Last week I met with a Certified Financial Planner for the first time. This was a free service provided by Vanguard, so it was a good opportunity to speak to a professional about my specific situation. For many years, I’ve been relying on mostly generalized advice, whether from books, large communities like the Motley Fool discussion forums (particularly the Living Below Your Means section), financial columnists, or a community of bloggers that has grown from fewer than a dozen to more than a thousand.

My financial planner and I started by discussing my goals. This was tough for me, as I’ve changed my long-term goals several times in the last decade. I’m trying to find the right mission for my life. I’ve made personal finance my passion since the creation of Consumerism Commentary in 2003, but long before that date I was passionate about other aspects of my life. I need to look at how I want to spend the next twenty, thirty, or forty years of my life and some of the more important developments along the way, like having a family.

From a financial standpoint, my next major expenditure will most likely be a house, though that purchase relies on making other choices in my life first.

With my current level of investable net worth — my assets outside of an emergency fund and money put aside for shorter-term goals like a house — I’m willing to give up potential returns in the stock market for less risk. We decided on a mix between 60% stocks and 40% bonds. Complicating the issue is the fact that almost all of my non-cash investments are in stocks. It will be important to look at my portfolio as a whole rather than analyzing my 401(k) separately from my IRA and separately from my taxable account. This is where tools like Quicken, offering charting and reporting across a variety of accounts regardless of where they are held, come in handy.

The 60%/40% split between stock funds and bond funds is more conservative than I would generally recommend for someone my age (thirty-five), but that might be appropriate based on my lower needs for long-term returns and need for maintaining value in the intermediate term as I determine the next steps for my life.

Before discussing specific investments, I made sure the planner was aware that I prefer index mutual funds rather than ETFs, managed mutual funds, or individual investments. The planner suggested that 70% of the stock portion of my portfolio be invested in the Total Stock Market Index with the remaining 30% in the International Stock Market Index. Half of the bond portion of the portfolio should be invested in the Intermediate Tax-Exempt Bond Fund with the other half in the New Jersey Tax-Exempt Municipal Bond Fund. I’m not sure how excited I am about the prospect of investing in New Jersey, but the tax advantage could be helpful.

I brought up the issue of tax efficiency. It was my understanding that tax-efficient investments, such as the bond funds recommended, should be invested in taxable accounts, while investments that did not offer any tax advantages should be invested in retirement plans like 401(k)s and traditional IRAs, where the tax is deferred until retirement. After analyzing my tax situation, the planner concluded the opposite would be true, admitting the idea seemed counter-intuitive. In today’s environment, the tax rate for qualified dividends, the result of stock-based mutual funds, is 15%, while income from bond-based mutual funds is taxed at ordinary income rates.

However, the bond funds he suggested to are federally tax-exempt, and one is also state tax-exempt as long as I continue living in New Jersey. The adviser’s suggestion to invest in bonds in my tax-deferred retirement accounts might make more sense if those investments were not tax-exempt. I think there’s a piece of discussion missing from my notes that might have explained this situation with a more satisfying rationale. I’ll seek a second opinion about this particular aspect of my planning.

With most of my portfolio in cash, the planner suggested moving these funds to stocks and bonds slowly, over the course of eight quarters. Leaving behind any amount I’d like to have let in cash at the end of two years, I would divide the remainder by eight to determine my quarterly investment amount. This method of dollar-cost averaging could ease the pricing risk inherent in investing a lump sum.

If my goal is only to have money for retirement, my time horizon would be long. Again, I’ll need to define some of my life goals to determine time horizons for specific pools of assets. That would be a topic for a later discussion.

In summary, these are the main points of our discussion:

• Six months to one year of living needs in cash, including an emergency fund and any other spending needs.
• With the rest, a 60%/40% split between stock funds and bond funds.
• Using a dollar-cost averaging investing strategy over the next eight quarters for current funds.
• Add the bond fund portion to 401(k) investments and stock fund portion to taxable investments.

What do you think of this strategy?

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On Tuesday, I had a phone consultation with a Certified Financial Planner from Vanguard. It was an initial meeting, wherein we talked about each other, focusing on my goals. I tried to take into account many of my own suggestions for working with a financial adviser, but in preparing for the meeting, I realized — well, I’ve known this, but nothing brings an issue more to the front of the mind than being required to think about it — that I’m not sure about the next steps I’d like to take with my life.

I’ve been running Consumerism Commentary since 2003. While I started it as a hobby and an opportunity to learn how to manage my own finances, it has grown into a business of its own, allowing me to leave my unsatisfying day job and work for myself. I don’t see myself doing this forever. When looking at the long-term possibilities, there is a significant opportunity to grow this business, but I also need to ask myself if that’s the right direction for me in the long term. I’m not particularly interested in writing a book, like many other personal finance bloggers have done. I love writing and building communities, and that’s been the core of what I’ve been doing since the early 1990s; I was just lucky to apply these interests to personal finance at the right time — a time I needed it from a personal perspective and a time at which the world would suddenly show a growing interest in independent financial voices.

It’s important to know and understand life goals before talking with a financial planner in order to devise a plan that matches those goals. When I left the non-profit arts management world in 2001, my dream was to re-enter when I was in a better financial situation. And while I thought it was an impossibility at the time, I liked the thought of starting a foundation if I ever found myself in the position to do so, never thinking I would have that opportunity. Today, I’m not convinced that is the right path for me. For now, I plan on continuing what I’ve been doing, but working harder to identify where I’d like to see myself in twenty years.

Of course, people set goals all the time, only for life’s circumstances to move in a different direction. All the best planning in the world can’t take into account changing interests and desires. Regardless of my contemplation over goals, I met with Vanguard’s financial planner. I came away with a good strategy that I can use for my investments while mapping out my future. He also helped me understand why, given the option and a desire to have tax-efficient bonds in your portfolio, it’s better in the long term to have bonds in accounts like 401(k)s and any stock funds in taxable accounts, the opposite of what I thought would be a good tax strategy. This is an idea I’ll share in a future article. Update! Read more about the investing strategy I discussed with the Vanguard financial planner.

The financial planner I spoke with is not paid by commission. He understood I subscribe to the index fund philosophy, and recommended only index mutual funds — and only four specific funds for the right diversification and asset allocation that will allow me to likely perform better than a savings account, invest for the long-term, and give myself a cushion to think about the next steps in my life.

Here are some interesting articles I came across this week, including one of my own published elsewhere.

Earlier this week, I wrote an article for Forbes about start-up entrepreneurs looking for capital funding. In some instances, starting a small business can require some money up front, and I’ve offered some suggestions for coming up with the funds. I’ll be writing for Forbes more often, and I’ll point out when those articles are published. On the same topic, don’t miss last Sunday’s podcast featuring a venture capital firm targeting entrepreneurs within Generation Y.

On Monday, Briana from 20 and Engaged hosted the latest edition of the Carnival of Personal Finance, which included last week’s guest article that asked, Could you Survive at the Poverty Line? This guest article from Your Finances Simplified attracted some media attention; the author will be appearing on WINA Morning News, a radio show in Charlottesville, Virginia, live at 7:45 AM on the east coast. The radio station also streams online, so you can listen if you’re outside of the broadcast area.

Sam from Financial Samurai notes that credit card usage has increased. For the last few years, a good percentage of American consumers put away their credit cards in what appeared to be a New Frugality. Experts asked each other whether the recession would breed a new generation whose philosophy was rooted in frugality.

While it’s a generalization, it’s fair to say that those who lived through the Great Depression had a good understanding of saving and buying what they need without relying on credit. The recession might have fostered a new generation with similar ideals, and many authors we’ve featured on the Consumerism Commentary Podcast have expressed their belief in a fundamental long-term shift in attitude, but that doesn’t seem to be the case. People have been returning to credit whenever it is available.

The Jenny Pincher describes the difference between making money and becoming wealthy. It’s all in the mindset. I agree with the article, but I like to step back once in a while and look at the big picture. Whether making money or becoming wealthy, you should have goals, and these goals should be in your mindset at all times. As I mentioned above, I’m working on defining my own long-term life goals, but I know that any goal itself is not related to money. Money is a tool to help put goals within reach or extend my goals to have a larger effect, but it should not be a life mission to die with the biggest bank account balance.

The original version of this article, Meeting With a Financial Planner From Vanguard Flagship Services, is copyrighted by Consumerism Commentary.

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People frequently ask me to share the best piece of financial advice I’ve ever received. Most recently, this was a common theme at the Financial Blogger Conference in Chicago. One company in attendance, creditcards.com, filmed and edited a video of various personal finance bloggers sharing their best piece of financial advice. I think it’s important for people to share what has worked for them, and their inspiration, as they succeeded in improving their financial conditions.

I find it difficult to remember my attitude towards money as a teenager. I just didn’t think about it often. I understood the importance of earning an income, I had a bank account, and I had occasional jobs as I was an older teenager, but I never placed any emphasis on money management. I didn’t think about budgeting, investing, or looking for income opportunities because I was mostly concerned with my extra-curricular activities first and academics second. I don’t recall my parents ever making money a real issue, and I’m fine with that; if kids can be protected from the added stress of financial management until they’re older, they’ll do a better job of making the most of their adolescence.

But I did sail through college and my first few jobs without thinking about my financial condition, and I eventually paid for it. I had student loan debt, credit card debt, and thanks to some other mistakes, unpaid speeding tickets, a suspended driver’s license, an auto insurance surcharge, and many other expenses and debts I could have avoided.

I didn’t always get along with my boss, but he was a leader whose primary responsibility included motivating a group of 128 talented teenagers and young adults through monthly weekend rehearsals during the fall, two-week camps during the spring, and a seven-week tour across the country during the summer. It was a music program, but it also presented the group of students with the opportunity to improve themselves and their approaches to life, with lessons that would stick with them and inform how they live each day in the future.

The advice that has stuck with me the most, although it didn’t sink in until years later and I didn’t recognize it at the time, isn’t a piece of financial advice. It’s advice about life, attitudes, and philosophy that can be applied to personal finance. While I don’t remember his exact words, it boils down to this: Every moment is a choice.

There’s nothing unique about this idea. The concept has been used by motivational speakers, like Patch Adams and Wayne Dyer who focus on making conscious life choices, and by others who see this idea as a call to connect better with a supreme being of some sort. I am not a big fan of motivational speakers or preachers, so I carefully select concepts that have meaning to me, allowing myself to think independently. I dismissed the idea that sleeping through an alarm clock was a choice. I dismissed the idea that arriving at the office late due to a traffic jam was a choice. I didn’t even stop to consider that my financial condition, thousands of dollars in debt, was a choice.

It wasn’t until I was out of a job and had no place to live that I started to reconsider my approach to life. I’m forever grateful to my father, who helped me re-start my life from a better position with financial assistance, and to his long-term girlfriend, who allowed me to reside in her house while I changed the direction of my life. My time there gave me the opportunity to look at the choices I made, accept responsibility, and move forward with a new approach. I took the idea that every moment is a choice and applied that to my finances.

