When we talked on the phone you mentioned a change in how consumers get their financial advice. What did you mean by that?

I think this is the really important story of what is changing in the financial services world that will affect nearly everyone. In the “old way,” consumers had a life insurance agent, an accountant, a banker, a stockbroker, a house and car insurance agent, and an attorney. Each of these professionals operated independently of one another. The consumer acted as the “captain” of this team of professionals. When the consumer had a problem he would decide whom to call. If he wanted to save additional money for retirement and he took that problem to his life insurance agent, the life insurance agent tried to solve the “investment problem” with a product that he could provide, life insurance. But this wasn’t always the best solution for the consumer. No single person was responsible for the overall success of the consumer. The goal of each professional was to make sure he or she had the “biggest slice” of the financial pie. The “old way” really helped the growth of magazines’ like “Money” and “Kiplinger’s Personal Finance”. And now the internet and information sources like “The Motley Fool”, Vanguard, CNBC, and such have taken over. They helped educate the consumer so they could make better decisions. But there is a glaring weakness in how people are receiving their information now, I believe. 

What has changed?

Well, in the old way, the consumer was responsible for overseeing his overall financial situation. He knew how much he was paying in taxes, he knew how much life insurance he had, he knew what he was invested in, he knew how much debt he had and what his interest cost was. But he was the only one who had all of this information together. And while he naturally had his best interest at heart, he had the least knowledge and expertise! So a new professional began to evolve.  The personal financial consultant. Their job was to act as a “generalist” and coordinate the overall financial plan. They didn’t take the place of the accountant or the attorney or the insurance agent, but they helped them work together to the benefit of the consumer. It’s almost like seeing your doctor who is a General Practitioner. He or she has a good basic knowledge of lots of health issues and about your health history, but will call in a specialist when needed. It’s pretty similar.

You mentioned the harm that you believe “Money” and “Kiplinger’s Personal Finance” can do. What do you mean by that?  How is providing good, solid financial advice a bad thing?

Well, let me qualify that. They can provide solid fundamental information. And they were useful under the old system where the individual was responsible for the overall financial plan. The problem I have is that they encourage people to use a magazine as their family’s financial consultant. For most people, this doesn’t work. Let me ask you a question. What is the goal of the publisher of “Time” magazine?

To be the best news magazine out there.

And how do they do that?

They try to cover interesting stories.

Right. Do you think it’s “Time’s” goal to report on the stories that no one cares about?

No,  I think they want to put out a good solid magazine. .

Right. And how they do that is by telling interesting stories in a compelling way. And that’s not a big problem for Time, because of the kind of magazine they are. Generally, people are not making decisions or taking actions that affect their lives based on what they read about in Time, other than how they vote. They are reading Time for entertainment. In my opinion, the problem with “Money” and “Kiplinger’s” and CNBC is that they need to tell interesting stories in a compelling way to increase their audience as well. The latest tax changes, budgeting tips, debt management, portfolio risk management, and estate tax solutions, are not interesting topics to most people.  And it’s tough to talk about them in a compelling way. So all of the focus goes on “the market” and performance, and the things that really matter get left behind. For example, I recently worked with a young couple and we looked at using a Roth IRA for them. By using this strategy over their lifetimes would likely save them over $500,000 in taxes! It takes a lot of “investment performance” to make that difference up. But when was the last time you heard a Roth IRA mentioned on CNBC? Generally, a magazine or TV network gives the people what they “want”, and not necessarily what they “need”. And this is fine when the goal is to entertain. But when people are making financial decisions based solely on information that a magazine or network presents, then I think you can have a problem.

Why can’t someone do-it–yourself?

Most people do not make enough money to make up for the mistakes that they are likely to make while they “learn”.  We’re not talking about fixing a leaky faucet here. It can take years to recover from a single mistake. Let me give you an example: Let’s say you were offered a role in movie that started filming in one year. Your payment for being in this movie would be $1,000,000. However, as a condition of this contract you needed to improve your acting skills and to get yourself in top physical shape.

