I like the new columns from Money Magazine featuring “The Mole,” an undercover financial planner. Like me, The Mole prefers to write anonymously to protect his or her identity. While my reasons for doing so pertain more with my desire to post sensitive personal information, The Mole maintains incognito status because he tends to speak out against the practices of his contemporaries and associates.

Some time ago, I considered publicly becoming a financial adviser or planner. Eventually, I decided it wasn’t the path I wanted to take, but the resulting discussion was interesting. So what does a would-be financial planner need in order to be hired and trusted by customers?

Perhaps a certification. The Mole says “maybe.” He has good things to say about Certified Financial Planners (CFPs), as he is one. This is a quality certification program with stringent requirements. Unfortunately, not all certifications require rigorous education and some have a loose grasp on ethics and fiduciary responsibility.

Now by my last count, there were more than 100 financial designations. Many, like the CFP, take a significant amount of time and expertise to master before the designation is awarded… Unfortunately, many of the others require nothing more than brief courses geared toward sales techniques; how to use emotions to sell annuities to seniors is a popular one.

A strong designation would reduce the chances your financial planner turns out to be sleazy like these annuities salesmen profiled by Dateline NBC.

However, even a designation like CFP does not guarantee the quality of the planner. Regardless of the designation, it’s best to get referrals from satisfied customers before selecting your financial planner. Don’t know anyone who is retaining financial advisory services? You can get referrals from the Financial Planning Association or the National Association of Personal Financial Advisors.

With referrals in hand, research your potential advisers with the North American Securities Administrators Association.

Walter Updegrave, another columnist for Money Magazine, submits the following:

I’d be wary of any advisers who contact me unsolicited, and doubly wary of ones who run free retirement-planning lunches or seminars. Many times such sessions are just a come-on to sell high-priced investments.

The lesson is to remain skeptical. If your adviser isn’t listening to your goals, suggesting products that are right for you, or trading frequently, it may be time to fire him or her, regardless of the adviser’s certification.

Do I Really Need a CFP? [Money Magazine]
Cracking the mysterious code of financial advisers [Money Magazine]

I often rail against “financial rules of thumb” for their overly simplistic view of what are often complex situations. There is far too much potential for snappy catchphrases to lead people to refuse to think and evaluate situations on their own. Rules of thumb don’t take into account individual circumstances and even the most popular ones are simply incorrect.

Kiplinger asks about the usefulness of twelve financial rules of thumb, particularly when some can be harmful if blindly followed. What do you think? Which “rules” are true and which are false?

1. You should always close credit card accounts you no longer use. (See How to Best Handle Old Credit Card Accounts.)
2. Save and set aside an emergency “rainy day” fund to cover at least three months’ worth of your expenses. (See Always Be Prepared: The Unexpected Job Loss.)
3. The percentage of stock in your portfolio should equal 100 minus your age.
4. Always go with a fixed-rate mortgage—especially when interest rates are rising.
5. Save 10% of your income each year.
6. Buying a car is always cheaper than leasing.
7. A Roth IRA is better than a traditional IRA.
8. Never buy a house that costs more than 2.5 times your annual income.
9. Make sure your own retirement savings are on track before you save for your kids’ college education.
10. If you carry a balance, you want a credit card with a low interest rate.
11. If you need life insurance to protect your family, your coverage should equal eight to 12 times your annual income.

1. With a nest egg of $1 million, you can retire comfortably. (See Does This Number Impress You?)

   Some of the answers may surprise you. Leave your thoughts in the comments or take the quiz at Kiplinger.com. Also, take a look at 25 Rules to Grow Rich By.

In 2007, I actually sought a financial advisor, developed an asset allocation model, and started to track my finances more closely than ever. All good moves, but after reallocating some of my investments, I made my third mistake:

3. Underutilizing Financial and Tax Advisors

I mentioned that I developed an asset allocation model with my new advisor (after lots of meetings and questionnaires, mind you). Nowhere did I say I actually read it.