• I started paying attention to my finances. There’s a moment in the film The Matrix where Neo, the main character, accepts that he is “The One” and finally sees the world around it for what it truly is. This is a powerful awakening. I saw that I was in control of my life, and in order for me to be in control of my finances, I needed to know where I stood and where I was going.
• I made decisions that improved my financial condition. Recognizing that without a car, my options were limited, I found a job that was accessible by train. It wasn’t an ideal job, but I eventually made it my own. With income, I was able to save, and I moved out as soon as I could to avoid being a further burden on family.
• I educated myself. I started reading more about managing money, particularly the Motley Fool discussion board that focused on living below your means. This eventually led to me creating Consumerism Commentary as a place to track my financial decisions — the choices I was making to improve my life.

When you don’t live as if every moment is a choice, you leave decision-making up to the world around you. You are subject to the whim of chance, and if the outcome isn’t what you’d like, there is always an excuse. There is always some way to blame your circumstances. Here are some of the excuses I’ve used to avert responsibility in the past:

• “The road was closed due to a car accident.”
• “I’m not feeling well today.”
• “I didn’t know about this bill.”
• “My car broke down.”

All of the above may have been true when I said it, but they are results of choices I made — the choice not to anticipate road closures or live closer to the destination, the choice to keep myself healthy, the choice to manage my finances and organize my bills, the choice to take care of my vehicle properly. Yes, sometimes there are forces beyond one’s control, but for the most part, the choices we make can make those external forces less relevant.

With this article, I have a choice. I could use my advice to deliver a direct motivational call for readers to take an active role in their lives my looking at every moment as a choice, or I could present the idea of every moment being a choice as a concept that worked well for me, and leaving the choice of whether to accept this approach up to the reader. I’m not a fan of motivational speakers, so I choose the latter.

This idea isn’t just about finances, it’s a philosophy that helps anyone become more involved in their life. Life is short, and taking ownership and responsibility adds to the reward you feel with each success and the drive to improve after every failure. It’s a life philosophy but it ties so well into personal finance. I wish I had come to this conclusion earlier in my life, but if my past experiences were to be any different than they are, I’d be a different person in some unknowable way today.

What’s the best financial advice you’ve ever received?

The original version of this article, The Best Financial Advice I’ve Ever Received, is copyrighted by Consumerism Commentary.

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The following is a guest post from Neal Frankle, a Certified Financial Planner in Los Angeles who owns the financial blog Wealth Pilgrim. Neal has been a financial planner for the past twenty-seven years and is writing this article on Consumerism Commentary to share what he has learned from his experiences with clients over these three decades.

Even if you’ve been pursuing in your career for only a couple of years, you’ve already learned a great deal about your profession and people in general. I’ve had the same experience. Twenty-seven years ago, one of the small business ideas I had was to become a financial planner. And over that period, I’ve learned quite a few lessons about Wall Street, my clients, and myself.

What I’ve learned about Wall Street

Everything you hear about Wall Street isn’t true –- but most of it is. I’ve found that the higher up you go in management, the more detached and greedy “the machine” becomes. In fact, I’m astounded by the depths to which some firms go to enrich themselves at the expense of investors. Having said that, I must say that I’m not sure this attitude is any different from other industries.

Since I spent very little time working in corporate America I don’t know this for sure, but my guess is that all large corporations encourage political jockeying and self-serving behavior. Wall Street is no different. Take the index annuity product as an example.

When these babies were first introduced, they were some of the best investments I’d ever seen. They allowed investors to participate in growth when the market was good and protected investors from declining markets. But over time, the fat cats got wise. They realized that they could play with the way those indexes were calculated and thereby keep more profit for themselves at the expense of investors. Now, index annuities are terrible investments. This is just one of many examples.

I’ve also learned that competition sometimes works, and the mutual fund industry is a great example of this. Mutual fund fees and expenses have been dropping relentlessly over time as competition increases from Exchange Traded Funds. In short, in the debate between exchange-traded funds and mutual funds, ETFs and index funds are wining hands down.

Last, I learned that the fee structure an advisor uses says a lot about the relationship clients are going to have with the advisor. This may be self-serving because I’m a fee-only advisor. Fee-only advisors are compensated if and only if they serve clients over time. That doesn’t mean they’re going to do it, and it doesn’t mean they know how to do a good job or that fee-only advisors are qualified. Anyone can become a financial planner.

Over the long-haul, advisors generally don’t stay in business if they don’t deliver. That’s not the case with salespeople earning commissions. They get paid up front, and there is a disincentive to serve clients. Not every commission-based advisor is a shyster of course. But when someone is compensated to sell rather than advise, that’s what they’re going to do.

My experience is that commissions put advisors and clients on opposite sides of the table. Generally, the reverse is true when it comes to fee-based planners. Again, this is a generalization and there are many exceptions on both sides of the equation, but for the most part, I’ve experienced this to be true.

What I’ve learned about clients

I’ve learned that people dislike losing money more than they enjoy making money. This aversion to losing money is unfortunately and paradoxically the very reason why many investors get wiped out. If someone has no ability to absorb investment losses, they’ll do one of two things. One potential response is to stick all the money in the bank for protection. Over time, this is a losing proposition.

The other response is to invest emotionally. When the market feels good, this investor becomes aggressive. When the market feels scary, this person goes into cash. This is a perfect recipe for disaster, of course. It’s called buying high and selling low, the opposite of how someone succeeds with investing.

I don’t believe in the buy and hold strategy. There are other strategies that are more market-sensitive, and these can help investors mitigate losses and take advantage of good opportunities. That’s how I manage money, but the method I believe in is far from perfect. It is a system and not an emotional reaction. This, like any other investment methodology, has its flaws.

Some people will tell you me that they want to be aggressive investors. That may be true — until the market turns against them. Just as I need constant education in areas I know little about, some people really need to be reminded frequently about the trade-off between risk and reward. Client understanding and education is not a one-time event.

Few clients have a financial plan and even those who do rarely execute it. They aren’t clear on their objectives and they don’t know how much they’ll need to reach their goals. (Do you know how much money you need to retire?) This is a real shame. I’ve seen people with very low salaries living their dream life because they formulated a plan and executed it, and I know multi-millionaires who are absolutely miserable and live in fear. That’s because they don’t understand the basics of financial planning and refuse to learn it.

What I’ve learned about myself

I’ve learned a great deal about myself over the last quarter century as a financial planner. The most important lesson I’ve learned is that I can’t do better than my best. I used to be harder on myself than any of my clients were. In fact, during the 2008 market melt-down, clients called because they were worried about me, not their money. While my clients’ investments happened to be performing better than the market that year, we still lost money. I didn’t like that and I felt as though I had let my clients down. I was mistaken to feel this way, but I felt that way nonetheless.

I’ve learned that if I did my best, that was good enough. If it wasn’t good enough for a client, that was the client’s problem, not mine. I’ve learned that most people are good, honest and responsible. Let me tell you, when you deal with a person’s money you really get to know them. As the years pass, I’m more and more impressed by the inherent good I see in others.

I have no plans to retire. I enjoy what I do too much. I believe that the future has a great deal of opportunities ahead, and its share of challenges, as well. The most important thing I’ve learned is that I have no idea what’s coming down the pike. That’s what makes being a financial planner so fascinating.

What have you learned about yourself, others and your profession over the last several years? Were you surprised?

The original version of this article, What I Learned as a Financial Planner, is copyrighted by Consumerism Commentary.

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This is a guest article from Kathryn. Kathryn has been working in the financial industry for 11 years. She is the founder and author of Kathryn’s Conversations, a money and lifestyle blog for people who like to get stuff done. This article continues the series covering working with financial planners and advisers.

First dates are exhilarating. You’ve met someone you like, you hope they like you, you get home and start wondering when the next time you’ll see them is; you might even search the Internet for information about them.

After a few more dates, you decide to commit, and the brainwashing is in full force. Life is so much better since I’ve met this person; he’s my savior. Your own ideas and opinions slowly fall by the wayside while their ideas and opinions become the way forward. You don’t second-guess them on anything because you’re wrapped up in love; they must be right about everything.

When you meet and then select a financial planner, you’ll have these same feelings. Financial planners have a way of making you feel like the rest of your life is now somehow safe, and you never have to go on a bad date again, ever. But just because you have a financial planner, it doesn’t mean you can put your financial plan on auto-pilot.

Sure, he’s the expert, but remember that you’re his client and you’re paying him to help you. You’re not paying him to intimidate you or give you cookie-cutter information that you could find online without his help.

Don’t check out mentally when you find a planner. Keep your head in the game. It’s your job to set the tone of the relationship from the beginning.

Here are a few things to be aware of that will help your navigate you relationship with your planner.

1. Your planner will position himself as the authority figure: you the student and he the teacher. One common way he accomplishes this authority is by wearing a suit. A study shows that when a jaywalker is wearing a suit, three and a half times as many people will follow him across the street than when he is in street clothes.

   What does this mean for you when you’re sitting across the table from your planner who is wearing a suit? You’re more likely to listen and take their direction because their suit alone will make you feel like they’re the authority; you’re less likely to challenge their suggestions.

   Solution: Separate the planner’s suggestions from his suit. If he weren’t wearing the suit, would you still implement the suggestions he has?

2. Your planner will talk fast when explaining something complicated. People talk fast, whether intentionally or unintentionally, because you’re more likely to believe someone when you don’t understand the topic. In short, The argument is more believable when the expert talks fast because you don’t have time to process (and rebut) his idea or piece of information. You comply with his suggestion, and you move on to the next topic.

   Solution: Tell your planner to slow down. Good planners can break down the most complicated topics into something simple. If they can’t speak slowly to help you understand a topic, there’s a good chance your planner is a bad communicator, so don’t get frustrated with yourself. Remember his job is to communicate with you, not intimidate you!

3. Your planner will have balanced opinions and suggestions. He will suggest one thing and provide the counter argument to their suggestion to be fair and balanced. This would boosts his credibility because he would be hiding nothing. Balanced opinions will still most likely lead you to the option they’re suggesting, which isn’t necessarily a bad thing, because they’ve earned your trust by not being one-sided.

   Solution: When they provide balanced opinions, keep in mind you have the responsibility to select the option that works best for you, not the option that you were persuaded into doing as a result of this tactic.

4. You’ll like your planner. After all, you went through a selection process and chose him. Like any relationship, you’ll like them even more if they’re good looking, if they compliment you, and if you have things in common with them. Your planner will most likely give you a few compliments and find ways to connect with you, so don’t be surprised if there is ample small talk during your first official meeting. They’re working to strengthen their bond with you, and that’s good. Just know that you may be more reluctant to challenge your planner when you feel a connection to him.

   Solution: Enjoy the connection you have with your planner, but keep in mind that your feelings for him shouldn’t influence whether you implement any particular suggestion. Just because you like them doesn’t mean all their ideas are suitable for you.

Keep these suggestions in mind as you’re developing your relationship with your planner. Doing so will help make sure you continue to think for yourself and share ideas that you have. When I lived in New York the rule of thumb was: “You can always find a better boyfriend, a better job, and a better apartment.” Let’s add on: “You can always find a better planner.” There are lots of fish in the sea.

