5 Lies Your Financial Adviser Might Tell You

More Americans are seeking professional help when it comes to managing their money.  

The percentage of people who used a financial adviser grew to 40 percent in 2015 from 28 percent five years earlier, according to a survey by the Certified Financial Planner Board of Standards. Those people said their decision had less to do with recent economic crises than with their desire for better financial guidance. 

However, reliable financial advisers are becoming increasingly hard to find, and more investors have grown distrustful of the profession as a whole. In the same 2015 survey, the board found that 60 percent of Americans thought their adviser valued his/her company’s interests over those of the consumer, compared with 25 percent in 2010.  

Jessica Parker, 23, is particularly wary. The first time she met with a financial adviser, she believed she was interviewing for an internship. Instead, she was given an hours-long investment pitch and left the meeting having unknowingly signed an insurance policy.  

“They made it sound so appealing,” says Parker, who works as a senior analyst for Johnson & Johnson in Raritan, N.J. “They had all of these metrics, graphs and data. They 100 percent lied about what it was going to be.” 

Whether lies are serious or more mundane, they can take a toll. Having an untrustworthy adviser can mean serious damage to your stock portfolio, your retirement plan or any number of other investments. Knowing the lies some financial planners will tell you  can help you avoid being tricked into a decision that could put your money in jeopardy. 

“Trust me, this is your best investment option.”

When speaking with your adviser, it’s important to know he or she has your wallet in mind, rather than his/her own.  

Julie Rains, 57, a writer in Winston-Salem, N.C., says she met with a financial planner who suggested an investment option that wasn’t in line with the type of portfolio she wanted. After refusing the offer and complaining to the brokerage, Rains said, she eventually discovered that the investment would have made her adviser a large amount of money.  

“His recommendation was complex and confusing, and would have resulted in a huge, unnecessary tax bill,” Rains says. “But the solution would have benefited him greatly with a large annual fee.” 

Ben Jacobs, a financial planning analyst based in Athens, Ga., says conflicts of interest are common among advisers who earn commissions for their services.  

Jacobs recommends seeking a financial planner who is registered with the National Association of Personal Financial Advisors (NAPFA), with some 3,000 members nationwide and high standards for membership. 

NAPFA members earn their money through a consistent client-paid fee instead of earning a commission from a percentage of the financial products they sell to customers, such as mutual funds, life insurance and annuities. As a result, fee-based planners have no financial incentive to sway you in any one direction, because they’ll get paid the same amount regardless.  

“Fee-only means you don’t pay me for the work.”

Still, fee-only advisers, who receive a set fee from clients and do not earn commission on the products they sell, can be just as misleading when it comes to how they’re paid. Jacobs says confusing pay structures are common in the industry, with consumers often misunderstanding how their financial planner calculates their total service charge. 

“You’d be surprised at the number of people who think they aren’t paying their financial adviser,” he says. 

The cost of working with a financial planner can vary depending on the planner’s experience and where you live. 

Vid Ponnapalli, founder of Unique Financial Advisors in Holmdel, N.J., says people should be weary of additional costs when making any agreement with a financial planner who says there’s just a flat monthly rate. These extra, sometimes hidden expenses can range from your adviser earning a percentage of your bond sales to 12b-1 fees — an annual marketing fee tacked onto some mutual fund agreements.  

You should read through any contract before signing, especially if you’re unsure how  your adviser is making money from your business, he says.  

“My credentials show that I’m an expert.”

Many advisers take on titles and certifications that have little to do with their actual skills.  The Consumer Financial Protection Bureau found more than 50 designations for senior-specific advisers in a 2013 study of financial problems facing senior citizens.

However, the CFPB also found that the educational and professional requirements for using those titles varied greatly, and that some could be obtained with little to no training or effort.  

The Financial Industry Regulatory Authority (FINRA) maintains a database of professional designations and the prerequisites for earning them. Some of these titles — such as Behavioral Financial AdviserDisability Income Advocate, and Retirement Plans Associate — require almost zero qualifications.  