I skimmed the hefty report, then tossed it aside. It’s hard to explain this incredibly lax behavior on my part. I called my advisor and asked her to summarize, then acted on what she said, yet the report remained shut. I am reading it this week, because after admitting my behavior here I am sufficiently humiliated. Shame on me.

But not reading the report led to even more bad behavior. Read the rest of this article »

You would think that the roles and responsibilities would be clear and there would be a strong line between individuals who call themselves financial advisers and those who call themselves stock brokers. The obvious answer is that advisers give impartial advice based on the best interest of the client and brokers sell products as a third party.

Advisers are sworn to put their clients’ interests ahead of their own, thanks to the Investment Advisers Act of 1940. This Act defines an adviser as, “Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” The Act also precludes brokers from being considered investment advisers.

In that case, what is a broker? The act also provides this definition. A broker is, “Any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank.” The key word is effecting, which astute readers will realize is not the same word as affecting. Brokers make the trades happen. Today’s brokers are “broker-dealers,” meaning they make the trades happen, and they sell financial products to customers for a fee.

While advisers must act in their client’s best interest at all times, brokers do not face this requirement. Brokers must understand their client’s complete financial picture and must direct them towards appropriate products.

Generally, investment advisers sell their services with a fee; perhaps hourly or per service, either flat or as a percentage of assets (to make financial advice in reach for those without millions of dollars to investment). Brokers should be earning a commission for each product that they sell, just like your car salesman.

Here’s where the line gets blurred. Brokers have been offering a product called a “wrap account.” Basically, the broker takes care of all the details, selecting investments, making the trades, and charging a flat quarterly or annual fee to the client. The theory with these accounts is it will reduce unnecessary trading by the broker, because she is not collecting a commission for each purchase or sale of a security.

In the past, fee-based services were held in the domain of only investment advisers, but the SEC granted an exception for wrap accounts. Recently, a court ruled that brokers who are involved with wrap accounts must register as financial advisers. This would hold these brokers accountable for making only investment choices best for the investor.

Brokers say that wrap accounts have saved clients billions in commissions. Even if that’s true, it doesn’t mean brokers are always making the best decisions for their clients. The New York Post cited a suit to bring wrap accounts to the public’s attention, citing an example:

Last December, then-New York State Attorney General Eliot Spitzer charged UBS with devising a system to lure unsuspecting clients, even when there were lower-cost and more suitable options available. The suit cited an 82-year-old woman who paid $24,000 in fees but only made one trade.

It’s difficult to know who to trust, and blurred lines between advisers and brokers don’t help the average person to make informed decisions.

Money Magazine is sharing an interesting piece of advice in their September issue. This comes from “The Mole,” the magazine’s “underciver financial planner.” If your financial advisor or broker tells you there are no fees for a particular investment or no risk for some product, ask to confirm in in writing.

Even though my clients relied on these promises [of no fees and no risks from other advisors] when they chose investments, they had nothing in writing to prove it. In fact, within minutes of making those misleading statements, the adviser probably had the client sign a multi-page disclosure document that contained language (buried deep inside) directly contradicting the oral promise. Advisers know no one is actually going to read all the disclosures before signing.

Here’s an easy solution. When your adviser makes an extreme-sounding claim, send him a nice, friendly e-mail articulating your understanding of what he said.

Ask him to confirm it in writing. If the statement is accurate, he should have no problem. If he backpedals, dismisses your request by saying “That’s in the disclosure document” or just calls you up to repeat his oral promise, get very suspicious. If he won’t write, something’s not right.

The Mole’s reports take a look at what happens behind the scenes in the world of financial planning. The more someone has knowledge of what goes on on the “inside” will be in a better position to make good decisions. This piece from The Mole is advise is quite clever; theoretically, an advisor knows better than to formally document a lie and will avoid that at all costs.

On Friday, August 17 and Thursday, August 30, the National Association of Personal Financial Advisors and Kiplinger’s Personal Finance are presenting free one-on-one discussions with professional advisors.

To get your questions answered, either call 888-919-2345 on one of those two dates between the hours of 9:00 am and 6:00 pm or email your questions in advance to jumpstart@kiplinger.com.

