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Getting Started With Investing

Self-Directed Investing or
Retaining a Financial Adviser

Financial Advisors and Their Compensation

There are many financial advisors who will offer to help you with planning for retirement and with investing your money along the way. Of course, no one can be as committed to your best interests and to your welfare as much as you are.

If you feel that you have sufficient know-how to manage your own affairs, unaided, there are self-directed brokerage accounts, like those offered by Charles Schwab and Company, that can allow you all the freedom that you may wish.

Today, it's not hard to open a self-directed brokerage account with a well-established, respected, and trusted brokerage firm.  Most firms allow accounts to be initiated online.  It's nearly as easy as opening a bank account, and minimums are no longer onerous. 

Moreover, there have emerged over recent years, an array of investment vehicles that can give diversification and discipline to investing. Most prominent among these are the Exchange Traded Funds (ETFs) which operate like mutual funds but without the intraday valuation risk to which mutual funds are subject. ETFs trade like other stocks.

They are similar to conglomerates in holding a portfolio of companies, but they do not manage the companies in the portfolio as conglomerates do. Instead, ETFs simply buy and trade stocks like mutual funds or other unit trusts. Some ETFs can have expense loads as low as 2/10th of 1% which is very low indeed.

And that can make a big difference in your results. Consider an environment like today in which savings bank returns are often less than 2%. If a mutual fund, or investment advisor, charges 1% of assets for management, that immediately cuts the customers’ returns in half. That’s significant. You likely don’t want to give up half your return to an asset manager

That brings us to the genius of Jack Bogle. You likely don’t know Jack Bogle and, probably, have never heard of him. Still, he has had a profound impact, together with his academic friend, Burton Malkiel, on today’s investing world. You see, Jack Bogle, is the founder of Vanguard Funds and Vanguard pioneered indexed funds.

Jack Bogle was called to his work from an early age. He wrote his undergraduate thesis at Princeton University on “The Economic Role of the Investment Company,” in which he identified opportunities to reduce costs in the mutual fund industry. He graduated from Princeton in 1951 and over the course of a long life he has brought financial sanity to the multitude.

Many people are afraid to handle their own investing and they turn to advisors. There are at least three ways in which such advisors are compensated and the basis for their compensation can influence the integrity of the advice rendered.

First are commissioned salesmen. Commissions can vary widely, say, for mutual funds or for annuities, and it is in the interests of a commissioned salesperson to seek to maximize the salesperson’s income. That creates a conflict of interest between the interests of the investor, in low costs with high returns, and those of the salesperson who seeks to maximize commission income.

Preferable are fee-only investment advisors, like those of Pure Financial Advisors, the firm we use as an example here because of the wealth of publicly accessible resources which the firm makes available. Pure’s fees are in line with those of other fee-only advisors. They offer a no-fee get-acquainted meeting at which they discuss alternatives. The next step is an Initial Plan, which can cost between $2,500 and $10,000. This is comparable to the kind of fees that an attorney might charge for an estate plan.

At Pure, if the client accepts the plan and wishes to have Pure Financial manage the investment assets in accord with the plan, the fee is 0.4% to 1.6% of Assets Under Management. Of course, that is higher than the 0.2% fee that Vanguard charges for its most popular indexed ETFs. Still, if you are uncomfortable handling your own investments, and you want expert assistance, there is merit in working with a fee-only adviser.

There is a third category of financial adviser between the commission-only salespeople and the fee-only financial advisers, and that are those who are primarily fee-based but who accept commissions as an offset against fees. That allows such hybrid advisers to include commissionable products in an investors portfolio while using the commissions to offset fees that might otherwise be assessed.

Common Designations Associated With Financial Advisors

There is no fool proof way to be sure that a financial adviser is well-suited to work with you. There are many credentials that a financial adviser may present to show that the adviser has the needed expertise. But the quality most essential in an adviser is integrity and that is a quality of character that you will have to judge for yourself.

It's desirable to meet often enough with a prospective adviser, and to ask a sufficient number of questions, to satisfy yourself that the adviser understands you, has assessed your propensity for risk or the lack thereof, and is committed to putting your interests first, before the opinions, biases, and personal advantage of the adviser.

Knowledge, too, is a factor. At the top of the credentialing ladder is the CFA, Chartered Financial Analyst, designation. This is awarded after a rigorous program of study and examination, and most CFAs work in institutional settings and rarely work directly with investing clients. The program is administered internationally by the CFA Institute.

Most common, and most likely to be encountered, is the CFP, Certified Financial Planner, designation. It, too, requires demonstrated competency through a series of examinations. The designation is granted by the Certified Financial Planner Board of Standards, Inc.

An outgrowth from the sales operations of the life insurance industry is the American College which grants a number of designations including the classic CLU, Chartered Life Underwriter, designation oriented toward commissioned life and annuity insurance sales; the ChFC, Chartered Financial Consultant, designation, which is similar to CFP qualification; and several other specialized designations for particular aspects of planning including health insurance, retirement, wealth management, etc. Moreover, as an accredited college, the American College is able to award a Master of Science in Financial Services degree.

Common to the CFP and American College programs is a commitment to a program of planned saving that may involve contract programs like life insurance and annuities or may suggest balanced investment portfolios with income-related target savings commitments oriented toward a target retirement income (or ancillary expenditure) goal.

An intimate and extensive knowledge of taxation is crucial to the advice generally offered by those purveyors who specialize in planned savings and investment programs.

That can bring in other advisers. Enrolled Agents (EAs) are tax specialists, recognized by the Internal Revenue Service, who are deemed to be tax experts and who are permitted to represent clients in proceedings before the IRS. An aspirant can become an EA either by examination or by having worked for the IRS for a certain period.

Since many CPAs, Certified Public Accountants, are retained by people to complete their tax returns, they, too, often also offer planning and investment advice. There qualification is more toward compliance and may not include the depth of understanding of lifetime financial planning that the CFP or ChFC designations can provide. It’s not uncommon for CFP or ChFC qualified practitioners to work in close coordination with CPAs and with attorneys who specialize in Estate Planning, Wealth Management, or in Elderlaw.

Ethics and Financial Advisory

Practice Integrity

All of the designation granting authorities emphasize codes of ethics intended to uphold high moral and service standards consistent with the public interest.

Nevertheless, ethics and integrity are character traits that cannot be legislated.  People of integrity, who have a service commitment to place the welfare of those they serve first, go well beyond any compliance standard that might result from mere adherence to a set of ethical rules or standards.

Ethical and moral behavior is a personal quality that is consistent with principled behavior, beginning with the Golden Rule of treating others with the same, or greater, consideration as one gives to one's own interest.  This is something that investors seeking guidance from a financial adviser or firm of financial advisers must assess for themselves.