The Securities and Exchange Commission (SEC) released a formal warning against deceitful titles in 2014, encouraging consumers to “look beyond a financial professional’s title when determining whether he or she can provide the type of financial services or products you need.”  

The titles that matter most, such as Certified Financial Planner (CFP) and Accredited Financial Counselor (AFC), involve accreditation by national standards agencies that often hold professionals to certain ethical standards. FINRA maintains a list of these designations, and you can also use the organization’s BrokerCheck tool to search for advisers who hold these titles.  

“I can help with all of your financial needs.”

Even when their credentials are legitimate, planners may try to emphasize skills they don’t have. For example, advisers may claim they’re qualified to sell you insurance despite having little knowledge of the subject.   

Rains, who runs a website called Investing to Thrive, says she thinks advisers are  attempting to seem more versatile and appeal to a large client base. 

“Certainly, some are qualified to handle a broad range of functions, but many have a specialty,” she says. “It’s good to be aware of the strengths, and limitations, of whoever you might hire to help you.” 

Even financial planners with highly respected designations can have their blind spots. For example, Jacobs says the CFP exam doesn’t include certain specialized topics—such as divorce settlement and disability planning—that advisers may need to seek separate training in order to properly cover.   

In order to ensure that he could meet the needs of prospective clients, Ponnapalli began offering free, hourlong consultations before doing business with them.  

“I can guarantee you big returns on your investments.”

Parker says it’s a bad idea to trust advisers who say they’re only concerned about making you money. Nothing is ever certain in finance, and consumers should be suspicious of planners who promise them a specific return on their investment. 

Advisers have the responsibility to set realistic expectations, and promising clients a specific payoff “can lead to huge problems,” Ponnapalli says. 

“The big myth is that we are moneymakers,” he says. “We have to explain to (clients) that money management is one small part of our job.” 

Tips for finding a reliable financial planner:

  • Look for a fiduciary. As a fiduciary, a financial adviser is required to take a formal oath stating that he or she will work in the best interests of clients. When looking for a fiduciary, start with the NAPFA, which requires each of its registered financial planners to renew the Fiduciary Oath every year. Also, MagnifyMoney has reviewed some financial planners, including online options Stash Wealth and the XY Planning Network. 
  • Compare advisers. Finding a financial planner who fits your specific needs can take time, and it may involve meeting with many in person. Rains recommends looking for substance over flash and charm. “Personally, I’d choose the smart person who’s good with money but slightly clumsy with conversation over the one who’s a smooth talker,” she says. 
  • Do your research. As important as in-person meetings are, you also need to do your homework.  According to a 2016 study at the University of Minnesota, 7 percent of financial advisers at the average firm have a record of misconduct (the figure reaches 15 percent at some of the largest firms), with almost half of these individuals keeping their jobs after they were caught or disciplined. To help with this, the SEC has an online database where you can do a background check on most registered financial planners.  
  • Don’t be afraid to ask questions. Once you pick an adviser, you need to make sure you’re both on the same page. When meeting with your planner for the first time, it’s good to come in with a long list of questions, as well as a full brief of your own financial situation. “Do your research on what type of plans they offer,” Parker says. “When you’re in there, be very clear on your intentions of what you want to do with your money, otherwise they might try to steer you another way.” 

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What’s the Best Way to Pay My Financial Adviser?

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Q. I’m going to work with a financial planner and I have two ways I can pay the 1% management fee. Either I can pay cash (then it’s deductible) or it can be taken from my retirement accounts (then it’s not, but it’s not a cash flow issue). What are the pros and cons?
— Unsure

A. There are definitely pros and cons in terms of what accounts you use to pay your financial planner, but there are other things to consider before making that decision.

There are many types of payment models for financial services professionals, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

He said some get paid commissions and fees based on products they sell to you, while others charge a percentage of the assets they manage, while others may even charge hourly or on a retainer basis for investment management and/or financial planning services.

It depends on the financial services professional, the organization they work for, and of course, the preferences of the client, Rossi said.

He said one of the most common ways for a fee-only or fee-based planner to assess fees is based on assets under management (AUM).