Now, would you run out and get copies of all of Tom Hanks’ movies, the latest issue of “Fitness and Health” and the “8 Minute Abs” video and run around your house practicing acting and working out? Or would you hire a personal trainer and sign up for acting lessons?

It’s for $1,000,000? Definitely a personal trainer and acting lessons.

Of course you would.  But when it comes to planning their financial lives, people don’t always show the same concern. And most people will need more than $1,000,000 when they retire to keep their standard of living and they have a limited amount of time to reach that goal. It’s not that different. In my opinion, many people trust their financial future to a magazine, internet site or TV network that provides general financial advice and knows nothing about them personally. But the do-it-yourselfers are really a very small percentage of the population and I think it’s left over from the “old way,” where the individual was responsible for gathering and using information to help make decisions. In my experience, most people want to spend more time on things they enjoy, like gardening or boating or spending time with their family, not trying to learn about all of the things we’ve talked about. I think most people realize the value and discipline that a good financial consultant can bring to their lives, they just haven’t found one yet or they didn’t know there was such a person.

But what about “bad” consultants?

They are out there, believe me. I’ve seen it when investors bring me their statements and tell me the horror stories. That’s why I encourage people to interview and get to know a consultant before they start working with them. Ask how they are compensated and see if you get a straight answer.  Find out if they do a written plan and how they will track your progress. Ask about their background and what type of clients they work with. I encourage potential clients to talk with my existing clients that have similar needs. And you need to make sure the consultant will work in your best interest.

How do you do that?

It really has to do with the character or trustworthiness of your consultant, which is difficult to measure.  One way to find out about the “true colors” of your potential consultant is to ask how he or she will be compensated or paid. This is a good place to look for red flags. If the consultant can’t explain how he or she is compensated in a way that you can understand or they make it sound like you don’t really pay anything for their service, look out! There are basically two ways in which consultants who handle your investments are compensated, commissions or fees.  With commissions, generally the consultant gets a larger percentage up front and a much smaller service fee in future years. With fee-based compensation, the consultant is compensated at a flat rate on the assets or investments that they manage.

Which way is better for the consumer?

It really depends.  I prefer to work under a fee-based arrangement because of the amount of time I like to spend with my clients and I do a lot of planning work. But you can make the argument for either side. The big advantage of working under the commission structure is that over time your cost is typically less than under the fee-based model. And if you just want some initial help setting up a portfolio and don’t need much ongoing service or advice, a commission-based package would be lower cost for you. But the problem I have with the commission based system, is the consultant is paid more to bring in “new money” than he or she is to service the investments they already have. And there can be an incentive for the consultant to “move things around” to generate commissions. Plus, I believe the small service fee is really not enough to allow the consultant to spend the kind of time with clients that they should. So the client is deserted. When it is fee-based, the consultant gets compensated the same whether it is “new money” or old. So they have an incentive pay attention to all their clients. And as the clients account grows, so does the consultants compensation. Plus, on a fee-based arrangement you know what you are paying for advice and you can change consultants without worrying about the large up-front fee that you paid. There are good professionals who work both ways, but I am biased to fee-based in most cases.

Can you name one thing that separates people who are successful in their financial lives versus those that are not?

Well, it doesn’t have much to do with the stock market or picking the perfect investment. It’s really about changing your behavior and focusing on what you can control. Investing automatically and regularly in a “tax-advantaged” way, managing your debt, planning ahead, figuring out what really matters to you, making a plan and putting that plan into action, making sure your investments are diversified…etc., etc.  These are the things that will determine whether you “make it” or not. You can’t control the performance of the market, so why spend 90% of your time focused on it? But that’s what gets the most press. Successful people understand this.  Think of someone who you consider a success, whether it’s in business, politics or sports or in their personal lives. Successful people focus what they can control to bring them success. This doesn’t mean they ignore things that may affect them, but they “keep their eye on the ball”. That’s your financial consultants’ most important job. To keep you focused on and working towards your goals, in spite of everything that is going on around you and all of the distractions.