The original version of this article, Working With a Financial Adviser: Building Your Relationship, is copyrighted by Consumerism Commentary.

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This is a guest article by RJ Weiss, one of the youngest Certified Financial Planners at the age of 26 and the founder of the blog Gen Y Wealth. You can download his free Financial Freedom Blueprint to create your own financial plan. RJ Weiss is contributing to Consumerism Commentary’s series on finding and working with the right financial adviser or planner with this article about being prepared for your first working meeting.

You’ve hired a Certified Financial Planner, and you’re days away from the first meeting. It’s a very exciting time, as you imagine your bright financial future.

The first step to ensure that your initial meeting goes well is to gather the information you’ll need to form the basis of your discussions. In order to make a comprehensive financial plan, a financial planner must know where you’ve been, where you are, and where you want to go. Once your planner has this information, they can start to design a plan that gives you the best chance of reaching your goals.

The purpose of this article is to walk you through the information-gathering process for your first meeting with a CFP. Most financial planners will ask you for these documents either before or during your first meeting, but in my experience, it’s always better if a client shows up prepared.

The following are the eight things you need to have with you to be prepared for a meeting with your financial planner.

1. Net worth statement with recent account statements. A net worth statement is easy to make, and helpful to have. A simple excel spreadsheet sorted by assets and liabilities, is all you need. Consumerism Commentary offers a good net worth template for Excel that can get you started in the right direction.

   Along with your net worth statement, bring the most recent statements that match each account listed. Include your bank accounts investment accounts, including retirement accounts such as IRAs and 401(k)s, so you planner can review your entire asset allocation.

2. Statement of cash flows. A doctor can’t do their job without knowing your health history. Likewise, a financial planner can’t do their job, unless they know your monthly income and expenses. In other words, you need to prepare a budget.The more detailed your budget the better. At a minimum, break out your expenses between fixed (mortgage, utilities, insurance, car, food, etc…) and flexible (travel, eating out, subscriptions, etc…) from the last three months. Again, Consumerism Commentary has designed an income and expense report template that should do the job.
3. List of 401(k) investment options sorted by expense ratio. If you want to save your planner a lot of time, bring a list of your 401(k) investment options, sorted by expense ratio. You may need to look at the prospectuses for each of the funds offered in order to find the expense ratio, and if you have annuities-based funds, that information might be difficult to find.
4. Social Security statements. Bring the Social Security statement that you receive once a year and file away. If you can’t find your most recent copy, you can get an estimate online.

5. Your goals, including projected retirement age. Knowing when you’d like to retire is a tremendous help to your planner. One of the basic calculations your planner will help you out with is to see if you’re saving enough for retirement.

   Besides a retirement date, write down your other financial goals. Are you looking to save for college for a child or grandchild? Are you looking to travel more? What about buying or selling your house? A good financial planner will take you through this process during your meeting, but the idea here is to put some thought into it beforehand, so you know what you really want.. Life often goes in an unplanned direction, but being as clear as possible with your goals is the only way planners can begin to design a plan that meets your needs.

6. Tax returns and paycheck stubs. On more than one occasion, I have seen someone with high-interest debt, giving a free loan to the Government. One adjustment to their W-4, and all of a sudden, this person can now start paying off their debt. This is just one good example of why you should bring your recent tax return and paycheck stubs. Also, many people don’t really have a good understanding of how much income they earn. In my experience, when you ask how much they earn, they tend to round up, making precise planning difficult.

7. Insurance information. As a Certified Financial Planner with an insurance background, I know firsthand that no one likes paying for insurance. Reviewing insurance documents may not sound as exciting as planning for an early retirement, but it’s just as important.

   The ironic thing about insurance planning (because nobody likes to pay for it) is that people are often over-insured. As a result, there is a good chance a client can save a tremendous amount of money by reviewing their insurance. For example, someone who hasn’t been to the doctor in a few years but still pays for a health insurance plan with a low deductible could benefit financially from changing his coverage options. Or, someone might pay $200 a year to insure her computer, but won’t spend that much for a term-life insurance policy.

8. Benefits package. If your employer offers benefits such as health, life, dental, disability, dental, or vision insurance, bring coverage information pertaining to each plan. You probably received a packet at open enrollment with all of this information. Also bring the rest of your benefit information such as 401(k), pension, FSA, employee stock option plan, profit sharing, tuition reimbursement, child care, and any other benefits offered by your employer.

I applaud you for working with a Certified Financial Planner. The steps above may sound tedious, but it’s for your benefit. A client who shows up prepared shaves off hours off of the total time it takes to put together a comprehensive financial plan. If you’re working with a fee-only planner, that results in immediate savings to you.

Best of luck.

The original version of this article, Working With a Financial Adviser: How to Show Up Prepared, is copyrighted by Consumerism Commentary.

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Over the past few weeks, I’ve been working on a series of articles about working with financial planners and advisers. The information about this aspect of the financial industry can be confusing, considering the variety of certifications, similar-sounding services, and hidden agendas. The first thing to consider is whether to work with a financial planner at all. For some, it’s a matter of convenience, for others it’s a desire to trust a professional who dedicates their life or livelihood to learning about handling finances. Once you decide to seek a professional’s assistance, breaking through the myths and finding the right partner is essential.

Part 1. Whom do you trust?

Financial planners, financial advisers, investment advisers, and asset managers all have different responsibilities, different backgrounds, and different foci. In addition, the names are often used interchangeably. This leads to a confusing array of professionals in the finance industry. Getting down to the responsibilities of each professional helps match you with the right service for your needs. In most cases, Consumerism Commentary readers are interested in financial planners above all else. Read more.

Part 2. Demystifying certifications.

From Certified Financial Planner (CFP) to Chartered Life Underwriters (CLU), financial planners and advisers can choose from among a set of certification organizations. Each certification has a different meaning, different education requirement, and different experience requirement. Some certifications require professionals to follow a code of ethics, while others don’t. Finding a planner with the right certification is crucial for understanding his or her role in your finances — and his or her motivation. Read more.

Part 3. Selecting the right planner.

Once you’ve used certification to narrow your search down, these suggestions will help you create a long-term financial relationship with the right professional for you. Before you walk into a meeting with anyone, there are specific actions you can take to verify the suitability and quality of your potential planners. Read more.

Part 4. How to prepare for the first date.

When you’ve narrowed the field of potential planners, start dating. In other words, take advantage of the free initial consultation that all fee-only planners should offer. Use this as an opportunity to get to know how each professional works and whether they understand your situation and your needs. There are several essential questions you must ask your potential planner that will help you understand, among other things, what drives the planner’s recommendations. Read more.

Part 5. How to show up prepared.

Now that you’ve scheduled your first working meeting with the planner you’ve selected, the process will be faster when you arrive prepared. This guest article by Certified Financial Planner RJ Weiss will help you understand from the professional’s perspective what you can do to ensure the planner will be able to create the most effective and appropriate plan with you. Read more.

Part 6. Build your relationship.

When you work with a financial planner, you have a long-term relationship. Kathryn has worked in the financial industry for eleven years. In this article, she offers suggestions for navigating this relationship with an eye towards the psychological aspects of working with someone who has an advantage over you when it comes to financial knowledge. Read more.

Part 7. What I learned as a financial planner.

Education is a two-way road. While clients learn from their financial planners and advisers, professionals learn about their clients, about the Wall Street financial industry, and about themselves. In this article, Certified Financial Planner Neal Frankle shares what he’s learned from almost 30 years as a professional. Read more.

Have you ever worked with a financial planner or adviser? I’d love to hear your stories. Also, if you are a professional and the finance industry and have stories to share about your experiences with clients, please let me know.

Photo: Will Scullin

The original version of this article, Working With Financial Planners and Advisers, is copyrighted by Consumerism Commentary.

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This is a series on finding, selecting, and working with financial advisers or planners. Recently, I evaluated the types of financial professionals and described the common certifications to help readers start on the right track. I also wrote about selecting the right planner. When you’ve narrowed your choices to a few, you’re ready to start meeting planners in person to determine if who is the right fit for you. A series of “first dates” can be daunting, but here is what you need to know.

The right financial planner will stick with you for a long time. Your relationship with a financial planner is long-term, like your relationship with a dentist or family doctor. Through time, these professionals get to know you better and understand your needs, desires, and means. Selecting the right financial planner takes effort and care, much like selecting the person you intend to marry. Finding your potential spouse is not an easy task, and often requires a number of first dates before connecting with the best match. It’s the same with financial planners — you don’t want to lower your standards when it comes to managing your money.

By now, you’ve narrowed the list of potential planners down from hundreds in your local area to fewer than ten, or better yet, fewer than five. It’s time to call the planners, introduce yourself, and schedule a free consultation. Any planner who is worthwhile will be willing to meet you for a short time, no less than an hour but no more than two, for free. This “first date” is your opportunity to interview the professional. He or she will be working for you, so this is part date, part interview, the purpose of which is to determine if there is the right fit.

Different people need different types of help from a financial planner. Some need to be told when they’re making decisions that will hurt their finances, and some will be turned off if it seems like the planner is judgmental. My friend whose question inspired this series seemed concerned that she would be criticized for making choices that may not have been in her best financial interest. While some people seeking planners need a bit of a kick to get on the right path or need to have some sense knocked into them, this type of motivation does not work for everyone. Your initial consultation will let you know if your personality matches that of your planner.

The Certified Financial Planner Board of Standards offers a list of ten questions that you can ask your planner during your initial meeting, but if you’ve done your research, you may already know the answer to some of these. You can see the full list in this brochure [pdf], and they include what you may already know, like qualifications and experience. It would be good to hear this information directly from your planner, but I think there are a few questions that are worth exploring in depth.

Number 4: What is your approach to financial planning?

This gets to the heart of a financial planner’s philosophy. You may find that her philosophy does not match yours, or that he offers some interesting insight that you have not considered. Find out about the planner’s typical clients, in terms of income range, marital status, and occupation. If you’re an artist, has she worked with other artists before? What challenges might be addressed differently with artists than with, for example, marketing executives?

Number 6: How will I pay for your services?

Pay structure is very important. Planners can work as fee-only, commission-based, or somewhere in the middle. With commission-based payments, planners are compensated by third parties, like brokerages, investment managers, or insurance companies. When a planner is working on a commission and recommends a product, there is always the question of whether the recommendation is in your best interest or your planner’s best interest.

Fee-only planners, on the other hand, will charge you a fee to meet with them. It will most likely be an hourly fee, a flat fee, or a percentage of your assets. Fee-only planners are paid the same regardless of whether they recommend an actively managed mutual fund or an index mutual fund. While this doesn’t guarantee the planner makes the best suggestions to you, but it does help satisfy the concern that they’re making their recommendations based on their potential income.

Other planners charge fees and receive commissions, and planners who do this often call the practice “fee-based compensation” to semantically align their practice with fee-only planners. Keep in mind that any commission means there is a salesperson inside who needs to be motivated by their own financial gain. This isn’t always bad. Many times, a planner’s financial gain coincides with his client’s financial gain, but it isn’t always the case.

