Financial Reform Amendments Begin to Fly

Caveat Emptor

Let The Buyer Beware. This motto is prevalent in many corners of the financial services industry as it is in many other sales professions. It basically indicates that the sale of a product is a zero sum game. Either the salesperson "wins" if you purchase something (quality and need be damned) or the potential customer wins by not purchase. Caveat Emptor has no place in a trust based profession. A profession that has the ability to truly help people create better lives is not a zero sum game. Financial planners and advisors should sit on the same side of the table as clients. These professionals should be the individuals who help clients in the "buyer beware" trap. I am not certain that a financial planner or advisor who is also the primary product salesperson can appropriately take on this role. Is it possible to be truly objective about the review of financial products when one's livelihood is impacted by the sale of those same financial products? If two mutual funds are nearly identical but one does not pay a commission while the other does, can a financial advisor receiving the commission fairly compare the slight differences to determine which product will be in a client's best interest? I am not a strict believer in the fee-only compensation model and am far more concerned with the service being delivered by a financial advisor and where that advisor's commitments lie, but I do wonder if an individual receiving any form of commission can truly overcome virtually irreconcilable conflicts.

Amendments to the financial reform bill begin to fly

The first amendments to Senate financial reform bill have been submitted for consideration to the Senate. Many more are sure to arrive today and early next week. The first amendment brought to the Senate floor dealt with an outright ban of taxpayer funded bailouts of financial institutions. There is wide, bipartisan support to include language banning bailouts. Bloomberg provides a good analysis of this here. There are a couple other amendments worth bringing to your attention that could impact the financial advice you can hope to receive in the future.

Uniform Fiduciary duty – Senator Robert Menendez may submit an amendment designed to require all individuals providing investment advice to act in the best interest of their clients. This amendment would effectively remove the "suitability standard" used by many brokers who are not subject to a fiduciary standard. The suitability standard is a much lower bar and does not mean an individual is making a recommendation in your best interest. More details on this amendment can be found here.

Reintroduction of Glass-Steagall – Some commentary has pointed to the repeal of the Glass-Steagall Act as the beginning of the most recent financial crisis. This act had prohibited bank holding companies from owning other financial institutions. Commercial banks were basically barred from being involved in investment activities beyond their core banking activities as savings and lending institutions. This Act was repealed in 1999, which some have pointed to as having allowed the creation of "too big to fail" institutions. Senators Maria Cantwell and John McCain plan to push for reintroduction of Glass-Steagall provisions.

The best coverage of potential amendments I have found can be found in today's Washington Post here. More details will be available when the Congressional Report for yesterday's session is released later this morning. I will update this post to include a link to that document once available. (Link to report here.)

As always, if you feel so compelled please contact your Senators to urge them to require financial planners and advisors to work in your best interest and reduce the Caveat Emptor mentality. This is our chance to make a difference and to help you receive access to good, objective financial advice. To find contact information for your Senators, visit and select your state from the drop-down menu in the top right corner of the screen.

And enjoy your weekend! Spring is here...and summer is approaching!


Financial Reform Debate to Begin Today

Late yesterday afternoon, the Senate decided to  bring to the floor for consideration the financial regulatory overhaul bill beginning at 12:15PM EST today. We may see a flurry of amendments during this debate process on a variety of subjects pertaining to the financial services industry. I hope that some bold Senator will take the initiative to present an amendment which will move forward the need for those providing financial advice to be held to a fiduciary duty, to require them to provide advice which places their clients' best interest first. If a Senator makes this move, they will likely be attacked by powerful forces in the insurance and investment banking industries. This Senator will require the support of constituents to have any chance of moving an amendment forward. Other Senators will need to hear from their constituents on the importance of such legislation. Please contact your Senators and let them know where you stand. Let them know if you would like to see all professionals providing financial advice to be required to uphold a fiduciary duty. Let them know if you would like to understand who you can trust to provide advice in your best interest.

I thought instead of a long, rambling, ranting post, I would instead provide a series of links discussing the bill before the Senate that I found particularly compelling. I will save the rant for tomorrow following opening debate on the Senate floor. I will also be watching to see if an amendment comes to the floor addressing clients' best interests.