Their press release was sent to me with my permission, and the event is worthy of mentioning. Free solicited advice from unbiased (or reduced-bias) professionals can’t hurt. NAPFA promoted fee-only financial advisors, a method of compensation that reduces conflicts of interest.

If you do take advantage of this service, email Consumerism Commentary’s tips mailbox with your question and the advice your one-on-one advisor offered, if it’s not too personal. We’d like to see some examples.

Jump-Start Your Retirement Plan Days [Kiplinger’s Personal Finance]

The two winners of the free copies of Cash, Cars, & College, by Janine Bolon were informed last night. If you entered the contest, check your email to see if you’ve won.

In order to enter the contest, I asked that commenters provide some financial advice they’d give their teenage self if they were able to travel back in time, a la Back to the Future. If only we really could travel through time and meet our younger selves. There were a number of great answers to the question, and here are a selected few.

Brett McKay has some baseball card advice. (I was a collector like millions in the late 1980s and I just handed off a large collection of excellent-condition Mets cards to my girlfriend, who is a big fan.) Here’s his advice:

I would tell my 13 year old self that baseball cards are not an investment. Sure, that Ken Griffey Jr. Fleer Ultra insert card is worth $40 in 1994, but in a few years it will be worth a dollar because a) the baseball card market will be oversaturated and b) Ken Griffey will be injured, traded to the Reds, and won’t be hitting very many homeruns. Instead of forking over $4 for a pack of cards, take that money and put it in a savings account… If you’re going to collect cards, just do it for fun.

Moms are always right. Archie shares:

I would tell her to listen closely to her parents about everything. My Mom passed away 4 years ago and there are too many days to count when I look up heavenwards and shake a fist, muttering angrily, “Ok, ok, I get it. YOU were right, I was wrong…” I would try to explain just how beautiful it is to buy your sister a $1,000 wedding gift out of money that was completely earned by you.

Fabulously Broke:

I’d say, “Self, you’re only 13 right now. But in a couple of years when you get your first job, cherish it. Do the right thing, and save 10% of all that you make, start a small retirement account or else you’ll be kicking yourself in the bum when you’re 24.

“Above all, Self, do NOT under ANY circumstances, waste it on your Current Boyfriend. Because you’ll meet Husband in about 3 more years. Save your money for him because he’s worth every penny.

“Lastly, Self, learn about the power of compounding interest, and use it to your advantage, because when you finally move out, 6 years later, and start really living on your own with no help from your parents who gambled away your entire educational savings, you’re going to be thrilled to bits to have your savings see you through the very hard times that are coming your way.”

There are so many good answers, and I really want to highlight as many as possible. Here’s Turtle64:

I would express the importance of a strong work ethic. So much is given to our children they may not grasp the importance of hard work. There is no free ride but work hard and perseverance will take you far. Don’t take everything that comes to you when you are 13 and carefree for granted. Learn to do without, and for God’s sake, read, read, read.

Dani from Living Behind the Curve:

Your dad is a great guy (you’ll realize that in about 10 years), but his views on money aren’t. Focus on doing what makes you happy, and not on material things and wealth.

I alluded to this in a post yesterday, the title of which got my girlfriend’s attention. Anyway, sometimes it makes more sense not to chase the highest returns. The Money Magazine Expert, Walter Updegrave, agrees.

In his latest advice column, he tackles the problem of a couple with a healthy emergency fund and student loan debt. Updegrave starts by taking a purely financial look at the situation, evaluating the returns through savings account interest and the interest rate on the loan, but then…

The point of keeping the money in the savings account isn’t just to maximize your return. If that were your only goal, you probably wouldn’t invest in that type of account at all. You’d put your thirty grand in a combination of stock and bond mutual funds, which are likely to pay a much higher return over the long term.

His conclusion is that different answers may be right for different people, for different reasons. That’s such an important point to remember, especially in a world where people want one-size-fits-all solutions to their problems—a world in which people latch onto catchphrases and over-simplifications that work well only in a world ruled by marketing.