Number 10: Have it in writing.

Get any terms the planner is offering in writing. This makes it easy to refer to if you have any questions.

Not mentioned in the brochure is the concept of fiduciary responsibility. It’s best to work with a planner who is obligated to make decisions that are in your best interest at all times. A fee-only planner is more likely to bind himself to fiduciary responsibility, but it is not guaranteed. Ask the planner about her fiduciary responsibility and ensure this is outlined in the agreement.

You may go through this process with the first planner you schedule a meeting with and decide he or she is a good fit. If you wouldn’t marry the first person you dated after your first date with that person, consider meeting a few more planners to get a feel for different style, approach, and professionalism. It may take some time, but when dealing with personal finance, there aren’t always “right” answers and “wrong” answers; you want to find the planner who sees the world the way you do and gives you confidence that he is the right person for your team.

Thanks to RJ Weiss, a Certified Financial Planner and the blogger behind Gen Y Wealth, who helped contribute information to this article. RJ will be providing a guest article later in this series.

The original version of this article, Working With a Financial Adviser: How to Prepare for the First Date, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is a series on finding, selecting, and working with financial advisers or planners. Recently, I evaluated the types of financial professionals and described the various professional certifications to help readers start on the right track. This article looks at the research you can do to narrow down your choices, getting you to your initial meeting.

When you select a financial planner, consider it like entering a long-term relationship. If the professional isn’t right for you, you don’t want to waste your time on more than a first date. The best relationship is with someone who understands you — your goals, your situation, your background, your needs, and your desires.

The certification

Just like you have non-compromising criteria for potential spouses, such as religion, political leaning, or sex, you shouldn’t settle for a less than stellar planner who doesn’t meet all of your needs. Start with the certification to narrow down your pool of potential planners.

For overall financial planning advice, the three best designations are Certified Financial Planner® (CFP), Personal Finance Specialist (PFS), and Chartered Financial Consultant (ChFC). Requiring a professional to have one of these three designations narrows the field considerably, eliminating possibly hundreds of individuals who call themselves financial planner in your vicinity.

Even after this elimination, you could have hundreds of listings. A quick search helped me determine that within five miles of Princeton, New Jersey, there are at least 140 Certified Financial Planners, Personal Finance Specialists, and Chartered Financial Consultants. The number would double if I expand the search to fifteen miles.

The personal recommendation

It’s easier to use your social network for recommendations for dates. Your close friends understand your personality and might be able to lead you to someone who would be a good match. I found my dentist and my accountant through recommendations by friends and family, and so far, the recommendations have proven to be good. More people visit dentists regularly than financial planners, so you might have to dig deep into your network to find a quality recommendation.

With a personal referral, there is a good chance that the friend who recommends the professional has had a positive experience — and a positive experience from a friend or family member carries much more weight than a positive experience from a stranger posted on an online review website.

Online evaluation

That doesn’t mean you should ignore information online, however. Before you schedule a meeting with a financial planner, whether recommended by a friend or not, check to ensure their certification is in good standing and they have not had any disciplinary actions. You can find this information on the websites operated by the certification boards — the Certified Financial Planner Board of Standards, the American Institute of CPAs for PFSs, and The American College for ChFCs.

Don’t stop there. The Securities and Exchange Commission keeps records on financial advisers who offer investment services. Find the planner’s Form ADV and read both parts it carefully. This will tell you if the financial adviser is paid by fees, commissions, or both. This is an important issue because you want to ensure that the advice you receive is not influenced by the planner’s own financial gain. A “fee-only” planner helps make that point. A “fee-based” listing, where the planner’s income is partly a fee and partly commission, could be a red flag.

If the financial planner isn’t registered with the SEC, and not every planner needs to be, check with your state to ensure their business can legally operate and does not have any disciplinary actions not already noted by their certification board.

The connection

You can learn much about a person by looking at their online presence. You probably wouldn’t go on a first date without searching the Internet for mentions of their name, and the same should be true about your financial planner. You should find professional results. While online marketing isn’t the final determination of the quality of a financial professional, you might find some red flags. The financial planning firm should at minimum have a website offering business information, but look for the additional steps that planners often take to increase their professionalism online.

• Does the primary planner operate a blog? Planners with blogs are not necessarily better than planners without blogs, but by reading a website updated frequently with information relevant to financial planning, you might be able to determine that they have a passion for their work. Conversely, if you find a personal blog that is not at all professional, and are sure the blog belongs to your financial planner, you might save yourself from wasting your time.
• Is your primary planner published? If your planner has written and published a book 00 not necessarily an e-book, this could be a good sign. If he or she regularly contributes to major publications, there is a good chance the planner has been vetted by editors to be knowledgeable. Again, this doesn’t ensure the financial planner will be the best fit for you, but it’s a good sign.
• Does the primary planner have an extensive LinkedIn network? Like it or not, LinkedIn is the de facto standard social network for online professionals. While LinkedIn recommendations are often worthless, a business professional should ensure that their LinkedIn profile reflects the image they wish to project. On the other hand, if the professional is more active on Facebook, spending most of their free time playing FarmVille, consider whether you want this person to be providing financial advice to you. Anyone is free to do what they like with their free time, but I would consider someone who was concerned with their professional online identity over a planner who didn’t care.

The first date

After you’ve done your research in advance and possibly discussed your financial planning needs via phone and email with a select number of finalists, it’s time to meet in person. Financial planners should offer a free initial consultation. Use this as an opportunity to interview the planner, asking about their code of ethics, fiduciary responsibility, compensation sources, experience, and financial philosophy. You’ll have the chance to describe your situation and determine how well the planner listens and understands your unique circumstances.

The first date with your financial planner is a complicated interaction, and you may benefit from not immediately entering a relationship from the first planner you meet with. When getting ready to involve someone else with your finances, it helps to take the process slowly.

There is more that goes into this initial meeting, and that will be the topic of a future article.

The original version of this article, Working With a Financial Adviser: Selecting the Right Planner, is copyrighted by Consumerism Commentary.

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This is a series on finding, selecting, and working with financial advisers or planners. Recently, I evaluated the types of financial professionals to help readers start on the right track. This article looks at the varied professional designations and certifications.

With a number of organizations granting different types of financial certifications, it’s easy to get lost in a sea of letters. Having initials after your name on a business card helps those you meet know that you’ve been able to pass some type of testing to earn your certification, but the content and extent of testing changes depending on those initials.

The public is generally aware the type of education someone might have when he suffixes Ph.D., M.D., or M.B.A. to his name. There are different requirements for these degrees depending on the institution that awards them, but with professional certifications like CFP®, CFA, and CPA, only one organization administers the certification for each. This way, customers and clients can be sure they are receiving the specific service they require. That depends, however, on the public understanding of the certifications.

The Certified Financial Planner® (CFP) designation is granted by the Certified Financial Planner Board of Standards. In order to become a CFP, an applicant needs to take a variety of courses focusing on overall financial planning and specific areas of finance, pass an examination, have experience in the field, and abide by a code of ethics. Once someone has been granted the certification, he must focus on continuing education and continue to pay license fees. This is the primary designation for financial planners, and if you plan on working with an adviser to help you with your overall financial picture, the CFP certification helps you feel confident that the professional you hire will help you make the best decisions for you.

Chartered Financial Analyst (CFA) is a certification administered by the CFA Institute. The CFA designation is awarded to those who, like Certified Financial Planners, have relevant education and experience. Chartered Financial Analysts are not financial planners, for the most part. The certification focuses on quantitative analysis, economics, financial reporting, corporate finance, and portfolio management. There is nothing wrong with having a CFA on your team of advisers, but their focus is not your total financial package. You’re more likely to find a CFA working for a corporation than for an individual.

Certified Public Accountant (CPA) is a certification granted by the states and territories. There is a standard examination that applicants must past, uniform across all states. The examination is designed by the American Institute of Certified Public Accountants (AICPA), but certification does not require membership in this organization. Like the other certifications, it’s not enough to pass the exam. To qualify, one needs the appropriate education and experience.

In some states, the experience needs to be in public accounting, specifically. Public accounting focuses on what companies or other entities must report about their finances to the public, like annual reports. This may or may not be relevant to your personal needs. When I shopped for a tax accountant for my business, I did not deem the CPA designation to be necessary. If my business were to have shareholders other than myself, or more specifically, trade on a stock exchange, the CPA designation would be more appropriate.

CPAs can also earn an add-on certification, Personal Finance Specialist (PFS). Personal Finance Specialists are CPAs who have had additional training and experience with financial planning. Many who are certified with the PFS designation also have the Certified Financial Planner designation. (He who collects the most letters must win.)

Chartered Financial Consultant (ChFC) is a designation similar to Certified Financial Planner, but the requirements are somewhat different. The ChFC certification requires more coursework, but there is no examination. The coursework focuses on comprehensive financial planning — the type of guidance most households look for when they seek financial advise.

This isn’t the end of financial designations. Chartered Life Underwriters (CLU) are insurance agents, and not necessarily trained to look at a client’s overall financial picture. Certified Investment Management Analysts (CIMA) focus on asset allocation and other aspects of portfolio analysis. There are dozens of other designations, each focusing on a specific area of finance.

The certification is only one part of your evaluation of a potential financial adviser or planner. The existence of the right certification does not guarantee that a professional will be the right match for your needs. For most family financial planning needs, look for the CFP or ChFC designations.

The original version of this article, Working With a Financial Adviser: Demystifying Certifications, is copyrighted by Consumerism Commentary.

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This is a new series on finding, selecting, and working with financial advisers and planners. A few days ago, a friend asked me on Twitter whether I had any articles on this topic. While I had a few old posts marginally related to financial advisory, I didn’t have anything in-depth.

People consider working with financial advisers for a variety of reasons. Some individuals are aware that in the near future they will be receiving more money than they are accustomed to dealing with. Some are having financial difficulty and want to work on a solution. Others are looking for an expert to help them confirm the decisions they’ve made are valid when planning for their future. Even more are preparing for an upcoming life change and are looking for guidance about what financials issues they should be concerned with. Some customers of financial advisers want someone to manage their investments.

Financial advisers come in different flavors, and it’s important to make sure once you start looking at your choices that you’re looking at the right group of professionals. Some of these professionals focus on selling investments and insurance, while doling out financial advice as they go about their sales pitch. Others have a role just to advise, providing you the information that is in your best interest, while leaving the final decisions up to you.

• Investment and insurance salespeople are often called financial advisers, but can also be called brokers, insurance agents, financial managers, and investment advisors. Walk into any major bank branch and they might have a few on staff. They will offer financial advice, but they will steer you towards their company’s products and other products for which they receive commissions.
• Financial planners fall into another category of financial advisers. Their goal is to help you make decisions, and they will help you evaluate at your entire financial picture, not just your investments. They often, but not always, carry a designation from the Certified Financial Planner Board of Standards, Inc. A future article in this series covers this designation and others.
• Asset managers are also called investment managers, wealth managers, wealth advisers, or Registered Investment Advisors. You hand them your money and sit back. They may not call themselves financial advisers, but they’re worth noting to help alleviate confusion. Asset managers will make investments for you — and if you have enough money, they might include your funds on investment opportunities not typically available to the public. They could have a focus, like private equity or hedge funds, or they could place your investments in index funds — something you could do on your own.

