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Financial Planners: The Good, the Bad, and the Ugly

Over at Bargaineering, Jim asks his readers if they use a financial planner. After starting to scribble an answer, I realized I wasn’t writing a comment; I was writing a whole new blog post. So rather than hijack his comments section, here’s my financial adviser story:

Those of you who read Funny about Money may know about my financial advisers at Stellar Capital Management, and about their amazing revival of my life savings after the trashing by the most recent stock market collapse. Several decades ago, while serving on the board of the Phoenix Chamber Music Society, I stumbled upon the gentleman who is now the most senior of senior partners there. The group had a large endowment that funded its activities. This guy, who had been a financial adviser and a music lover for years, was also a member of the board, and in that capacity he managed the endowment.

Came a serious market crash, followed by a brief recession. Everyone we knew lost their shirts, ourselves included. But the society’s endowment not only didn’t LOSE money, it MADE money.

When I pointed this out to my then-husband, a corporate lawyer, he hired the man forthwith.

After we divorced, I continued to have our financial adviser handle the money I took out of the marriage. I dealt with my sole and separate property myself, mostly by investing in mutual funds and in one half-baked municipal bond.

The municipal bond and the American fund, neither of which performed well, were suggested to me by another financial adviser, a former wife of one of my ex-husband’s former partners, who advertised herself as specializing in women’s finances.

Well, while she was very kind, gracious, and certainly most encouraging to women on their own, her advice was  just barely OK. The American Fund performed adequately but not brilliantly (it was not, we might say, “stellar”), and the municipal bond failed to keep up with inflation while it locked up my cash for a decade.

Meanwhile, back at the ranch… A few years after the divorce, my father passed away. Turns out he deeply disapproved of his 45-year-old daughter deciding what she should do with her life, and so, unknown to me, he contrived to disinherit me. He had told me that when he died, his then-wife would get the interest from his investments until she passed, and then the principal (about $90,000) would come to me. Trusting in this, I factored his promise into my long-term financial plans.

By way of delivering one last slap to the wayward child, he set up a trust that would disburse $1,500 a month to his widow, an arrangement that would drain the principal in about five years. He kept his money in a bank CD, whose return was so small as to be negligible. The widow, as he well knew, was the daughter of a woman who lived to be 102 years old, and so he expected she would easily outlive the money, which was passing directly from her bank account to her own daughter. To frost the cupcake, he made me his executor, so I would be forced to write her a check every month.

So I called my friend from the Chamber Music Society, and that was when I got wind of Vanguard Funds. He advised me to move all the money out of the CD and into a Vanguard short-term corporate bond fund. It was conservative enough that it posed no serious question about fiduciary responsibility, but it made a far better return than the laughable CD. In fact, for every dollar I had to fork over to the widow, the mutual fund returned 50 or 60 cents.

She outlived my father by about six years. Her health had been so exhausted, however, by having to care for my ailing father and by the questionable medical care she got at the life-care community where they lived, that she didn’t make it to the grand old age of 100. Far from it.

Thanks to my financial planner’s advice, even though she should have taken the entire inheritance away from me if things had gone according to my father’s plan, I managed to salvage about $40,000 of its principal. Additionally, my lawyer informed me that I was allowed to draw out an annual executor’s fee of about $1,200, which of course went directly into savings. All told, I rescued a little over $47,000 that would have disappeared without the advice of someone who knew what he was doing.

Having learned about Vanguard, I divided the rest of my non-tax-deferred savings evenly between Vanguard’s Wellington and Windsor II funds. These did moderately well over the years, while the financial adviser was managing the big IRA by investing in a wide variety of securities.

Contrary to our experience in previous bear markets, we lost a fair amount in the fall of the Bush economy, as everyone did. But in 2010 it came back, the rich getting richer as they do and bringing some of us along on their coat-tails. Total investments today are about five times what they were when I walked from the marriage, twenty years ago…not counting the paid-off house.

Along the way, I ran into another kind of financial adviser. At one point, the State of Arizona made a misstep, some charged as the result of corruption, that caused all its employee health-care insurers except Cigna to cancel coverage. None of my doctors would do business with Cigna, which was roundly hated in these parts. My dermatologist so reviled Cigna that he would not let me walk in the door, even after I offered to pay him out of pocket. It’s not easy to find competent medical care in this state, and so rather than discontinue a gynecologist and an internist whom I knew to be very good, I decided to buy private health insurance.

To afford this, I bought into an early health savings plan. In those days, such plans were few and far between, and you had to search out an insurance agent who could sell it to you. Well, after some digging I found one, and he did indeed sell me a health insurance policy.

Then he tried to make a move on my savings.