One last request. If you do decide to call your Senator's office, please treat the person answering the telephone respectfully and like a fellow human being. As I sat in the waiting room of a Senator's office last week, I watched two young interns answering telephone calls and being verbally attacked nearly every time they picked the receiver up. These young men showed incredible patience and resolve dealing with these attacks, never becoming flustered and answering questions to their best ability. They deserve to be treated with respect regardless of whether you agree or disagree with the Senator's positions. 

On to the links:

A summary of the bill:

From the Washington Post:

An international perspective from the Financial Times:

From the Associated Press:

This an interesting piece on the failed cloture votes in Newsweek:

Let’s Have a Bit of Clarity

The Simple Solution to the Advice Problem

When I began my career in the financial services industry, I spent a few months with a large insurance company. I was quickly indoctrinated with the internal sales culture, while trying to maintain a perception of being a trusted advisor to clients. Many of us called ourselves Financial Advisors even though we had scant training to give any advice beyond basic investment or insurance advice. We had met regulatory requirements, but these were found severely wanting. The only accurate title for me would have been "insurance agent" or "financial product broker." I had been trained to sell insurance products and mutual funds, and use a financial plan to make the argument for a need for the products I was selling. Most individuals in this office used similarly inaccurate titles. There was an "old-school" insurance agent who did not play this game, however. He used the title "insurance agent" and did not pretend to do anything but sell life insurance. He did not cloak his intentions with financial plans. If you met with him as a potential client, you knew he was selling life insurance and would be paid by selling a policy to you. He was also very successful and remarked often on how unnecessary the "Financial Advisor" title game was to success.

I have ranted over the past several posts (here and here and here) about the confusion many financial service companies intentionally create to make it difficult to discern the salespeople from the advisors working in a client's best interest. We were taught the art of this confusion very early at the insurance firm where I worked. Reflecting back on that time, simply eliminating this game from the financial services industry would go very far toward curing many of the ills that have been beset on consumers by the industry. Using titles which reflected a professional's job duties would create clarity and help clients recognize whom they are working with. People providing financial planning services putting the client's best interest first would call themselves Financial Planners. People who offered investment advice putting the client's best interest first would call themselves Investment Advisors. People selling insurance products and working under a suitability (not a client's best interest) requirement would call themselves Insurance Agents. People selling mutual funds and stocks and working under a suitability requirement would call themselves Stock Brokers. Simple, effective and clear. Consumers would no longer be confused about whom to see for what purpose.

I do not see this transformation happening without legislation to force the issue. There is profit to be had in the confusion game. Large financial services companies are able to steer clients away from fiduciary financial planners by claiming to do the same work. It also seems that there is a certain shame to being labeled a salesperson among many people in the financial services industry. I am certain there is no shame in holding this role. Salespeople hold a vital position in the distribution system of any product or service. Drug representatives are important to make doctors familiar with new and better medical treatments. Educational tool salespeople are necessary to bring innovative teaching methods to our schools. These salespeople play a vital role in their industries, but neither would ever think to begin treating patients nor teaching students without first attaining appropriate training and making a career change. The financial services industry would be well served to adhere to this type of clarity. Separating the advice service professionals from the distribution professionals would benefit you, the consumer, dramatically.

If you agree, I ask you to contact your Senators and urge them to consider pushing for legislation which splits up the advice channel from the distribution channel. Ask them to support legislation which requires that professionals dispensing financial advice and financial planning services be held to a fiduciary standard. Ask them to support legislation which creates a distinct financial planning profession.

Financial Reform Update

Yesterday afternoon, the Senate again took up the Restoring American Financial Stability Act of 2010 and again voted against beginning debate on the bill. A third vote to gain cloture is scheduled for today. There remains a high degree of certainty that a financial reform package will move forward. All indications are that both parties recognize the importance of reform and the American people's desire for such legislation. What we are watching is the political dance on a difficult issue. Striking a balance between strong regulation which protects the American people while not harming the potential positive effect the financial industry can have on our economy is no easy task. We shall see what today's vote brings.

Is your Financial Advisor a NAIFA Member?