With the last group of professionals, you take your money out of its current investments and turn them over to your investment manager. Asset managers usually take a percentage of your assets, such as 1% or 2%, each year. If you’re just looking for financial advisement, this is not the approach to take. You’ll want to work with someone in the second category above. The key word to look for is “fiduciary;” this is the requirement of a financial adviser to base their advice only on what’s best for their clients, not what will earn them most money through commissions.

Not all who call themselves financial advisers have fiduciary responsibility. Some have suitability responsibility, which means that their advice needs to meet a lower standard — their suggestions need to be an appropriate choice, but not necessarily the best choice. it’s important to determine whether the professional with whom you plan to work has fiduciary responsibility.

It’s best to avoid commissions-based advisers completely. Salespeople work on commissions. Financial advisers who have your best interests in mind usually work on a fee basis — perhaps an hourly fee, a flat fee for each session, or if you have a short-term need, a fee for one project. Rates of $100 to $250 an hour are not uncommon, and your geographic area will strongly influence your rate. If you foresee a long-term relationship with an adviser, some may prefer to be on retainer. Some financial advisers also charge a percentage of your assets, but there is an increasing trend to work with “fee-only” planners, who limit their fees to a flat rate.

Even though a financial adviser or planner can have a fiduciary responsibility to you, the individual who cares the most about your financial situation is you. No one else can fully understand and appreciate your life’s particular situation. While you can do well by working with an effective financial professional, whether or not you succeed with your financial goals is mostly up to you. Even financial planners have something to sell, so keep this in mind when approaching your discussions with a professional.

Next article in this series: Demystifying Financial Adviser Certifications.

The original version of this article, Working With a Financial Adviser: Whom Do You Trust?, is copyrighted by Consumerism Commentary.

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Two interesting articles caught my eye recently. First, on Get Rich Slowly, J.D. Roth asks when it is okay to judge someone else for their financial behaviors. J.D. describes his encounters with two friends — one friend more frugal than he is, who judges J.D.’s spending choices, and the other friend struggling financially, trying to improve, but not making the choices J.D. would like to see.

The second article is on the blog My Journey to Millions. The author, Evan, expresses how people who refuse to change drive him nuts. His buddy is admittedly miserable but hasn’t made strides lately to improve his condition, and this is touching one of Evan’s nerves.

Both articles made me consider a person’s obligation to help improve someone else’s life by offering advice. First of all, I make an effort not to judge other people, and if I judge their decisions, I generally keep my opinions to myself. If a friend asks, I will gladly share my thoughts to an extent, but I will do so with caveats and disclaimers, just short of asking him to sign a release form.

I wrote about this earlier this year, offering suggestions for handling requests for financial advice.

When I see a friend making financial choices that could significantly hurt him or his family, I might offer some suggestions in a non-judgmental way, but I would only share at an appropriate time if I see that the friend might be open to some discussion. It is best to approach the subject as a concerned friend, not as a “financial expert.”

I don’t expect people to change. Major behavioral change requires a shift in approach or philosophy, and that’s not something that everyone is prepared to do immediately. Some people just like to express their frustration without looking for a solution, and I am fine listening for a while without outlining a path for them to follow. Even after hearing the same complaints for years, I won’t let myself be significantly affected by their decisions. It’s often not my business.

Adults are free to make their own decisions. I don’t control anyone’s choices but my own, so I try not to get upset if someone doesn’t follow my suggestions or doesn’t work to improve their condition even after expressing their dissatisfaction. While I would be thrilled to see my friends as happy and successful as they want to be, I would not want to be so far involved that their disappointment becomes my disappointment.

I can control the choices I make, so that is where I focus. Aside from the decisions I make that can improve the world in some small way, I try to accept the things in the world I can’t change.

The original version of this article, Worry About Only What You Can Change, is copyrighted by Consumerism Commentary.

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I don’t have to remind myself that I’m not an expert when it comes to money. While my choices have improved over the past few years, I still make mistakes at about the same rate I always have. Even recently, I thought I could outsmart the public and take advantage of Toyota’s recent bad news. I bought shares of Toyota Motors (TM) on January 28 with the impression that temporary bad news wouldn’t stick to a strong brand. That purchase hasn’t worked out well so far; the bad news keeps coming.

So I am taken aback when friends and family ask me for financial advice. I am not an expert. The concept of “expertise” is meaningless when it is possible for people to self-brand themselves as experts. Real experts don’t write dust cover autobiographical snippets calling themselves experts. They don’t solicit endorsements from authors they admire or recommendations from their friends on LinkedIn. Expertise can only be observed from the outside.

What if Carl Jung were alive today? Would he be a recurring guest on Oprah with a series of books and seminars to sell? Would Adam Smith, if creating his best work in the early 21st century rather than the 18th century, focus on building an email distribution list for marketing a series of products to his customers?

Since I am not an expert, I don’t offer financial advice to my friends. Even though most do not read Consumerism Commentary on a regular basis, they all know I write about money every day. They may not realize that I do this not because I have all the answers and I need to share my knowledge with the world, but because I always have questions and I use Consumerism Commentary as a resource and sounding board.

Every once in a while, a friend has a question about which they believe I can help. I’ve been asked questions such as whether a Roth IRA is a good investment vehicle, whether I would recommend a bank’s forced savings program, and even asked to analyze someone’s complete retirement portfolio. Some questions are easier for a non-expert to handle than others.

I try to avoid even the easier questions. I want to help, but it’s not my place to tell my friends how to spend their money or how to invest. In the worst case scenario, I might offer suggestions that end up being detrimental down the road, and advice that turns out bad has the potential to disturb the relationship. Another way to lose friends is simply to present ideas someone just doesn’t want to hear.

Regular readers of Consumerism Commentary might be in a similar situation. An interest in smart money management is occasionally seen by outsiders as expertise. So here are some tips for handling friends who turn to you for financial advice.

1. Determine your friend’s true intent. Is he looking for someone only to listen to a complaint or is he willing to accept specific suggestions? This is one key to communication that would be difficult to interpret if you are not speaking in person. Sometimes, a concerned friend is looking for only confirmation that a purchase won’t have a long-term negative effect on their finances and not a detailed spending plan.

A friend’s willingness to talk about money is not an invitation for you to offer your suggestions. Look for specific questions directed to you and try to determine if the friend asking the questions wants truthful answers or just a friendly ear.

2. Redirect your friend’s attention to experts. If the question is simple, feel free to offer a few opinions. When a friend is looking for a quick recommendation for a new savings account, I usually start with ING Direct due to the bank’s simplicity, popularity, and level of service, but I might offer a few options that offer higher interest rates if I feel that my friend is open to more than just the basics. You don’t have to be an expert to handle this kind of request; opinions based on personal experience are generally welcome.

But when it comes to questions whose answers depend more on an individual’s full financial picture, like whether to invest in a Roth or traditional IRA, I stay away from making specific decisions on her behalf. I may offer some generalizations and examples, remind her that I’m not an expert, and suggest some resources that might help or a financial adviser who will take the time to analyze all the relevant numbers.

3. Don’t offer unsolicited advice. If you see a friend in financial trouble, it might be tempting to offer your help. It pains me to see a friend making poor choices and setting himself up for financial failure in the future. It is none of my business, however, so I won’t get involved unless he asks me for thoughts. Even when he does ask, I am very careful to stay as uninvolved as possible. There may be a point at which intervention is necessary, for example, if his financial choices hurt others in addition to himself. That should be saved for extreme circumstances.

I admit that I find it very hard staying silent when I overhear co-workers offer each other bad financial advice — but I stay out of the discussions.

4. Don’t lend money to solve your friend’s financial problems. Adding another obligation is usually a Band-Aid, not a solution. Your friendship will turn sour if your friend cannot pay you back, and you will be bitter when you see her spending money on anything other than repayment. Once you lend money, you don’t want to see your friend taking vacations rather than accelerating his credit card debt payment.

In the rare situation I’ve been approached by a friend needing a loan for any reason, I direct them to peer-to-peer lending services.

5. Remind your friend that your thoughts are only opinions. No one knows for certain what will happen in the future, and even when considering only the present there are few absolute truths. My financial opinions come mostly from my own experiences and somewhat from research. That should be similar to most non-professionals or even someone who considers himself an expert. Any one person’s experience might not fit the model of the mythical “average investor” or “typical American,” and I’m always careful to point this out.

It’s not worth the potential of ruining a relationship with a friend or relative by bringing attention to money-related issues. The best answer for anything other than a simple question is, “That question would be better answered by a financial adviser who can analyze your full financial picture.” Don’t play the part of an expert, just be available as a friend.

Photo: alancleaver_2000

The original version of this article, How To Handle Requests For Financial Advice, is copyrighted by Consumerism Commentary.

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This is a guest article by Outlaw, who lives and works in New York’s financial district and writes on the blog Credit Card Outlaw.

I don’t believe in conspiracies.

A few weeks ago someone I vaguely knew from college forwarded me an email about how the World Trade Center was likely destroyed by government “beam weapons.” I don’t even know what a beam weapon is, but it sounds absurd. Then, more recently, I was watching a special about Roswell on the History Channel.

Interesting stuff… But I just don’t buy any of these conspiracy theories, and here’s why: people love to talk. We can’t resist talking, in fact.

No employee or government official can be trusted for long before he or she gives in to the urge: a high-traffic whistleblower blog, an interview on CNN, a tell-all book. No matter how far up the food chain you go, people love telling others about their “hot” information. This is why insider trading is a problem. This is also why viral videos go viral.

It is this same human compulsion to share exclusive info that sometimes convinces me I have to spread the personal finance gospel. Now that I am totally immersed in personal finance — I blog about it, I read about it, I try to live it — I want others to get in on the action, too. I want others to see their money working for them, rather than only working for money.

When a friend tells me he is liquidating everything to load up on gold bullion, or that he plans to take his fiancee on some extravagant vacation financed entirely by high-interest credit cards (when he still has massive student loans to pay down), I start to get hives. And chest pain.

Fact of the matter is, I hate watching someone walk into the path of an oncoming bus. Especially if that person is a long-time friend or family member.

Despite this, being the armchair financial advisor no one asked for can lose you friendships. It can upset family. And it can even backfire… If you’ve ever given someone a well-researched stock tip, you know what I mean. If the stock goes down, your buddy blames you for his loss. As if you literally stole the money from his wallet and ran off with it. And if it goes up, you get no credit — he will praise himself for his amazing “find” and sound judgment.

I’ve developed a rule of thumb that seems to work really well for spreading the good word. Here it is:

1. Help close family members (parents and siblings only; grandparents are a lost cause) when you see them doing the wrong thing consistently, or when you know they could be allocating their money better, or saving much more. They’re your own blood, after all, and you have an obligation to help them get on the path.

