April DC Update: Working With Financial Professionals
Special Edition - Choosing a Financial Professional
In this month's edition of the update, we're tackling financial professionals. Do you ever feel like everyone, and their brother, is a financial advisor? While studies have shown that financial professionals can better prepare savers to meet their goals, it's crucial that you understand not all financial professionals are created equal. The best way to differentiate these professionals? Lots and lots of questions.
Client: How do you charge for your services?
Adviser 1: I'm a fee-only financial planner, which means I'm only going to charge you a flat fee for my services.
Adviser 2: I get paid by my company, don't worry, you won't pay me a dime.
Client: So you work on commission?
Adviser 3: That's kind of a dirty word. We don't like to call it that.
Financial professionals can make money in a number of ways, but rest assured you are paying for their services. Fee-only financial planning is arguably the most transparent way financial professionals charge for their services. As the name suggests, you pay a disclosed price for the services rendered. That fee may be a percentage of your account balance, or just a flat-dollar amount agreed upon between the client and financial professional. It may be far more difficult to track how much you're truly paying when working with commission-based financial professionals. Many times these types of professionals are compelled to sell certain products to bump up their commission, regardless of how suitable that investment is for the client. Figuring out how a professional is paid is one of the most important questions to ask, and don't be afraid to ask the financial professional to put that fee structure in writing.
Client: So what type of certifications do you have?
Adviser 1: I'm a Certified Financial Planner™ or CFP®.
Adviser 2: I'm a broker dealer.
Adviser 3: I'm a registered representative.
Advisor, planner, broker, consultant, registered representative - the names financial professionals use to market themselves are seemingly endless. To cut through the confusion, look for a designation like a Certified Financial Planning™ professional (or CFP® for short). CFPs are governed by the Certified Financial Planners Board of Standards and must meet education, examination, experience and ethics requirements. They're also regulated by the Securities and Exchange Commission (SEC). The CFP® certainly isn't the only designation out there - there are CFAs (chartered financial analysts), ChFCs® (chartered financial consultants), CLUs (chartered life underwriters), and RIAs (registered investment advisors). The bottom line: be sure to ask any prospective professional about their education and qualifications, and ensure they are monitored by a regulatory body like the SEC or the Financial Industry Regulatory Authority (aka FINRA). FINRA, in particular, offers a BrokerCheck service, which allows you to check the background of a prospective investment professional.
Client: So I've been reading about standards. Do you follow the suitability or fiduciary standard?
Adviser 2: Well, I follow the suitability standard.
Adviser 1: As a CFP®, I'm bound by the fiduciary standard.
Adviser 3: Standards? Well, I operate by my own set of standards. It's like standards on steroids. They're real strong. Uh, but actually, yah, let me call my boss about that. I'm not sure what standards we follow.
Investment standards have been in the news a lot lately, as Washington aims to simplify how financial professionals operate. Why the need for change? Based on some estimates, savers lose more than $17 billion each year as a result of unsuitable investments and bad advice. Currently, some investment professionals follow a "suitability standard," which means investment recommendations must only be "suitable" for a client based on age, wealth, and other factors. This standard gives financial professionals a great deal of flexibility when choosing investment options for their clients. In some instances, this standard opens the door for professionals to "sell" certain funds that will produce higher commissions for the financial planner at the expense of the retirement saver. Other financial professionals are bound by a "fiduciary standard," which declares that a financial professional must act solely in a client's best interest. As of this video's release, lawmakers are pushing for a measure that would place ALL financial professionals under the fiduciary standard. Knowing which standard your prospective professional follows could tell you a lot about the type of services you'll receive.
Client: If I roll my money over to you, are there going to be any loads on the funds you sell me?
Adviser 2:Uh, I'm going to have to look into it...
Adviser 1: That's a very good question to ask. I'm not going to put you into any funds that have a front or back-end load.
Adviser 3: Uh, did you see that game last night?
Client: ...because I had a friend who rolled a big chunk of money to some guy and they had to pay a 5% fee on their entire balance. They didn't even know that was going to happen.
Adviser 2: <silence>
Similar to asking how a financial professional is paid, don't be afraid to ask about any one-time load or sales fees charged on the investment options they recommend. Front-end loads are a one-time charge (or commission) that you the investor must pay to purchase a specific investment option. For instance, investing a $100,000 balance in a fund with a 5% front-end load would immediately decrease the invested amount to $95,000. The $5,000 fee, or at least a portion of it, would then go to the financial professional. Be extremely wary of any investment option that charges a front or back-end load.
As you can see, there are a number of financial professionals in the market who are competing for your business. While it may be easiest to choose the first professional you meet or perhaps one you already know, we hope this month's DC Update empowers you to ask the right questions so you can find the financial professional that's right for you.
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For more information on financial professional, be sure to check out the first quarter edition of our Simply Put newsletter, which mails with this month’s first quarter statements and will also be available at modeferredcomp.org and on the Plan’s social media channels. The plan’s pages on Facebook, Twitter, LinkedIn, and YouTube are always a great way to receive the most up-to-date news and savings information.