How to Find a Financial Planner

HOW TO FIND A FINANCIAL ADVISOR- Short version

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My book unquestionably provides the most definitive analysis as to who is competent to perform various financial services in the U.S. Additionally, I follow up with an Investment Pyramid, comments on diversification, insurance coverage and much more throughout this site to verify any statements. But for brevities sake, I distilled some of the most noticeable commentary into less than two pages. In essence,

You Never "Buy" Stocks from a Stockbroker

You Never "Buy" Insurance from an Insurance Agent

and

You Never "do" Financial Planing with a Financial Planner

As stated, each of these issues is definitively addressed with factual content, but as to stockbrokers: Stockbrokers have never been taught the fundamentals of Investing. Never! Isn't happening today either. The licensing training is clearly inadequate for even the simplest of risk scenarios. Use somebody with more extensive and intensive training.

Insurance is an absolute minefield. Most licensees have gotten licenses in the years past by simply taking a course at a private school where most of the answers were provided. Most states have increased competency somewhat through mandatory continuing education, but it still leaves a lot to be desired. All that said, never accept insurance advice from someone who does not at least possess an insurance license. That includes all financial planners, CPA's, attorneys, your mama and anyone else. The license is not perfect, but having nothing at all and offering advice on this most sophisticated issue makes absolutely no sense whatsoever.

Financial Planners- The consumer has been led to believe that a few designations represent the definitive education and training in the field. Not even close. The CFP Board of Standards states on its web site, that CFP's have "met the highest standards for the practice of financial planning.......and competent and ethical financial planning advice." I do not agree.

Let me put all this into perspective with a simple example. Your daughter has a brain tumor. You can bring her to a witch doctor, veterinarian, emergency room physician, proctologist or neurologist. It's a simple question backed by this reflection- how important is your daughter? Some pundits will say the emergency room physician is "adequate", but I submit that this is a rationalization to stupidity. In that context, however, I admit that the patient may not die initially- maybe even having a good life for "x" years. But no amount of concession can alter the probabilities that a more experienced and better trained individual could vastly improve the odds of success for any procedure. The neurologist is not a panacea for success- but it beats the alternatives simply because of the added knowledge and experience.

My point to planning? First of all, outside of the witch doctor, at least all the other entities above had a mandatory degree relative to their work. That is not the case with a CFP, ChFC, PFS or all other planning designations. There are no planning degrees required. Nor is it a requirement simply because one joins an organization such as the Financial Planning Association (FPA), National Association of Personal Financial Advisors or whatever. Yet, starting in the 1980's, the American College offered the first accredited Master's course in Financial Services. The College for Financial Planning (where I got mine) followed suit and now there are many colleges and universities offering Bachelor and Master's degrees in planning. This additional effort increases competency (through my experience) by 75% more than that obtained through a designation.

The second point to the degree status is that, due to the increasing numbers of degree graduates, consumers have adequate access to this greater competency in every metropolitan area in the U.S. You may have to do some more work to find them, but 'isn't your daughter worth it'? It's obviously your decision, but anyone of any reasonable intelligence would clearly opt for something better than a designation and there are enough degree practitioners available to now be considered the "standard of practice".

So, what about planner ethics? Sorry- this has been a complete "misconception" fostered on the public through marketing hype and inexperienced journalists. Note this statement- ethics starts where the law leaves off. Yet from an attorney with the CFP Board of Standards, "we will not enforce an ethical violation unless preceded by a legal one." It is a perfect business decision but belies the promotion of highest standards. There are numerous CFP, ChFC and CPA planners in California- and literally all NAPFA members- that are in active violation of state statutes. Per insurance code Section 1844, " any person who acts, offers to acts, assumes to act, as a life and disability insurance analyst when not licensed by the commissioner per this article...... is guilty of a misdemeanor." Take a look at Texas, New York, Pennsylvania and Massachusetts statutes as well, just to name a couple more states with similar requirements (there are about 32 states with specific licensing). These states cover over 75% of the U.S. population but the rules are summarily dismissed by the planning organizations since they allow the practitioners to practice illegally. But it's more than just the law. Each planner is required to adhere to high ethical and fiduciary standards.

