The large insurance and investment firm TIAA-CREF recently released the results of its Advice Matters Survey which looked at the role of financial advice in the lives of American consumers. The survey results were eye-opening, both for the financial services industry and consumers.
Most importantly for consumers, financial advice is extremely valuable: The survey found that 86 percent of Americans who have received financial advice act on the guidance they receive, with 62 percent changing their spending habits, 56 percent increasing the amount they save each month and 46 percent increasing the amount they contribute to their retirement. 52% establish an emergency fund and 46% increase the amount they are saving for retirement. Those who receive advice also generally feel better about their financial situation. In fact, those who have received advice are 15 percentage points more likely to be optimistic about their finances compared to those who didn’t receive any counsel at all.
The financial industry should take note however, many Americans encounter challenges as they try to access the financial advice they need. Sixty-four percent of respondents say it’s hard to know which sources to trust and 44 percent think good financial advice will cost more than what they can afford. Respondents also mentioned several other obstacles, such as:
- The information available isn’t meeting their needs. 39%
- It’s hard to find the time to look for financial advice. 35%
- They’re not sure what questions to ask. 32%
- It’s hard to know where to start looking. 31%
Half of the survey respondents say now, more than ever, they need a trusted source to turn to for financial advice. Advice pertaining to retirement, in particular, is becoming increasingly important—86 percent of survey respondents who said they received advice say they sought out retirement-related advice, up from 81 percent who reported the same in 2013. Seventy-four percent of those who received advice looked for help on general budgeting and saving.
That 64% of American consumers don’t know who in the financial services industry they can trust speaks volumes about the financial services industry. The lack of a uniform fiduciary standard in the U.S. creates a minefield for consumers. It is getting harder to continue to dance around the fact that the financial services industry operates primarily on commissions, kickbacks and hidden fees. In other words, anyone who is not a Registered Investment Advisor (RIA) does not have to put the interests of consumers first. Their loyalty lies to whoever pays them.
What can you do to find competent, trustworthy financial advice?
Seek out an independent fee-only registered investment advisor. Fee only advisors work only for you, not for the brokerage firms, mutual funds or insurance companies that pay brokers. Registered investment advisors are held to a fiduciary standard that requires them to put their client’s interest ahead of their own.
Below is a list of eight questions to ask any financial advisor you are considering engaging:
#1: Can you describe the types of clients you work with?
Find someone who has experience working with clients like you. Be careful of advisors/planners claiming to be all things to all people.
#2: How do you make money?
Advisors/planners are paid by one of the following mechanisms:
- Commissions for products they sell (commission-based)
- Fees you pay them, plus commissions on products they sell (fee-based)
- Only fees you pay them (fee-only)
The best advice comes from independent fee-only advisors who are not employed by a company that has a product-sales focus. Avoid fee-based as, in most cases, you will pay twice as these firms charge you a fee to sell you products.
#3: How do you invest money for your clients? How do you invest your own money?
Ask advisors about the methods they use to invest client’s funds and about their investment philosophy. You should get a clear, well thought out response. Better yet, get this information in writing. Avoid advisors that claim to be able to predict the future or time markets. There is no evidence that anyone can do this consistently and it is very risky.
#4: What happens to me if something happens to you?
If an advisor were to experience health problems or suffer an accident, who would step in to advise you? Good financial advisors have a succession plan in place
#5: What is your educational background?
There is a confusing profusion of financial designations. Some credentials have rigorous, graduate-level testing requirements that set advisors apart from their peers in a meaningful way. Unfortunately, many credentials require little or no study and are essentially a marketing ploy. Some credentials are good measures of competence, due to their rigor, time commitment, and ethical standards. Look for advisors that hold either the CFA (Chartered Financial Analyst) or CFP (Certified Financial Planner) designations. If your financial advisor has no professional credentials, ask why. If your financial advisor has a credential other than the CFA or CFP, you may want to do some additional research to determine the relative value of the designation.
#6: What is your process for advising clients? Can you describe how you work for clients?
Ask about the process they follow to help their clients. The more concrete, proactive, and explicit the process, the more likely you are to be well served by your advisor. You should be offered a comprehensive menu of planning services and also be able to choose just those that serve your needs from that menu. Good financial planning is process driven. The key question is how the advisors process is going to address your concerns. Qualified advisors will go into great detail about why and how they service their clients
#7: Are you a fiduciary?
We recommend using a Registered Investment Advisor (RIA) because these individuals and firms have a fiduciary duty to act in your best interest and are legally bound to invest funds accordingly. Stockbrokers and insurance agents do not have a fiduciary duty. Advisors held to a fiduciary standard have higher legal requirements.
#8: Who will have custody of my assets if you manage them?
A custodian is a firm that holds client assets for investment advisors and provides a trading and investment platform. Some of the larger and well know custodians include TD Ameritrade, Schwab, Fidelity and Pershing. Avoid advisors who serve as their own custodian. The central problem in the Bernie Madoff scandal was that Mr. Madoff’s firm was both investment advisor and custodian, so there was no independent third party to verify assets. Unfortunately this practice is not illegal and continues today.