2. Let friends and co-workers spend their money however they want. You can’t convince someone to lead a financially sound life if he or she has already committed to a delusional “rock star” existence fueled by credit cards. If your friend’s spending habits are truly unbearable, you need new friends. Just as it is hard to stop drinking if all of your friends are stone cold alcoholics, it is hard to remain financially savvy if those around you abuse wealth and do not understand the time value power of money.

When you do stage an “intervention” with a family member, keep it low key. I have personally found that “show, don’t tell” is an excellent strategy here: rather than lecturing to them about interest rates or emerging market ETFs, loan them one of your favorite books on personal finance or investing. “I’d love to get your views on this one when you finish reading through it,” is what I say. It’s low-pressure and laid back. (The Richest Man in Babylon is good for those who seem to have no respect at all for money. For more hopeful cases, try an inspiring Warren Buffett biography.)

If they are ready to see the light, they will. And if not, hey, at least you tried. Now get back to making money.

Photo credit: Solo, with others

The original version of this article, Don’t Tell Others How To Spend Their Money, is copyrighted by Consumerism Commentary.

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Last week, I had doubts about the advice provided by a so-called financial expert on the local prime-time network news program. Offering advice in public is a difficult task to do well. You have to appeal to your audience by suggesting solutions appropriate for the bulk of the listeners, a group that can vary in terms of intelligence, experience, and education.

In many cases, what ends up happening is that the advice is geared to the “lowest common denominator” (in the non-mathematical sense) and those in need of personalized financial advice end up feeling dangerously fulfilled by platitudes, rules of thumb, and averages. But aside from financial guru superstars like Suze Orman, Dave Ramsey, and Robert Kiyosaki, how do producers of local news programs find the experts they use for their economic/human interest pieces?

According to “the Mole,” my favorite undercover financial adviser, radio and television stations contact financial professionals in the community. The stations approach financial advisers to invite them to present “expert opinion.” There is a catch, however. The financial adviser must pay the station to appear.

Previously, I assumed two things. First, if you are interviewed on a television or radio show, you are not paid for your appearance, nor do you have to pay the broadcaster. I’ve been interviewed several times for print and radio, and never once have I been paid nor have I received an invoice. Second, if you are a station or program’s “official financial expert” or “resident financial adviser,” you are paid for your affiliation. The station should be lucky to have an expert like you on “staff.”

This is not the way media works. Radio and television considers your appearances as advertisements for your financial advisory business. Accordingly, you must pay in order to appear. While I have no evidence if that was the case with the financial adviser on the ABC news program I happened to catch, if the Mole is correct (and I generally trust what he has to say), it’s likely she paid ABC in order to be their resident expert and have her name and phone number flash across the screen.

It makes sense from a business standpoint as well. Presumably, the news audience will believe that this financial adviser is reputable for her to be “awarded” the post of resident expert. In turn, some of the audience may become clients. This may make the adviser’s fee worth the price of admission.

As consumers, it’s more evidence that we can’t simply trust appearances.

Taking financial advice from radio gurus, the Mole, Money Magazine, October 1, 2008

The original version of this article, Pay to Be a Financial Expert on Television, is copyrighted by Consumerism Commentary.

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I’ve done a good job of sharing my disdain for Dave Ramsey’s popularization of a method of getting out of debt that caters to unmotivated individuals, the “Debt Snowball” method. That doesn’t mean I don’t agree with his principles or his intentions. I just think he, as one of the most popular “gurus” in personal finance, has to cater to the masses. It makes sense for him to profess a methodology that is simple reaches people on an emotional level. Real financial planners who work one-on-one with individuals to get out of debt and formulate a lifetime financial plan would be able to supply better options.

Dave Ramsey does offer something I like, his “Baby Steps.” These are seven suggestions that, when followed sequentially, will do wonders for helping people struggling with their finances to take ownership of the money in their life and start moving towards a more prosperous future.

Here are Dave’s suggestions, verbatim:

• $1,000 to start an emergency fund
• Pay off all debt using the Debt Snowball
• 3 to 6 months of expenses in savings
• Invest 15% of household income in Roth IRAs and pre-tax retirement
• College funding for children
• Pay off home early
• Build wealth and give!

In general, I like this plan of action. These “baby steps” help someone ease into a pattern of new, financially responsible behavior, with small mini-goals which when taken in full view go a long way to help ensure financial stability.

These “baby steps” are designed to appeal to a large mass of people. This is not advice based on any one individual’s real situation, so it’s fair to apply some customization and perhaps even improvements. Here are a few small criticisms.

Is $1,000 enough or too much for an emergency fund base? Dave Ramsey suggests shoring up a $1,000 cash cushion before beginning to pay off debt. Although $1,000 is a finite number of dollars, its value has a different meaning to different people or to different families. A family with an income of $250,000 a year and $1,000,000 in debt may not consider $1,000 to be much of anything, while a family earning $20,000 per year and $100,000 in debt might find the saving of $1,000 to be a struggle. So what’s a better option? I would suggest that this base savings, what is needed to lay the groundwork before embarking on the great debt reduction journey, should be one months’ expenses, whatever they happen to be. That sets a high enough starting goal.

The “Debt Snowball” method is not so great. Despite its popularity and proven track record with a million dollar business marketing this method, I’d like to see more people give a real try to the Debt Avalanche. They’ll save money and time in the long run if they are intrinsically motivated. I’ve discussed this at length before.

Is it too soon to worry about college funding for children? I’ve heard experts suggest that parents should make sure their retirement is fully funded before worrying about funding education for their children. I don’t think saving 15% of household income, unless begun at a young age, will get most parents to a secure retirement, but that depends on the family’s needs at that later date. There are too many variables to predict that with any accuracy. The reason most experts suggest this is because you can borrow money for college, but you can’t borrow money (as easily or inexpensively) for retirement.

I strongly believe that parents have a responsibility to ensure that the best educational opportunities are available to their children, but with the prices of tuition increasingly well beyond the rate of inflation, I’m not sure how well that philosophy will work in the future.

Why pay off the mortgage early? Dave Ramsey is strongly against holding all forms of debt. Mostly, I agree. If the mortgage rate is low enough, and you have the fortitude, risk tolerance, and availability to invest the funds you would otherwise use to accelerate your mortgage payment in an asset allocation designed with a long-term time horizon, it may make more sense to pay just your minimum to the mortgage. But I won’t stop anyone who wants to pay off their mortgage early, even if they might end up with a lower net worth than if they had invested. The market is unreliable, but when paying off a mortgage early, you’re guaranteed to “earn” the rate of interest you’re being charged. It’s not a precise way of figuring the math, but knowing that you don’t have to pay interest that was originally included in your amortization is good.

Thanks go to Dave Ramsey for popularizing good general advice.

The original version of this article, Dave Ramsey’s Baby Steps, is copyrighted by Consumerism Commentary.

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General advice for an imaginary average person

Personal finance advice comes in many forms, running the gamut from Dave Ramsey’s philosophies on getting out of debt to Suze Orman’s no-nonsense anti-stupidity spending advice. Opinions vary wildly as you stroll down the promenade from the broker, a salesperson, to the financial planner paid by the hour rather than commission. Mass media, by definition, must appeal to the masses, so unless you’re working individually with a professional, the advice you hear is geared towards the “average” individual.

I don’t know any average individuals. This concept is a fictional statistical human being, an amalgamation of a sample population, with no defining characteristics. Mass advice cannot cater to the most diligent or intelligent of the crowd, because invariably less apt individuals overestimate their abilities, attempt techniques designed for the more able, and fail. Thus, advice is often “dumbed down” or simplified to meet the lower qualifications of a larger group.

Take, for example, the case of the best way to pay off credit card debt. I call it the “Debt Avalanche” but it certainly wasn’t my invention. While there are exceptions, this method of debt repayment calls for credit card debt always being paid off by focusing on the debt with the highest interest rate first. But people don’t always want to take this approach. They may receive more “satisfaction” by paying off the debt with the lowest balance first, which they believe will motivate them to continue paying off debt. Money, after all, is emotional more than it is mathematical.

Unfortunately, it’s this mindset which helps many people fall into debt in the first place (or repeatedly), and it is not correct. The best way of reaching a specific financial goal will always be the mathematical way. If not, your true goal is not purely financial. For example, is your true goal to get out of debt quickly and efficiently or is it to feel good about your debt situation? You will feel better in the end knowing you took less time and spent less money to get out of debt. If not, then perhaps you haven’t learned much from the experience and will find yourself succumbing to the “emotions” of money again and perhaps falling back into debt.

There are legitimate places for emotions when dealing with money, but debt reduction is not one.

Self-limiting philosophies and beliefs

You may hear that “doing what works for you” is the best way to approach a financial situation, but it’s often not a good idea. Doing what works the best mathematically is the ultimate approach. Other approaches may help you reach your goal, but not in the best way possible. “Doing what works for you” is an admission that you feel you have no need to improve yourself. This philosophy tells the world that you’ve learned everything you need to learn and are satisfied with your choice, even though you know it may not be the best. Or worse, if you have not learned all you need to know about your situation, you may not even realize that what you’re doing is in fact “not working.”

“Doing what works for you” is one of a number of self-limiting philosophies, excuses that people will use to convince themselves that they don’t need to strive for excellence. Here are some others:

“Luck and chance affect me more than my effort and skills.” Do you attribute a missed career opportunity to bad luck or not enough hard work? When you received a good grade on a college exam, was it due to the ease of the test or your preparedness? Those who attain their goals are more likely to be those who believe their own decisions and actions affect outcomes, good or bad. Those whose philosophy of outcomes is built around an internal locus of control have been shown to reach their goals more often.

The locus of control is one way psychology pays a significant role in your goals, financial or otherwise.

“Anything is better than nothing.” When it comes to saving, reducing debt, and investing and planning for the future, I agree. You have to start somewhere, but it is only a start. But if you believe that your financial condition in the future is important, the minimum is not enough. Don’t stop at “anything,” even if it is better than “nothing.” This is like saying it’s fine to feed your children one meal a day because one meal is better than no meals. Everyone is busy, but if the minimum is all you have time for, don’t expect results.

“At least I’m better than average.” The New York Times recently cited the Federal Reserve Board with an “average household credit card debt” figure of $8,565. Owe less than that and you’re in good shape, right? It’s unclear how that figure is determined. It may in fact be the average credit card debt of only households that have credit card debt. Include debt-free households in the calculation and the figure will drop. A number this high lulls many people into a false sense of security with the belief that with their balance of $6,000 in credit card debt, they’re “doing better” than most of the country.

This “security” leads to inaction and, in this case, to the glee of credit card providers, merchants, and manufacturers around the world.

Getting over it

The result of a lifetime with these beliefs is guaranteed mediocrity. While removing self-limiting philosophies doesn’t guarantee excellence and the ability to reach every goal, keeping these philosophies guarantees that you will not do your best. I do not know any man or woman with children who is satisfied with being anything but the best father or mother he or she could possibly be, so why are so many people satisfied with being an average personal financial officer?

