What Financial Pros Aren’t Telling You

This week we analyze the Truths Financial Pro’s Won’t Tell article from the October issue of Consumer Reports and share our thoughts and perspectives with you about working with financial advisors. We also cover the humble story of NFL running back Alfred Morris and his first car.

Form ADV Part II

The SEC requires advisors to file form ADV Part II and provide it to current and prospective clients. It contains an array of advisor information from what they charge and how they receive compensation to how many clients they have and how much money they manage. Here is our checklist of things to keep in mind when hiring a financial advisor.

Fees and Taxes

These are the two things that are most likely to diminish returns faster than anything else. We agree with the majority of this section of the article. If you are just looking for hourly advice or someone to put together an allocation, you should find the best quality at the best price. If you are looking for someone to cover the entire realm of your financial life, you need to understand the value you receive for the price you pay.

• Make sure that you know what you are getting for your money. The article quotes Vanguard’s investment management rates are as low as .70% of assets under management. While that is affordable, you need to ask, “what am I getting?” Most likely, a model allocation and a recommended list of Vanguard funds that fit your model. We’re not knocking Vanguard, we use a number of their funds, and we think they do a great job with investment products.
• Be careful when trying to buy cheap indexes, especially in inefficient markets or asset classes. We love index funds for well-developed efficient markets, like U.S. Large Cap.

We like comprehensive planners that work in all aspects of their client’s lives, bringing value to everything from buying cars to structuring your estate plan for generations to come.

Your Best Interests

• Ensure that your advisor is working in your best interest. Make sure your advisor holds themselves to the Fiduciary standard, instead of the suitability standard which is a term that is loosely thrown around. It basically means that if you can afford an investment it could probably work for you somehow and therefor it is a suitable investment.
• The CERTIFIED FINANCIAL PLANNER™ designation alone is not enough. The CFP® board holds planners to high ethical standards but does not require advisors to be Fiduciaries.

Understand your investment objectives

• Bring Simple Back – know what your invested in and why. Your advisor should be able to explain, in an easy to understand way, what the objective of the investments they place you in are and how each effects the overall direction of your portfolio.
• If your advisor is a broker-dealer, make sure you know why you are in certain investments and try to limit your exposure to proprietary products.
• Be careful not to let the tax tail wag the investment dog, but make sure to keep an eye on your “asset location.”

Alfred Morris’ and “The Bentley”

This is an awesome story of how an NFL star, who could probably afford to buy any car he wants, still choses to drive his 1991 Mazda 626 he bought from his preacher when he was in college for $2. Alfred exemplifies the characteristics we love to see, and this would definitely grant him membership into the Tightwad Nation!

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