite that, the "financial planner" term not only lived on but grew into a staggering array of permutations. The insurance industry jumped in, its "financial planners" often counseling that the best financial plan involved, of all things, insurance. Next, some stockbrokers began calling themselves financial planners, though their main emphasis was on investments and managing investment assets. This, combined with high returns from the stock market in the 1990s, led many to begin equating financial planning with investments, after which the bulk of planners were hired primarily to handle only investments. Finally, before the beginning of the housing collapse in 2007, when real estate became the next "sure thing," a bunch of real estate folks started calling themselves financial planners.

So which ones among the above group are really financial planners? Technically, I suppose, they all are. But if you truly want objective, untainted advice from an advisor who has your best interests at heart, none of them fit the bill.

Simply put, the vast majority of those who call themselves financial planners are nothing more than salespeople. (And a small, but dangerous, minority are actual crooks, but we'll get to them later.) You can dress them up and put them in pretty, hushed offices, but the bottom line remains the same-they're being paid by someone else to talk you into buying their product. So it's no surprise that a financial adviser who earns commissions selling annuities is often likely to believe that annuities are just the perfect path for you. He's not really a financial planner. He's an annuity salesman. Financial planners that sell life insurance have a similar tendency to believe that an insurance product-for which they will receive a commission-is just the fit. A stockbroker thinks stocks will be just the ticket. You get the picture here.

To be fair, the vast majority of these folks working in annuities, insurance, or brokerage houses have their hearts in the right place. But this doesn't mean we shouldn't still heed the old saying, "If the only tool you have is a hammer, you tend to see every problem as a nail."

(Continues...)

Excerpted from Finding a Real Cowboyby James Pasztor Copyright © 2010 by James Pasztor, CFP. Excerpted by permission.
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