There is usually a perfect mathematical solution to financial goals, like the Debt Avalanche mentioned above. Although Dave Ramsey says that most people have more success with a different, more expensive and time-consuming technique, that doesn’t mean you shouldn’t strive for the better solution. Just because perfection is not always attainable doesn’t mean that it’s worthwhile to stop striving for that approach and settle for lackluster results, especially if the better approach is not more difficult than the alternatives.

If you’ve found something that “works for you,” don’t assume that there isn’t something else that works better for you. Follow the best examples, not examples set by the fictional average individual. If your financial security is important to you, don’t settle for mediocrity. You won’t always reach your highest goals or always be excellent, but you’ll never be excellent if you limit yourself.

The original version of this article, The Path to Mediocrity: Doing What Works For You and Other Self-Limiting Philosophies, is copyrighted by Consumerism Commentary.

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Consider a hypothetical popular financial adviser with $30 million in investable assets. Her (or his) primary clients may average $500,000 of liquid reserves ready to be directed in any manner as instructed. The typical advice these clients may receive likely involve investing mostly in equities through stock index funds. They have low expenses and are poised to provide decent returns with average risk. This advice may include special consideration of asset allocation, with a slide towards lower risk once in retirement to help provide more reliable income while maintaining capital.

This is sensible advice for the average client, though a financial adviser has the responsibility to tailor his advice to the client’s unique situation.

Let’s take a look inside the portfolio of a $30 million adviser. In fact, it just so happens we have some details on one particular famous financial adviser with television and radio shows, books, and a strong brand image, so let’s use her portfolio as reported in 2007.

Suze Orman has a liquid net worth of $25 million, which doesn’t include her $7 million in real estate. Only $1 million, or 4% of her liquid net worth, is in equities. Suze, whose advice is over-simplified and dumbed down to be understood by the most idiotic of callers and is usually accompanied by “motivational” words of empowerment bordering on mean, doesn’t follow her own advice. Far from it. As of 2007, Suze invests almost exclusively in municipal bonds, favoring “safe,” lower returns over the risk of the stock market. Out of her entire portfolio, Suze invests only what she can afford to lose in equities.

Does her asset allocation and refusal to follow her own rules mean she is a bad financial adviser? While there may be several reasons to seek personal advice elsewhere, her own portfolio isn’t one of these reasons. Her advice is not directed at people with $25 million to invest. While some of the general tenets of her advice, like pay off debt, spend less than you earn except in some circumstances, and avoid costly commissions, hold true universally, some of the specifics like asset allocation are directed toward a certain type of client.

Suze’s personal choice makes some sense. With $25 million, you can afford quite a bit of flexibility. With $24 million in bonds, you may be generating a yearly income of $720,000. (Add to that seminars, royalties, appearance fees, and endorsements, and you’re doing pretty well.) One might levy criticism that she is not securing the future for her heirs, but I’m not convinced of that argument. Personally, I have no idea if Suze has any heirs or future plans, but I would think that she would want to do something with her accumulation when she dies, either provide for a family or provide for a foundation. And I would also think that she wants to build as much as possible to do the most she can to help whatever cause she chooses. So in that sense, she may not be doing all she can to allow her funds to grow.

But her current wealth puts her in a position where she can still reach her goals, and give herself a better *chance* of doing so by backing off and choosing less risky investments for a major part of her portfolio. You and I, her average clients, can’t afford to forgo the potential for higher returns and must therefore take on higher risk.

The first fallacy is the idea that one piece of financial advice fits all people all the time. The other fallacy is that one cannot give advice without following that same advice. A stunt man can advise an actor not to jump out of a moving car. A parent can advise a child not to handle knives. A police officer can advise a civilian to put down the gun. Suze — or any other financial adviser — can advise her average clients with not much investable assets to invest as much as possible in equities for the greatest return, regardless of her own portfolio.

But when Suze yells at callers, placates the lowest common denominator, or is otherwise condescending, I change the channel. I tend to think her recommended allocation for the average caller is a little on the safe side. However, she’s free to do whatever she likes with her money, and it doesn’t affect the quality of her advice.

Information on Suze’s portfolio from Outing Sue Orman’s Investments, Chuck Jaffe, MarketWatch, March 8, 2007.

The original version of this article, Can You Judge a Financial Adviser By Her Own Portfolio?, is copyrighted by Consumerism Commentary.

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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]

The original version of this article, Is a CFP Certification Necessary When Choosing a Planner?, is copyrighted by Consumerism Commentary.

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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?

# You should always close credit card accounts you no longer use. (See How to Best Handle Old Credit Card Accounts.)
# 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.)
# The percentage of stock in your portfolio should equal 100 minus your age.
# Always go with a fixed-rate mortgage — especially when interest rates are rising.
# Save 10% of your income each year.
# Buying a car is always cheaper than leasing.
# A Roth IRA is better than a traditional IRA.
# Never buy a house that costs more than 2.5 times your annual income.
# Make sure your own retirement savings are on track before you save for your kids’ college education.
# If you carry a balance, you want a credit card with a low interest rate.
# If you need life insurance to protect your family, your coverage should equal eight to 12 times your annual income.
# 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.

The original version of this article, Take This Rule of Thumb Quiz, is copyrighted by Consumerism Commentary.

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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.

Because I hadn’t read it, I didn’t keep in touch with her the way I should have. As the market began acting up, I wondered whether I should reallocate my investments, but never reached out to ask. She told me my investments were long-term so I shouldn’t spook at the first sign of decline, but I still should have asked. She might call me if she sees trouble ahead, but there’s no guarantee. It’s my money, and I need to manage it, actively.

From this comes a goal. In 2008, I am going to check in with her on a monthly basis, even if it’s just an e-mail. It’s going onto my calendar so I can’t possibly forget.

Another mistake: Although I did my own taxes last year, I have a long-standing relationship with a tax accountant and planner, and as questions flitted across my mind this year, I didn’t call to ask them.

I’ve a sneaking suspicion that if someone examined my tax situation, they’d find I could actually donate even more to charity while optimizing my deductions. Last year I just gave as much as I felt I could, but I need to have both my advisor and tax accountant address this with me for 2008.

I’ve started a running list of questions for my tax and financial advisors which I keep on my desktop so I can jot them down as they arise. By March, I’ll schedule a meeting to address all the queries I’ve gathered to date.

If nothing else, I plan to learn from my mistakes.

The original version of this article, 5 Stupid Financial Mistakes I Made in 2007: Underutilizing Financial and Tax Advisors, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Financial Advisers and Stock Brokers: What’s the Difference?, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Money Magazine: No Fees? Get It in Writing!, is copyrighted by Consumerism Commentary.

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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 original version of this article, Get Your Personal Finance Questions Answered, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Your Advice to Your Younger Self, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Sometimes Financial Decisions Must Consider More Than Just Money, is copyrighted by Consumerism Commentary.

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A few years ago, I had a brief chat with a financial advisor provided to me by my company, which also happens to be in financial services. I listened to what he had to say, but he was searching for commissions. His only offerings were expensive mutual funds.

I decided to wait until I had more knowledge about financial products before going back to an advisor. But when I do, David Bach will help me out through his five rules — the best five out of ten of his tips — for hiring a financial advisor. Here are Bach’s suggestions:

Get a referral. The referral should come from someone who has some experience and knowledge, not from a high school buddy you haven’t spoken with in ten years. Don’t take just a name and phone number, ask questions about their style, fee structure, customer service, and performance. Bach’s article has a checklist.

Do your own research. I’ve mentioned some resources in the past. Here are some ways to find an advisor online. Bach lists these additional resources: The Financial Planning Association, The National Association of Personal Financial Advisors, and The Certified Financial Planner Board of Standards, Inc.

Go to your first meeting prepared. Bring your bank and brokerage statements, last year’s tax returns, and insurance information. Have some questions in mind for the first meeting and be ready to talk about your goals.

Treat the first meeting like an interview. This is how I looked at my first meeting with that company-provided financial advisor. He didn’t get the job. It wasn’t because he didn’t tell me what I wanted to hear, but I didn’t feel the service he was prepared to provide was worth the fees. I could have asked more questions, and David Bach has a list.

How long have you been a financial advisor? What makes you a good financial advisor? What’s your educational background and what licenses, credentials, and other certifications do you have?

Have you ever been disciplined by the NASD or any regulatory agency during your career? What type of client do you specialize in? What services do you and your firm offer?

Do you create a written financial plan, and if so is there a cost? Do you spend time educating your clients about money? How do you service your clients?

How do you charge your clients (commission, fee-based, fee only, combination plan)? How many clients do you have and how much money do you manage?

Check out a prospective advisor’s background. You must research any advisor you choose through the National Association of Securities Dealers (NASD). You will find the advisor’s educational background, work history, and complaints filed.

All of this due dilligence is necessary in order to ensure your money will be handled properly if you choose to work with a financial advisor. You have to thoroughly vet your options.

The original version of this article, David Bach’s Five Rules for Hiring an Financial Advisor, is copyrighted by Consumerism Commentary.

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In an incredibly unscientific web poll, Yahoo Finance discovered (as of 11:12 pm last night) only 36% of the 2,200+ respondents — Yahoo Finance readers probably already biased towards the financially savvy — use a financial advisor. Almost the same amount (35%) say they do not take advantage of the help from a professional.

The remaining 30% (I like a poll that measures 101% of the sample population) are former clients of advisors, but have discontinued purchasing the services when they discovered the advice given was not objective.

The original version of this article, 36% Say They Use a Financial Advisor, is copyrighted by Consumerism Commentary.

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Some readers of financial blogs keep coming back for the free “advice.” There are some better ways to get in touch with financial advisement online, and Kiplinger’s Personal Finance has a few suggestions for finding a real advisor through the internet.

* The Alliance of Cambridge Advisors is a network of 75 advisors in 25 states who passed a peer review, passed a long training course, and regularly attend industry conferences.
* The Garrett Planning Network lists 250 fee-only advisors and helps you find an advisor tailored to your own interests. Take a look at their financial fitness wheel.
* MyFinancialAdvice.com pairs you up with an advisor who can provide immediate advice. Their database contains advisors grouped by topic their a range of hourly rates. Once you select an advisor, you can email your question. The website will respond with the price and estimated response time for your answer.
* WiserAdvisor.com lets you narrow down your search to find an advisor with a specific set of qualification determined by you, but Kiplinger’s claims spotty results.
* Paladin Investor Resources is an elite group of advisors; only 820 out of the 14,000 who applied made the cut and many have multiple certifications.

When you meet with a financial advisor, the first meeting is usually free. This time should be used to determine if the relationship is right for you. Kiplinger’s offers these suggested questions:

• Are there financial incentives for you to recommend certain products?
• Do you provide a comprehensive written analysis of my financial situation and recommendations?
• Do you take custody of, or have access to, my assets?
• Do you have clients who might be willing to speak with me about your services?

The Internet is a great tool for financial advice, as long as you’re looking in the right places. These links should help you get started.

The original version of this article, Find a Financial Advisor Online, is copyrighted by Consumerism Commentary.

