The Informed Investor

The Benefits of Comprehensive Financial Advice

When you are looking to buy a suit or a dress for a special event, you will encounter many options. You will likely whittle down your choices by asking yourself some questions. Is the event formal, semi-formal, or casual? Is there a particular theme? Are bright colors appropriate? Will the weather be a factor in your decision? And once you've purchased your suit or dress, you may have to go to a tailor to have it properly fitted. They will rework the fabric to fit your specific measurements.

This same kind of care and attention goes into delivering comprehensive financial advice. A one-size-fits-all financial strategy for everyone does not exist. People are complicated, with different circumstances, goals, aspirations, financial situations, etc. A business owner might also be a parent, an avid mountain climber, and a marathon racer. That same person might have inherited a large sum of money or have a modest nest egg and a good deal of debt.

Since everyone has a unique financial story, financial advisors must consider as much relevant financial information as possible when offering advice. For advice to be truly comprehensive, the advisor must consider many different paths their client could take to achieve a successful financial future. A comprehensive financial plan consists of not only general financial planning but may include investment planning, banking, insurance, and estate planning, depending on the advisor's expertise. The financial advisor could facilitate some of these areas, or they could recommend trusted experts.

Why is Comprehensive Financial Advice Important

Why is it important for financial advice to be comprehensive? At its core, comprehensive financial planning is about goal achievement. We all have different monetary-related goals, and a holistic financial strategy can help us obtain those goals. A comprehensive financial approach gives investors a direction—a path to follow when making decisions.

Comprehensive financial advice takes the investor's "big picture" into account. A person's big picture could include kids in college, a new home, plans to retire in Florida, or lingering credit card debt. Holistic advice aligns financial planning with a comprehensive investment strategy. As a long-time financial advisor, I believe comprehensive advice is foundational to smart investing. But how does this happen from a logistical standpoint? How do financial advisors organize the information they need to build a logical, customized plan for their clients?

Continue reading

The Informed Investor

The Average Investor is Woefully Unprepared

It’s an all-too-familiar story for financial advisors. A potential client comes in for an initial meeting, they share a few aspects of their financial situation, and then they ask some variation of the same question: “When can I retire?”

Some potential clients take the question a step further and ask, “Can I retire by next year?” or even, “Can I retire by the end of the year?”

Many people expect a straightforward answer to these complicated questions. But the truth is, a retirement plan is multi-faceted and takes a good deal of planning and consideration. You might be able to take a 5-minute test on the internet that tells you when you can retire, but there’s no way a generic test can make a comprehensive assessment of your highly individualized life situation. We all have unique goals, different assets, and differing life circumstances, and sometimes it takes a good deal of digging by an experienced financial advisor to piece together a full picture of an investor’s situation and begin developing a plan.

Not to mention, a person’s financial situation tends to become more and more complicated as they age. A young adult in their early twenties has far different considerations than someone in their fifties who has worked in five companies, has chronic health issues, owns two homes, and has kids in college. The twenty-something likely doesn’t need a financial advisor to help them invest their first $10,000. With a little research, they can do it on their own. But the fifty-something with a laundry list of considerations could certainly benefit from some professional financial guidance.

However, many people resist reaching out to a financial advisor until they’ve reached a breaking point. Often, they take a fairly hands-off approach to investing and get by with the basics. They toss some money into the 401(k) and set aside cash in an emergency savings account, until their circumstances change. They may inherit some money. Something may happen to their spouse, or their marriage may dissolve. Or they may come to terms with the fact that they’re aging and need to think about their next steps.

Whatever the case, we tend to be a nation of procrastinators. 

Continue reading

The Informed Investor

Why I Quit Working for Commission-Based Brokerage Firms

Thirty years ago, I decided to change my life’s trajectory and center my career around helping individuals make better financial decisions. Up to that point, I had been working as a certified public accountant, which was an honest and steady job, but not terribly inspiring. I wanted to be on the front end of financial decision-making; I wanted to guide others to make evidence-based choices.

When I switched career paths in 1988, I had a vision of becoming a combination of a coach, a counselor, and a trusted mentor. What transpired was much different.

I began working at a large brokerage firm in the Twin Cities, bright-eyed and armed with a new investment securities brokerage license. Like so many wealth management firms, this company had a commission-based fee structure, meaning it profited whenever a financial product or security was sold to a client. The financial advisor and the firm would take a slice of the profits. 

I didn’t think about it much at the time, but this type of compensation structure can inevitably lead to conflicts of interest. Ultimately, the brokerage firm centers around profit, which can lead to pushing products or timelines that are not in the client’s best interest. The firm does not have a fiduciary duty to serve the client first and the company second. The company, and its profits, take priority.

Regardless, when I began my work in the personal finance arena, I had no real reason to examine my company’s fee structure. I was simply happy to be part of the team, and I reasoned that would give unbiased, solid advice, regardless of earning incentives. I was wrong.

Continue reading

The Informed Investor

Advice or Sales?

You should be glad you don’t work as a financial planner who believes in a fiduciary standard—who has pledged to work for the best interests of clients rather than yourself or the company you work for. Why?  Because the big sales organizations on Wall Street have been trying to influence the organizations that make our rules.

Case in point is the Securities and Exchange Commission’s new Reg BI—aka Regulation Best Interest. The regulation was in part intended to help consumers recognize the difference between fiduciary advisors and salespeople who sell insurance, annuities, and other products. 

Alas, I believe that Reg BI actually did little to stop salespeople from calling themselves professional advisors, and even recharacterized their asset gathering and sales activities, on behalf of their brokerage employers, as “best interest.” The result is that consumers have to be extra careful that they aren’t being sold products under the guise of advice.

Continue reading

The Informed Investor

What Is Fiduciary Investment Advice and Why Does it Matter?

How do you know when an investment recommendation is worth heeding? Red tape and legal jargon aside, it’s about finding an advisor who exemplifies a few simple ideals:

“There’s no confusion in the minds of investors as to what they want. They’re very clear. They want somebody they trust who makes recommendations that put their interest first and don’t allow the advisor to profit financially at their expense.”

Phyllis Borzi, Dept. of Labor EBSA head, 2009–2017

That makes sense, doesn’t it? There’s even a term the investment world has been using since at least the 1940s to describe this high standard. It’s called fiduciary advice.

Why Fiduciary Advice (Still) Matters

Fiduciary advice makes sense to us too. Investors deserve nothing less than the fairest possible shake from anyone entrusted with advising them about their personal wealth. For decades, the fiduciary standard has shaped this high level of care for those of us committed to delivering it.

Having a fiduciary duty to our clients puts us on similar footing with other professional consultants, such as physicians or attorneys. You hire us partly because we have dedicated our career to understanding every facet of your wealth. But you also hire us to always use our knowledge to advise you according to your highest financial interests – even ahead of our own.

 

Unfortunately, the fiduciary standard has been under attack lately. A recent Securities and Exchange Commission (SEC) overhaul has downplayed rather than strengthened its significance by overlaying it with a new industry standard, paradoxically called “Regulation Best Interest.”

Continue reading

More Articles ...

  • 1
  • 2