"Being ethical is professional but the gesture goes beyond the mere compliance with law. It means being completely honest concerning ALL FACTS. It means more than merely NOT telling lies because an incomplete answer can be more deceptive than a lie."

If you want ethics (kind of an understatement), do not look to the organization to do much more than simply say they have some. Their standards are designed primarily for show.

"Integrity means avoiding any communication that is deceptive, full of guile or beneath the dignity of people. A lie is any communication with intent to deceive. Whether we communicate with words or behavior, if we have integrity, our intent cannot be to deceive."

Summary: As far as stock brokers are concerned- they sell stuff. As far as insurance agents are concerned, they sell stuff that hardly anyone understands (including themselves) and may never work as intended. As regards financial planners- most have limited background that a reasonable person would find inherently suspect. Financial Planning itself is an industry, not a profession. And a fragmented industry at that since there are no real life guidelines regarding various strategies. Comprehensive continuing education is NOT mandatory.

Minimum requirements on hiring a planner are a degree in planning, probable association with a planning organization, licensing in insurance and licensing in securities or registration as a Registered Investment Adviser. I will not state that the planning degree will guarantee the best performance or highest ethics, but it sure beats all the other requirements that effectively have neither.

As a criticism against myself, maybe I am a zealot in regards to "ethical standards". But then I have to ask you, put this altogether and ask yourself,

'How important is your daughter?'

Addendum 2004: From a new CFP advisor: "As you mention on your site, you are the only CFP/Life Analyst in the state. You very well may be the only person in the state that is able to offer comprehensive fee only planning services and implementation under one roof. We know that insurance agents can not be fiduciaries to their clients. Therefore, either everyone in the state that needs planning goes to you for services, or they pursue other options available.

My point is that there is not a better option available to the client than what I am offering. I am a fiduciary to my clients. I take a fiduciary oath. I am ethical, honest and serve them with integrity. I believe I fulfill my duties as a fiduciary by referring the clients to specialists who I feel is will provide the client with the best product/service available. That is then integrated in to the client's plan.

That is no different then recommending an actively managed mutual fund to a client that has a management team that you feel is ethical, competent etc. Unless you are actually selecting individual securities based on your own research, you are "outsourcing" a component of the financial planning process. Certainly that is not a dereliction of ones fiduciary duty. How is that different from informing a client that they are exposed to the risk of premature death or disability and they should follow up with a vendor from a panel on which you have performed due diligence, to obtain the appropriate coverage? Does the planner also have to be an expert in all areas of tax and do tax prep or can that tax prep be outsourced? The same could be said of sending a client to an atty for the drafting of a will.

"Financial Planning is the process of examining a client's personal situation, financial resources, financial objectives and financial problems in a comprehensive manner, developing an impartial, integrated plan to utilize the resources to meet objectives and solve problems, taking the steps to implement that plan once approved by the client, and monitoring the plan performance to take corrective action as necessary to assure that results match the plan projections."

I have never seen a definition of financial planning that requires the planner to personally implement all aspects of the plan. If at some time in the future my firm grows to the point where I can afford to have a Life & Disability Analyst on staff, or P&C expert or CFA etc, or a PhD in economics that would be ideal. Until that time, from a practical standpoint, there is no better alternative for my client. I am honest with the client in representing what services I can and cannot offer. The client's best interests are being served, I am operating within the law and all reasonable ethical standards."

My reply- Therein is the major problem with planners- fee or otherwise. They assume a strong level of competency by completing the CFP designation. As stated, it is effectively one semester of college. But it has been highly promoted as the be all and end all of professional requirements. Not even close. When I got mine 20 years ago, I said "I don't think I know that much." I didn't. The education to many different planning areas was mandatory- but not in depth. Pundits now say that the new CFP is more encompassing. Well I have recent CFP study manuals. Sure it does cover more material in various areas. For example, it does state that an inverted yield curve will have to come back to normal. And that is about it. Same thing with the Series 7 license identifying the quick asset ratio. My point is 'so what?' if there is no real life application. There is nothing on EIA's nor no lapse insurance. Incorrect data on diversification. Incorrect standard deviation and risk.

