Planners and Fees

July 10, 2007

Money Magazine has a feature each month called The Mole, which is a column written by an anonymous financial planner. I’m not exactly sure why he’s anonymous unless he’s scared of colleagues harrassing him. Regardless, it’s usually an entertaining column and this month’s column is no different:

I’ve never met a financial planner who didn’t claim to put his client first.

Take this colleague I dealt with recently. On his Web site you’ll find him saying things like “My client’s interests come first” and “I recommend products based on what’s in their best interests and not based on which one would give me more earnings.”

This same planner sold his 60-year-old client seven expensive variable annuities, which made up the vast majority of her portfolio when she came to me for advice.

He even put her Roth IRA in a variable annuity, which is paying for tax deferral within a tax-free vehicle. He sold her so many “income guarantees” that he drained her portfolio of more than $20,000 annually.

Bottom line: just because a planner (or ANYONE you do business with for that matter) tells you that they put your needs ahead of their own, doesn’t mean they do! It’s still your responsibility to know whether or not you are being taken advantage of. The Mole even offers up four suggestions to help you protect yourself:

1. Always ask your planner to estimate your total costs and what benefit you are getting for it.

2. Ask if there is an alternative way to meet your goals that lets you keep more of your money.

3. Get the planner to put the above two answers in writing. If he won’t, ask yourself why.

4. Always know what you are buying. As a general rule, the more complex it is, the worse it is for you.

I believe whole-heartedly with number 4! Seriously, I can’t imagine any honest planner (whether commission-based, fee-based, or fee-only) ducking those questions. I liken to when I take my car in for repairs. I want to know how much it is going to cost BEFORE the repairs are done. If the mechanic can’t tell me that or refuses to tell me that, I’ll take my car somewhere else. It should be the same way in the financial services business.

12 responses to Planners and Fees

  1. Amen!! A couple of years ago, Citizens Bank was fined $3,000,000 for targeting elderly depositors and selling them annuities. When I was asked why I was withdrawing my funds, I said that I would not do business with an organization that preyed on the elderly. The answer: “Oh, that’s a separate organization.” Oh, really? – Then why did Citizens pay $3 MILL?

    Particularly when dealing with financial planners, caveat emptor. There are not enough regulators to control them all. Even when caught, they can open up with another company name or get hired elsewhere. Unfortunately, few people seem capable or willing to understand the complexities of financial planning

  2. I subscribe to Money Magazine and ‘The Mole’ is one of my favorite features! I highly recommend the magazine overall.

    I don’t have or plan on having a financial planner, whenever I have a personal finance question I usually can figure it out on my own. But this may change when more complicated issues such as estate planning, etc. arise (which is a loooong way off for me =))

  3. People should really consider a truly self-directed IRA and place non-traditional assets in them. One you have only yourself to blame or pat on the back. 2) The risks are often easier to evaluate. A good site is http://www.myrealestateira.com it is the most comprehensive site on the subject.

  4. It’s not just the little old seniors who get hoodwinked. This is the same thing that happens everyday with “retirement plan consultants” who convince HR executives to purchase group variable annuities to fund a 401(k) plan. Just shameful. The last survey I read indicated 75% of plans with less than $3 million were in Variable Annuities, and 50% of plans with less than $5 million funded with Group VAs. This means millions of participants. I remember almost getting a CFO fired when I met with he and the company President to discuss their plan. “Barry, how did we get insurance (Group VA) for our 401(K),” the President barked. Me: “Not his fault Terry, you had this plan when you hired Barry. Whew!”

  5. The Mole’s four rules are good. I had never really considered #4 as a rule, but I think that it fits. As a mortgage broker, I frequently have folks try to sell me on the Money Merge Account idea. While I know that other countries have successfully used it and that a few Americans might like it, it is presented as a convoluted way for me to extract money from my clients. Generally speaking with financial instruments, more convoluted = more expensive. Flat fee compensation really is the way to go.

  6. I read that and I was thinking, “JPL is The Mole!”

  7. JLP that is …

  8. I get Money magazine as a member of the Financial Planning Association and I like it. My favorite writer is Jason Zweig whose latest writings deal with how the brain and investing works, fascinating stuff! I also really like the Mole column, this guy (or gal) is usually right on!

    I agree wholeheartedly with Al Brockman who said:

    “Particularly when dealing with financial planners, caveat emptor. There are not enough regulators to control them all. Even when caught, they can open up with another company name or get hired elsewhere.”

    Just two incidents over the last few months:

    -Client’s mother got taken high six figures from a scumbag who took advantage of her fragile mental state due to the recent death of her husband. He almost went and got the whole nest egg with two equity indexed annuities of six figures each but thank God for the grace period!!

    -I had a call today with a prospect who is a life insurance salesman and had some financial planning issues due to his wife’s company being bought by one of these private equity outfits. As I was asking him questions I could not help but express my strong dislike about variabla annuities and then he tells me “Oh, that’s what I do, I sell them but I am not buying them”!!

  9. be your own financial planner. no one cares about your money as much as you do. it’s easy, fun, and saves a ton of money and worry time.

  10. I am 100% agree with Muddlehead, Be your won Financial planner. In these days it is not tough to plan about your money when there is internet and all other services there and you can meet many good people who can advice you.

  11. I’m a financial advisor and I actual do put my client’s interests first. Do you want to know why? Because, I will pretty much make money off of a person no matter what I do, so I might as well help them out while I’m there. Is anyone else tired of the variable annuity cliche? Is there seriously no other way for a financial advisor to rip someone off?

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