He told me that he was a financial planner and only sold insurance on the side. He could, said he, undoubtedly help me to earn lots more than I was earning with my present guy. All I had to do was tell him what my assets were, and for free he would draw up a financial analysis.

Right. Having no intention of moving a dime, I allowed the insurance agent to give me his pitch. What he presented was identical to the “analysis” prepared by the feminist CFP, only his style wasn’t as smooth.

I realized at that point that just about anybody can hang up a shingle as a financial “planner” or “adviser.” You don’t have to be a Certified Financial Planner to bill yourself as a financial planner. Nor do those letters after the name signify much more than that you have a bachelor’s degree, that you’ve passed a standardized test, that you haven’t murdered, raped, or embezzled from anyone, and that you’ve worked in the field for all of three whole years. At least the feminist had an MBA!

So. Do I use a financial planner? Yup.

Would I advise someone else to do so? Maybe. I would advise you to be very, very careful. Get references from people who have money—a lot of it—and keep a sharp eye on what your financial manager is doing. Find out, in full detail, how the person is compensated (they work either on commission or fee-for-service).

I review my financial statements in detail every month. Not once a quarter, not once a year, not whenever I feel so inclined, but every single month. I know where my money is invested, I get prospecti from those investments, and I know what those investments are doing over the short term and over the long term. Management of your life savings is not something you should blindly hand over to someone else, even if you think he (or she) can be trusted 100 percent.

Don’t expect to get rich quick, or to build capital without active involvement of your own. Never put all your eggs in one basket. And if an investment adviser comes up with something that’s too good to be true, run! As fast as you can, in the opposite direction.

6 thoughts on “Financial Planners: The Good, the Bad, and the Ugly”

  1. My father had a few professionals giving advice over the years and eventually decided he could do it himself. He did. When he died, my mother handed half her assets over to a planner (this was w/in a week) recommended by someone she had met a few days before. I met with him. He proudly announced that his income was $700,000/yr. He would not divulge how he made the money.

    My mother now claims that he “only sells when things go up.” And that she doesn’t mind that he “makes $100 if she makes $1000.” Can we say “churning”?

    I keep telling her that EVERYTHING has gone up since my father died in Nov 2008. I think she will make it, simply because my father did a good job.

    ERGH. Luckily, my son is very interested in personal finance, so I figure he can take care of my assets.

    Do I trust financial planners? No.

  2. @ frugalscholar: Good grief…that is scary! Not only the churning aspect, but he’s charging 10%? Really? The guy will clean her out at that rate. Stellar charges 1% for the first million.

    My guys are committed to conservative, blue-chip stocks. The only time they sell is when they get wind of some good reason to do so: developments that are likely to affect the company’s profitability. Occasionally they will reposition — carefully — if they think indicators suggest the market will slide.

    Interestingly, they tend to avoid any investment in high-tech but large, well established electronic corporations — Oracle, Cisco Systems, and the like. When the dot-com bubble popped, I lost almost nothing because relatively little of my funds were invested in Silicon Valley stocks. Proceeds from securities that they do sell are reinvested in other blue-chip style companies.

    The investments are spread broadly among a variety of industries and economies. Their strategy seems to entail a fair amount of educated prognostication: estimates of the direction this industry or that country’s economy is likely to go. For example, small proportions of my large IRA are distributed among categories such as consumer staples, health care, industrials, financials, and the like. Some of the holdings are in international stocks — Banco Santander, for example, Vodaphone, an ETF invested in India.

    I suspect that investing is more akin to gambling than to nuclear physics. So I expect that a person who has the time, energy, and patience to learn a great deal about economics, industry, and the way markets work could do this. The younger partner who’s now in charge of my account has an MBA. He seems to be pretty knowledgeable.

    For the record, they strongly advised me and my son not to buy the downtown house at the time we did. We went against their advice and lost our communal shirt in the real estate fiasco. They were right. We were wrong. 🙄

  3. I don’t know if I’m just cynical or have less to invest, but I read top notch personal finance books, and have NEVER used an advisor.

    I use basically Vanguard mutual funds and CDs. Fairly conservative. Possibly I could do better but I don’t trust anyone else with my money.

    It’s great that you personally knew this gentleman that did so well for you. That goes a long way.

  4. Since my first experience with a financial planner (aka investment salesman) 25 years ago, I have been managing my own investments. Back then, I could have really used some good advice and guidance. Instead, I got slammed into a terrible performing mutual fund, with a 8.5% front-end load. Luckily, my parents were pretty knowlegdeable about investing and they set me straight.

    I never recommend anyone consult with a commiission-based financial planner unless they first understand the basics about fees and investments.

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