“Most investors and financial professionals feel that this model aligns the motivations of both parties because it’s win-win if the value of the portfolio increases,” Rossi said. “That said, it’s not without its cons.”

Rossi said dissenters will point to situations when a financial professional recommends an investor transfer assets from a 401k into an IRA so that the financial professional could include the assets in his or her AUM.

No compensation model completely eliminates conflicts or issues, Rossi said.

“The best way to pay your financial professional is via a model that aligns with your specific situation and needs,” Rossi said. “It pays to ask a lot of questions about fee structures before signing on the dotted line.”

If you’re not sure what to ask, the National Association of Personal Financial Advisors (NAPFA) has a list of tips and questions for consumers to ask when interviewing financial planners.

When paying via an AUM model, some things are not as clean cut as they may seem.

If you pay the fee out of a taxable account, Rossi said, it’s generally deductible to the extent the investment-related expenses — along with your other miscellaneous itemized deductions — exceed 2% of your adjusted gross income (AGI).

“The caveat is that the portion of the expense that is deductible needs to be tied to investment management and not financial planning,” he said. “Sometimes it’s not clear where financial planning services end and investment management work begins, which is why a 1% AUM ‘bundled’ fee can cause some questions if you were to get audited after taking the deduction.”

Some people prefer to pay the fees via a retirement account because taking it out of the retirement account (assuming it’s pre-tax) can reduce Required Minimum Distributions (RMDs) in the future, Rossi said.

He said others prefer to pay fees from a pre-tax account such as an IRA because that money has not been taxed and when it is paid to the financial adviser, it’s one of the few times earned income is never taxed.

“The major caveat with paying fees from an IRA is that the fees should be for investment management services on the IRA,” Rossi said. “When an IRA’s assets are used for other non-IRA expenses, it is deemed to be a distribution from the account, and in extreme situations could cause the IRA to lose its tax-qualified status.”

Most financial planners can set up AUM billing per account, so a blended approach may work best if you want to realize some of the benefits of paying from an IRA, Rossi said.

[Editor’s Note: Remember, it’s good for your overall financial health to keep on top of your credit, because good credit can help you save money over time on financing — whether it’s a mortgage, car loan or a line of credit. You can check your credit reports for free every year through AnnualCreditReport.com and monitor your credit scores for free on Credit.com.]

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CFP vs. CPA: What’s the Difference?

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Q. Are there real benefits to going to a financial planner who is also an accountant? What should I look for?

— Learning

A. We’re glad to hear you’re paying close attention to what credentials different advisors have to offer.

Financial planners who are certified financial planners, or CFPs, have extensive experience and education in comprehensive financial planning, including the areas of insurance, investment, income tax, retirement and estate planning, said Jodi Cirignano, a certified financial planner with Lassus Wherley in New Providence.

When you choose to work with a CFP who is a licensed certified public accountant, or CPA, you may obtain access to an even broader range of services and subject matter expertise, particularly in the areas of business planning, tax planning and tax preparation, Cirignano said.

“CPAs are trained to integrate the income and estate tax implications of financial decisions into a client’s overall planning, helping client’s optimize their after-tax income and returns,” she said. “Many CPAs also have experience in advising business owners on issues such as personal and business financing, business succession issues and cash-flow management.”

She said earning the CPA credential requires a significant amount of education and experience and a commitment to 120 hours of continuing professional education every three years.

Cirignano said a CFP and CPA practitioner can provide a powerful combination of skills, experience and expertise for clients, but ultimately, you will want to select an advisor based on who is best suited to help you with your unique issues.

“In addition to inquiring about the advisor’s credentials during the interview process, you will want to determine if the advisor’s strengths complement your needs, if they are experienced in working with clients that have similar financial profiles and planning issues, the scope and the cost of their services,” she said.

Be sure to understand how the advisor is paid before you enter into any relationship.

Financial well-being requires ongoing management and planning to build, protect and transfer wealth, Cirignano said.

“Working with the right CFP or CFP/CPA professional who understands your concerns and is well-positioned to address these can provide peace of mind for you and your family,” she said.

[Editor’s Note: You can monitor your financial goals, like building a good credit score, each month on Credit.com.]

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