NAIFA On Putting Your Interests First

"NAIFA is lobbying against bringing insurance agents, securities-licensed professionals, and retirement plan services providers under a new layer of regulation that would be imposed by a proposed Consumer Financial Protection Agency. NAIFA also continues to play a leading role fighting proposals to impose an impractical fiduciary standard of care on registered representatives who offer securities products through their broker-dealer."

This quote comes from NAIFA's (National Association of Insurance and Financial Advisors) "Advocacy Brief 2010" flyer. NAIFA is a large trade organization made up largely of insurance agents. This organization is lobbying against a fiduciary standard with the arguments that it is "impractical" and that requiring a fiduciary standard will make financial services unavailable to many people. These are two of the hollow arguments that have been used to confuse the issue many times. In my opinion, financial advice that is not in your best interest is advice that is better made unavailable. Are you looking for advice that benefits an insurance company first, but at least it's affordable? This is not advice, it's a sales pitch. Let's allow this advice to disappear. The argument that not putting your interest first is for your own benefit is bunk. This organization has proved to not be on the side of the consumer. Do not believe opposition to a fiduciary standard to be any different.

Generally when a fiduciary standard is called impractical, it is meant that putting your interest as a client first is difficult to execute both for an advisor and from a regulator standpoint. It is correct that often it is difficult to determine what is in a client's best interest, and that at times advice does not work out as expected. And it is true that regulating a fiduciary standard does not mean that there will be no instances of fraud and abuse of clients. There will always be crooks in ANY profession. Nevertheless, a financial advisor who claims to hold a relationship of trust with clients should be required to do what's in that client's best interest. Another financial advisor may disagree with the advice delivered, but if the advice is based on well-thought out rationale, the advice can remain valid as in the client's best interest. It is no different than two doctors recommending a different course of action for the same illness. Arguing that a fiduciary standard (putting your interest before the company's) is impractical is a nonsense argument.

If your financial advisor is a member of NAIFA, ask them where they stand on putting your interest ahead of their own and their company's interests. Do they work for you? NAIFA is anti-consumer; they fight to keep from being required to do what's in your best interest. Take your advisor to task if they support NAIFA. It may turn out they do not agree with this position and are a member for other benefits. I think you have a right as a client to know where they stand.

Frighteningly, the 
"Advocacy Brief 2010" flyer also discusses NAIFA's efforts to fight a New York state regulation that would require insurance agents to clearly disclose all forms of commissions and compensation received by an insurance agent before and during the sales process to a potential client. This disclosure would require a client be given information about the nature, amount and source of compensation an agent would receive by the purchase of a product. Instead NAIFA would rather a generic compensation disclosure be required without clear details. Without clear disclosure, it makes it very difficult for you to judge whether advice is given based on your interests or based on a large commission check. General disclosure statements can prove extremely difficult to interpret and do not provide you the information you need to make an informed decision.

Senate Votes on Financial Reform

Yesterday the Senate held a cloture vote to begin debate on the Restoring American Financial Stability Act of 2010. As expected, the issue failed and voting largely followed along party lines. Interestingly, one Democratic broke ranks and voted against the measure. Even more interestingly, both Democrats and Republicans seem to be satisfied with the vote. Democrats see the vote as ammunition that Republicans stand with Wall Street instead of American families. Republicans are satisfied to have closed ranks and to force further negotiation and possibly some Democratic concessions despite their vote representing some political risk. This issue is long from dead. Both parties agree action is required, but the substance of the legislation has not been agreed upon by a wide margin. The Financial Times offers a very good analysis of the vote and issues here.


Living Financially Aware Shifting Focus

LFA's New Focus

I have decided to shift the focus of the Living Financially Aware blog, at least temporarily. While I will continue to occasionally write about how to increase your financial awareness around your finances, many posts will now be concerned with the deception being perpetrated upon the American people by much of the financial services industry I wrote about Friday. I will continue to write about what I know personally and I am also going to scour resources looking for examples of this deception occurring. As I wrote last Friday, many large financial services firms do not work for you, are fighting against putting your interests first and should be exposed. I am not the first to voice this, but hope adding my voice will further the impact we are having to bring Americans closer to a time when they can feel comfortable with the financial advice they receive.

