Trusting a pro with your nest egg
If your financial planner tells you something that doesn't check out, here's what you should do.
NEW YORK (Money) -- Question: I recently retired and visited a Certified Financial Planner on the advice of a friend. He developed a portfolio for me, at no charge, and presented me with an investment plan for a fee of 1.35% per annum. I scrutinized all the paperwork he sent me. It seems that in addition to the 1.35%, there are a number of hidden fees, including various fund fees within the portfolio that he said nothing about. What should I do?
The Mole's Answer: The first thing you should do is pat yourself on your back. I can tell you that I've never actually met anyone who scrutinized all of the paperwork their financial planner sent them, before entering into a relationship. I'm impressed.
The CFP you consulted apparently only told you about the 1.35% annual fee he charges. As you discovered for yourself, it also matters how much you really pay in total. In addition to his adviser fees, your research revealed that you were also paying fees embedded in the funds, like annual expense ratios and even hidden trading costs.
Worse yet, I've seen some planners pitch "no fees" insurance investments that end up making that expensive mutual fund look cheap.
The first thing you did right is to not immediately trust your financial planner. Your nest egg is too important to trust anyone on your first visit.
You also did right by doing your homework. Your financial planner probably counted on the fact that you wouldn't go through the stacks of paperwork he gave you. I wish I could say such due diligence was more common, but the sad truth is that most of us hire a planner because we don't want to pour through the paperwork.
I've attended many courses on how to market and win over clients. The key is to give a 90% sales pitch that builds a rapport based on our trust and credibility. We encourage you to imagine how your life could be if you had enough money to do whatever you want. Then, we flip that coin and have you imagine what life would be like if you're retired and watching your money run out like sand through an hour glass. We know this combination of fear and greed is an effective sales technique, and somehow gets you to trust us.
If your initial meeting with a planner is more generic than specific to your investments and goals, it's a solid sign that you are in a sales presentation. Ask your planner some tough questions such as the four outlined in Truth or dare for your financial adviser.
Write down what you consider to be the most important points from your initial meeting with the adviser. Never sign with your planner on the initial meeting. It's important to sleep on it. Then, do just as you did and check things out.
I'm guessing that this CFP, having conveniently left out the other fees you'd be paying, will never have your trust. I certainly don't think he deserves it.
My Advice: I think you should keep doing what you're doing. Interview a few financial planners with some of the techniques mentioned above. Much like doctors or lawyers, some financial planners are better than others. Don't just pick a planner you like, pick one that uses a philosophy that makes sense to you. Ask him to write down his estimate of your total costs.
In addition to friends, possible sources for finding advisers include the National Association of Personal Financial Planners for fee-only planners and the Garrett Planning Network for hourly planners.
In the end, if you meet with a few planners and think that you can do the investing part yourself, there is a lot of evidence that shows you may be right. And if you do find a planner you like, never put total trust in anyone. Always ask questions and understand the total strategy.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail firstname.lastname@example.org.Send feedback to Money Magazine