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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Pay to Be a Financial Expert on Television

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Dave Ramsey’s Baby Steps

Fourteen years ago this month I was nervous about what was about to transpire. At this time. although I had been away from home for extended periods of time, I was about to leave for college. Honestly, I thought I might be biting off more than I could chew. Rather than living at home and attending a local college like a number of my high school classmates, I was preparing to live on the campus of a major university in another state.

I should have known that I had little to worry about. But there are a few things I wish I had known — or at least thought about — before entering college.

Pay attention to your expenses. For me, my expenses were fairly controlled. On campus, I had a meal plan. My breakfasts, lunches and dinners were paid for in advance and rolled into my tuition and board expenses. In order to eat in one of the many dining halls, all I had to do was flash my student identification card. This meal plan entitled me to a certain number of meals per week in addition to an allotment of “points” which can be used to purchase snacks at other times.

The meals and points expired at the end of each semester, and the college reminded students that “It is [their] responsibility to budget [their] points over the course of the semester/session.” I don’t recall doing any budgeting. I may have known at the time how many meals and points were available to me, but I didn’t do any planning. I ate when I felt like it and bought snacks and other things at the university’s shops when I desired. There was an option to add points to the account, and I’m sure I did this as needed.

Who is paying for college? My undergraduate education was paid for by my parents, a partial scholarship, and loans in my name. If your parents are paying for your education, be careful not to fail any courses. If you fail a class required for your degree, you will have to take that class again, paying for it twice. It’s not worth it, particularly since it’s usually difficult to outright fail a class. Paying for college yourself supposedly gives you ownership of your academic decisions while in school, but if you’re in a situation where you don’t have to worry about affording your own tuition, then consider yourself lucky.

Work shouldn’t interfere with studies. I am quite grateful I didn’t have to pay for most of my undergraduate education. It allowed me to focus on my education and extracurricular resume-building activities in my field rather than focusing on earning income to afford tuition. I did find a few jobs, however. I stayed on campus for winter and summer sessions to take more classes, but with a lighter load during these in-between semesters, I worked in the department library to earn some extra money. I also served as a web consultant in my department, designing their first departmental web site and teaching professors how to publish their own sites for a measly ten dollars an hour.

These jobs provided me with a little extra cash. I probably spent it just as fast as I was earning it, however.

Open a Roth IRA. I wish I had known about Roth IRAs when I started college. It would have been impossible for me to do so without a crystal ball or some other form of premonition. These retirement accounts were brought into existence while I was enrolled in the university, but I did not hear of it until a few years after I had graduated. If I had known that I could put money away for retirement in a tax-advantaged account while I was in such a low tax bracket, I might have taken advantage of the opportunity. Then again, I might not have. It’s hard to imagine retirement before you’ve officially begun a career, but it’s harder to argue with long-term investing in the stock market. If I had invested $1,000 in the S&P 500 index on October 11, 1996, it would be worth $1,825 now (not including reinvested dividends) and much more by the time I retire.

Like many, I played the “stock market game” in elementary school. By the time I entered college, I probably knew only a little more about investing, but my interests lay elsewhere so I did not particularly think about having a secure financial future.

Avoid credit cards. The credit card companies are vultures on college campuses. I remember when I first arrived on campus as a freshman for orientation, one week before the upperclassmen. The companies set tables outside the dorms with applications and free tee-shirts, enticing subfashionable freshmen like myself to sign up. Although I escaped relatively unscathed, having a credit card without a job is asking for trouble.

One particularly sneaky aspect of college-geared credit cards is the introductory offer. The 0% APR on purchases deal sounds great, but what they don’t explain is that you must pay off your entire balance on the card before the promotional period ends, otherwise you could owe back interest as if the 0% APR promotion never existed. It’s always explained in the fine print, but if you have an appointment for orientation, chances are you just want to sign the form and grab the tee-shirt.

Forbes offers these thirteen financial tips for students entering college for the first time.

• Use credit cards sparingly
• Pay all credit card balances in full
• Get the best deal on a checking account
• Start saving
• Keep track of your spending
• Set a limit on entertainment
• Shop at second-hand stores
• Keep an eye out for free money
• Get a part-time job with tips
• Walk or ride a bike — don’t drive
• Avoid the tax on stupidity
• Look for student discounts
• Don’t eat out all the time

Tavis Smiley has a number of similar suggestions. He suggests making a budget, shopping smart, and learning to cook.

Had I known what I know now about compounding interest and the tendency for the stock market to increase over time, not just theoretically but from experience, I’d be in a better financial position right now. And it’s not about having more money, it’s about having more options for doing the things I like to do.

Photo credit: Éamon
13 Financial Tips For College Kids, Scott Reeves, Forbes, August 30, 2004
Financial Advice for College Students, Tavis Smiley

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Financial Tips for Students Entering College

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

The Path to Mediocrity: Doing What Works For You and Other Self-Limiting Philosophies

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Can You Judge a Financial Adviser By Her Own Portfolio?

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Is a CFP Certification Necessary When Choosing a Planner?

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Take This Rule of Thumb Quiz

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

5 Stupid Financial Mistakes I Made in 2007: Underutilizing Financial and Tax Advisors

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Financial Advisers and Stock Brokers: What’s the Difference?

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Money Magazine: No Fees? Get It in Writing!

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Get Your Personal Finance Questions Answered

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Your Advice to Your Younger Self

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Sometimes Financial Decisions Must Consider More Than Just Money

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

David Bach’s Five Rules for Hiring an Financial Advisor

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

36% Say They Use a Financial Advisor

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Find a Financial Advisor Online

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Can You Trust Your Financial Advisor? Or Anyone?

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

The Top 25 Money Tips of All Time, Part 5

$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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Does This Number Impress You?

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Be A Financial Advisor

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

HOWTO Get Personalized Financial Advice

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

A Look At The Number, Part 4: Advisors

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 Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

7 Reasons to Fire Your Advisor