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The truth is people are selfish. A person makes decisions on what actions to take based on what they believe will benefit him or her. Is there such a thing as true selflessness? Even when someone helps another individual “out of the kindness of his heart,” isn’t she really acting in order to get that pleasing feeling of having done something “for” someone else?

Liz Pulliam Weston is asking whether you can trust your financial advisor or whether he is looking out for his own well being instead of yours, his customer.

She suggests looking at the advisor’s professional title. According to her chart, an attorney is looking out for your best interest, as is a certified public accountant. A financial planner, even a CFP, may be looking out for your best interest. Registered representatives and stock brokers are looking out for their own best interest.

The author provides three questions to ask your advisor to determine if your advisor is really on your side:

* Are you legally obligated to act in my best interests at all times? If so, are you willing to put that in writing?
* Will you disclose all potential conflicts of interest?
* In what ways are you compensated?

Perhaps I’m cynical or overly philosophical, but sometimes I feel there is only one motivator in anyone’s decision making process: What will be more beneficial for me? That may be selling products with high commissions for the short term monetary gain. That may be building trust through an advisor relationship in order to assure repeat and consistent business. That may be building a trustworthy reputation also to ensure future business.

Do people become [doctors|lawyers|advisors|psychologists|mentors|...] because they want to help people? Or do they because they want to feel good about their ability to help people?

The original version of this article, Can You Trust Your Financial Advisor? Or Anyone?, is copyrighted by Consumerism Commentary.

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I’m finally delivering the last installment of MoneySense’s top 25 money tips of all time. This follows parts 1, 2, 3 and 4. Now, without further ado, are the final five money tips, as decided by Canadian financial experts.

Understand how your advisor is paid. In Part 4, some tips were related to finding the right financial advisor. This is an important aspect of completing that task. Some advisors are paid by commission when selling certain products. You can be sure he or she will be looking out for his or her own interests (making money through commission) rather than offering what is truly best for the customer. “[A]sk your adviser to put on paper a complete list of all the ways he or she will derive compensation from your account, as well as estimated amounts… [O]nly by understanding your adviser’s incentives can you judge whether the advice you are receiving is unbiased.”

Consider risk. The article says you should have your advisor put any statements including the phrase “no risk” in writing. Anyone promising high returns with no risk is trying to take advantage. If markets are efficient, any no risk, high return opportunities will be gone long before we regular folk will have access to them.

Ask questions. Ask for credentials. Ask for the fee structure, as we mentioned above. Ask for discounts.

Beware of 10% solutions. I’ve heard many estimates of a 10% annual return in the stock market, but a 5% to 7% return is more likely. The 10% figure that is common excludes fees and was calculated at the height of the stock market book in the 1990s, according to MoneySense.

Write it down. Any investment conditions you would like to set should be written down in a formal agreement. You could call this an “investment policy statement,” and it may outline types of funds (like those containing investments in tobacco, defense contractors, or Japanese auto makers) that you wish to exclude from your portfolio. It should also outline your risk tolerance and your expected returns. “How do you know if your statement is complete? Ask yourself if a new manager who has never met you could, with only that information, handle your portfolio the way you would like. Only if the answer is yes should you be satisfied.”

It took me a while to finish posting the series, but these top 25 tips are excellent suggestions for maintaining personal finances and working with an advisor. Remember that these tips came from advisors, so they may be biased. Some people prefer not to work with advisors. Everyone needs to make a living and it’s often difficult to determine who in the services industry is really there to help the customer rather than their own.

The more educated the customer is, the more of a chance he or she will succeed.

The original version of this article, The Top 25 Money Tips of All Time, Part 5, is copyrighted by Consumerism Commentary.

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$400,000.

Do you consider someone with a net worth of $400,000 rich? Well-off? Comfortable? Would you set a lifetime goal for yourself at $400,000?

Actually, a net worth of $400,000 sets you well above the median net worth in this country, and in the world, to say the least. But these statistics don’t matter… what matters is your immediate environment. In your immediate environment, could you give up working once you have $400,000 when you subtract your liabilities from your assets?

I think many people will say “no” to this question, yet they’re willing to set a goal of $1,000,000 in the future — say, 30 years from now. $1,000,000 sounds much, much better than $400,000. With $1,000,000, one might be able to stop working and live off the income. At a 4% safe withdrawal rate, that’s $40,000 a year.

This is why some financial planners, some columnists, and even some bloggers are big on telling people what they can do now (how to invest) to increase the chances of ending up with $1,000,000 thirty years from now. It’s simple: invest $8,250 a year, invest in stocks, and pray for good markets at the end of the time period and a yearly average of an 8% increase.

The huge problem with this model is the fact that it completely ignores the effect of inflation. Assuming a 3% inflation rate over the next thirty years (it could be higher or lower, who knows, but this is a historical average), your $1,000,000 then will only be worth what about $400,000 is worth now.

By the time you’re a millionaire, a billion dollars may be what is needed for the “comfortable” life. With $1,000,000 in the bank, at the safe withdrawal rate of 4%, you’ll be living off the equivalent of today’s $16,000. (For that safe withdrawal rate — the amount you can withdraw while not depleting your funds over time — it’s assumed the money will be invested in the stock market, not sitting in a bank.)

Methinks you should strive for something well beyond $1,000,000 if your time horizon is 30 years.

The original version of this article, Does This Number Impress You?, is copyrighted by Consumerism Commentary.

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Money Magazine has ranked hundreds of careers and have decided that the job of Financial Advisor ranks third. That’s not too shabby. Here are the stats provided by the magazine.

The average salary is $122,500, which is a little less than three times what my base salary would have been this year had I not been taken the new job. Financial Advisors get strong marks in flxibility, creativity, two things important to me. Ease of entry ranks well, but the level of stress is not perfect.

My career choices are never complete. I started as a music teacher, ended up in arts-related non-profit, got a temp-to-perm job at a large financial corporation, taught some more, returned to accounting in that same corporation. At one point, I was considering law school, so much that I took the LSAT. I didn’t score as well as Reese Witherspoon in Legally Blonde, but I did score well. In the mean time, I’m finishing up a Master of Business Administration degree, mostly paid for by the corporation.

In effect, I’ve avoided making any real choices about my career path, mostly because I have so many interests. (Did I mention I do web development in my “spare” time? This fall I’ll likely be teaching music on weekends and some evenings, as well.) At times, I have considered becoming a Financial Advisor. I’m great with people and I am thirsty for knowledge. I’ve informally coached friends on their money management. I could probably enjoy doing that full time after training and certification.

I’m not going to make any decisions based on a survey from a magazine, but this career is something I’ve thought about occasionally over the past few years. There are 6,100 job openings each year according to Money Magazine, and that probably doesn’t include new private practice businesses.

Now, for all your Financial Advisors out there: What do you hate about your job? I need to hear all the negatives.

The original version of this article, Be A Financial Advisor, is copyrighted by Consumerism Commentary.

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I get a number of emails from individuals looking for financial advice. Presumably, these people read this blog and are hoping I will have some insight into their own personal finances. Even more often, I receive emails with requests for a certain topic they’d like to see me cover.

While I’m flattered, those seeking personal finance advice shouldn’t be looking for bloggers to provide it. I am not a financial advisor, and neither are 99.9% of those who write blogs about personal finance. (JLP is a notable exception, of course.) You can count them and watch the numbers grow by monitoring pfblogs.org. The truth is, if you’re taking advice from a blog, in general, you get what you pay for. Be wary of self-professed “experts” and don’t misinterpret a blogger’s personal story as advice.

Yahoo Finance is running a feature pulling together articles that deal with finding a real financial advisor. Working with a good, fee-only advisor is a good idea for anyone who wants professional help securing their future. (No, I do not have a financial advisor, but I may seek help as I come closer to buying a house.)

The feature includes articles from Kiplinger’s Personal Finance, the Wall Street Journal, and other providers. I’ll take a look at each of these articles and point to some additional resources in a short series of posts.

So here I am, giving “advice” for people to seek professional advice. I guess that makes me a hypocrite of some sort.

The original version of this article, HOWTO Get Personalized Financial Advice, is copyrighted by Consumerism Commentary.

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This is Part 4 in a series about The Number by Lee Eisenberg. Part 1 is here, Part 2 is here, and Part 3 is here.

Chapter 11 of Lee Eisenger’s book, The Number, focuses on the topic of financial advisors. The author’s opinions of the financial advice industry is neatly summarized by the second paragraph of the chapter, paraphrased here:

There’s a giant and unruly industry out there ready to provide you with support and counsel. While this country may have a shortage of nurses, special ed teachers, and tool and die makers, it certainly does not lack for… financial advisers… all eager to make your acquaintace, impress you with their wisdom, and grab their share of the market. Most advisers present themselves honestly and forthrightly; some are a little funky and strange.

The financial industry places stock in the many certifications available to those wishing to be financial advisors, and the book lists 19 different professional certifications available in North America alone. Eisenberg asks about the usefulness of an organization and designation if the certification board does not police its members.

He brings up this point: When you deal with a trust officer, the bank assumes resposibility for your assets, but when you deal with a financial advisor, there is no such protection. “The most charitable thing once can say is that financial planning is still in its infancy, and regulation hasn’t yet caught up with it — that is, if you consider a big, strapping thirty-year-old still an innocent, babbling baby.”

Eisenberg sees big changes in the immediate future of the financial advising industry. One view is that there are too many financial service organizations lured into business in awe of the potential revenue from high-income clients. Just like doctors lost one-on-one relationships with patients when managed health care came into play, financial advice will continue to become commoditized with larger firms providing the service for tens of millions of customers.

Another view for the next ten years is that going to a financial advisor will become like going to H&R Block to file your taxes or to Jiffy Lube to get an oil change. Either way, or in a combination of both, Lee sees radical “wealth care reform” coming our way.

Consumerism Commentary’s series on The Number by Lee Eisenberg:
Part 1 | Part 2 | Part 3 | Part 4 | Part 5
Official Website | Official Blog | Buy the Book

The original version of this article, A Look At The Number, Part 4: Advisors, is copyrighted by Consumerism Commentary.

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Liz Pulliam Weston gives us seven reasons to fire your financial advisor. If you hear these phrases or witness these attitudes, the MSN Money Queen’s advice to dump your advisor and find someone new.

1. Who cares what you think?
2. Don’t worry your little head.
3. It’s not my fault… and if it is, too bad.
4. … (Nothing)
5. I don’t have to follow the rules.
6. We don’t need no stinkin’ credentials.
7. Oh, no. Not you again.

These are good tips, but some are hard to determine ahead of time. The better question should be how to avoid getting into a situation that involves an advisor who would say such things and act in that manner. (Prevention is always preferrable to treatment after the fact.)

Here are some quick thoughts: Go with a fee-only financial planner, get recommendations from people you know, and get in touch with the prospective advisor’s clients to find out whether they are satisfied.

Once you do find an advisor, treat your money like you’re a good parent of a high school child: stay involved.

The original version of this article, 7 Reasons to Fire Your Advisor, is copyrighted by Consumerism Commentary.

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