There is no question that the MSFP is far more intensive. Yet I found that that also did not provide real life application. And that- at least for the estate section- referred back again to insurance. It also requires a review of policies already written. The point is that when you take on a new client, they invariably have insurance, annuities or disability policies already in place (same with funds). But are they any good? What could be done? How do you do the review if there are no sources like Morningstar to (supposedly) guide you?

I have been involved in an arbitration involving a 74 year old woman that was sold a variable life policy with a $200,000+ premium- and no income to pay it. This from a highly regarded CFP. It took me over a year to do the report for the attorneys and required an insight that is not currently taught. Actually not even referenced. All her other prior "experts" said that it was wrong but were unwilling or unable to develop the report for her.

Also the CFP Board of Standards told her that there was insufficient information on which to proceed with her complaint about the CFP. Yet independently and surreptiously, it sent a separate statement to the CFP saying they did an "investigation" releasing him from any and all parts of the dispute. We only found out about that through a subpoena. That is a breach of duty by the very organization that promotes the highest integrity.

In essence, the planner above is (almost certainly) nothing more than a closet asset allocator looking to gather as much assets under control as possible for a 1% or better fee. Just about all other work will be parcelled out to other "experts" . He is not doing planning and cannot and should not be able to identify himself as such. You are not a financial planner unless you can do the work- certainly the bulk of the work. Outsourcing may be required nonetheless, but the planner directly has to understand the inherent problems initially (has to know the questions to ask). If you are not licensed in insurance- fact is, if you only have one semester of knowledge- the whole planning element is suspect if not downright incompetent.

If you send your daughter to such an expert, you are a fool.

Addendum 2004: From a disgruntled reader of my book: "It seems from your book that you are perhaps the only person not only in CA but in the entire world who understands all of the nuances of financial planning, but your services are not available to all of us. Where do we turn, or should we just put all of our money under the mattresses to avoid the pitfalls you describe? (perhaps taking a hint from The Godfather, going to the mattress may be a good idea.) A lot of the material you seem to think the average person should be able to master is beyond our ken, or do you believe this is just the justifiable result of our being ignorant or just plain stupid? I personally can grasp the dangers you present, but am not sure I am capable of applying the remedies."

My reply

There are several dimensions to your statements. First, I do believe I can "beat" almost any planner anyplace simply because I have put more time and effort into the area that anyone else. No one anyplace has my background. These statements are just a matter of fact. No other planner has made this effort. I decided almost 25 years ago that I had a choice- either try to make as much money as I could or try to get as good as I could. I tried the latter not recognizing that getting good was a financial disaster since nobody effectively cared about such intensity. (It's marketing and a perception of competency)

That said, if I was all that good and already knew everything, how come there is so much new material that I post on my site literally every day? It requires a lot of reading and research all the time to stay up on the various disciplines of planning. But that is what gets me so "annoyed" with the industry. Why is it that no entity has developed a directory like "Moody's Directory"? I thought it was a valuable service to consumers but I could never understand why some private entity (NAPFA,FPA, Board of Standards?) didn't do it. Too much effort? No financial return (probably). Why aren't these same entities identifying economic, social, insurance et al elements that impact the consumer. Too much effort? No financial return (probably)

While I am on a tear- how come no one addresses no lapse insurance. It's not taught simply because the material for CFP's et al is limited at best. But it is there in the book for all to validate (or invalidate) at their leisure. That consumers will have a hard time finding the info and, certainly, investigating the issues of shadow accounts and so forth is just the way it is. But if they also think that a standard planner has a clue, sorry. A broker? Insurance agent?

What about 7 ADLs instated of 6. Planners around California refuse to get a license to take the courses on LTC. Yet the comment is in the book. That consumers will have a hard time finding the info and, certainly, investigating the issues of ambulating and so forth is just the way it is. But the difficulty in finding the info or even finding a planner that has a clue does not negate the necessity for doing so.

What about the fact that literally all marketing firms have touted the be all and end all of "buy and hold". Yet Peter Bernstein and many others have changed their tunes after losses of over 1 trillion from 2000- 2002. That consumers don't even know who Peter Bernstein is or Bill Jahnke and will have a hard time finding the info and dissecting the intricacies is just the way it is.

That many people go to American Express or Merrill or whoever expecting that level of review are simply kidding themselves. They haven't done the homework on how to pick a planner. The chapter Who Can You Trust- the same on my site- gives them the direction to attempt. That it may be hard and frustrating- too bad.

My intent was to inform readers of material they won't get elsewhere- the same as my site. That they don't follow the required emphasis on an inverted yield curve and its implications to 2000- 2002 is just the way it is. That they may have to do intense study is just the way it is.

Your comment about being stupid is justified for the people that don't read. Dear Abby once said that "stupid people are those that don't know and don't try to find out". I concur. Ignorance is an entirely different. All my clients are ignorant. Fact is, I am probably the most ignorant person I know. I rarely am so "impressed" by my knowledge that I don't read. I point once again to my daily commentary at my site. If I already knew everything, none of it would be necessary. That effectively no other entity makes even close the same effort is what gets my goat. That they can get away with it is even more distressing- and that is due in large part to a media that has done little more than scratch the surface of the material needed to do comprehensive planning at a professional level. And as stated, I find that a designation is far from a professional. If someone has not gone to the effort of getting a degree in planning, why bother? That literally all of consumers do not bother to address the obvious does border on being stupid- certainly if they have now read my book.

However, most people will be content with Rich Dad, Poor Dad or some sophomoric offering by Orman. I am not saying that she, and others, do not provide some fundamentals but how in the world was over 1 trillion lost in 2000+? Should not have happened. That DCA down is difficult to master and interpret- so what? That advisors don't do much more than closet allocations and the purchase of software should now, hopefully, be evident to readers.

Another item- planners gave Zvi Bodie short shrift in 2003 when he introduced the item that risk goes UP the longer you hold a security. Yet his book, with Kane and Marcus, so stated the statistical position back in the 80's. Planners didn't know it (and didn't like to be told it) because the coursework for any planner does not incorporate it. And none of the continuing education does either. That the consumer does not know this is a part of the arrogance they have displayed with the reading of a couple issues of Money mag and that they then have their investment and retirement planning down solid.

Invariably, every person that has written me about lost money, gone to arbitration, whatever, always says the same thing- "but I thought I could trust him." No review of background at all. Hopefully, any reader of my book will never do that again. Never. They now must realize that they have to do far more scrutiny that before- fine. Unfortunately, and as I have also stated, they can still get screwed because even the MSFP provides little insight on real life application.

Therein is part of the summary to my book- the industry has a long ways to go before it can justify a professional that the consumer can rely on. Consumers have a long way to go before they can simply accept their own limited reading to justify the purchase of stock. That some things are hard is just the way things are.

The material at my site will help many go forward. If they don't like that intensity- not my problem. I am "sure" that the PRU rep they selected because they play golf with him will be just as good. Or that a NAPFA rep is properly licensed. Or that integrity and ethics as mandated by every planning association are being strictly adhered to by its own officers and directors.

That no one else has read as much- so be it. That the consumers or planner will not grasp the difficulty of the subject matter OR MAKE A CONCERTED EFFORT TO DO SO is just the way it is. I provided what I feel are the issues that need to be addressed. If someone cannot master the material due to time constraints or lack of background, they will need to seek out those that do. Unfortunately, there are very very few. Hence the problem- planning is an industry, not a profession. It can be done (not perfectly) by those that commit the effort. But no effort, no success. Nobody ever said this was going to be easy.

All that said, I appreciate your comments. I do recognize that some feel that my book is a railing against the industry and the lack of professionals (true) and that stuff is hard (true) and that I am the only person with a background that "may" be justified in presenting the arguments on ethics, basis and so on. But I point once again to my site. This is the stuff that must be reviewed ALL the time. If not, a lot of the current decisionmaking (many times by stupid software) is apt to go wrong. The tendency of marketing is to make all elements of planning into a simple 1 hour per week (if that) review. Not even close.