In this effort, I will focus on four topics:

1) Providing examples of firms putting their interests ahead of clients, despite putting on a public appearance of trust

2) Keeping you abreast of news and legislation that may impact the financial advice you can expect to receive

3) Offering tools to help you better recognize when a firm is working for you or against you

4) Offering examples of firms that have been successful and put clients' interest first.

I think it is important to inform you that there are many people who work for deceptive firms that do a very good job for clients. These people fight through the systems put in place to benefit the company at the detriment of the client. Your financial advisor may be one of these people. It is not my goal to convince you not to work with this individual, but I do think it is important you are aware of the conflicts they must deal with when providing advice. I can also tell you that picking a firm which does have a commitment to putting your interest first does not provide a guarantee that you will always receive the best financial advice. Working with this type of firm does, however, increase the chance of receiving good advice exponentially.

I may sound like a broken record at times. This is in many ways intentional. I am frankly angry. I have watched as the American consumer has been tricked, confused and deceived to believe that all financial advisors are providing the same type of service and always sit on the same side of the table as clients. This is simply not true.

Getting good financial planning advice can positively impact your life in dramatic ways. Getting conflicted and bad advice often does more harm than no advice at all. It is time you knew what type of advice you are receiving.

A Bit of Relevant News

Today the Senate may bring a financial reform bill, the Restoring American Financial Stability Act of 2010, to the table for debate. Currently, partisanship seems to be stalling forward progress of any action on reforming the way the financial services industry operates. While the bill does not directly impact the type of financial advice you receive in its current form, it remains relevant to this discussion. Both parties recognize the need for reform in some manner, but as of now appear quite a distance from reaching agreement on a bill. Whatever the form of the final bill, this may be the first step to improving the advice you receive. There will be more to come as this issue proceeds.

Linked below is a good article in this morning's Washington Post on this issue:

It’s Time Everybody Knew!

Yesterday I spent the day in Washington DC representing the FPA of Northeast Wisconsin meeting with a Senator and staff to support the Financial Planning Coalition's positions. I came away very honored that this Senator and staff believe in what true financial planners do and may be willing to take some political risk to bring the profession forward. On my way home, it struck me how absurd the entire argument against a fiduciary duty is and I decided that I would forgo today's "Friday Financial Feeds" and instead get on my soapbox. If you find this important, as I do, please share as much as possible. It is time everyone knew!

The issue is a very straightforward and ugly one. Many firms in the financial services industry are dead-set against and willing to spend significant resources so that they do not need to do what is in your best interest as a client! They have lobbied hard to prevent from being subject to what is known as a fiduciary standard. This standard would require people providing financial planning services to put the client's interest first, before the planner's interest and before the company's interest. THESE COMPANIES DO NOT WANT TO DO THIS! They DO NOT want to WORK FOR YOU! THEY DO NOT WANT TO WORK IN YOUR BEST INTEREST! Their goal is to part you from your money!

Yes, entrepreneurship is the American way. Yes, companies are established to create a profit. But what is being done is, in my opinion, virtually unethical and certainly deceitful. The relationship these companies would have you believe you will receive is a relationship of mutual trust where you can feel comfortable with the advice received and where that advice is in your best interest. But they then turn around and do not work in your best interest. They attempt to blur the line between those who do work in your best interest and those who do not.

Entrepreneurship is a wonderful thing; deceit in the name of profit, however, is despicable and should be rooted out and vilified. These companies are deceiving you every day. They have created a system to deceive you. They do not work for you! If you don't believe me, check where large investment companies and insurance companies stand in the financial reform debate. If they do not support a true fiduciary duty where they must place a client's interest ahead of their own, know they do not stand with you. They have consistently offered volumes of reasons why working in your best interest is not beneficial to you. It's all a load of crap! Do not believe it! These are hollow arguments meant to confuse the debate and shift the focus away from the fact that THESE COMPANIES DO NOT WANT TO WORK IN YOUR BEST INTEREST!

Individually your financial advisor working for one of these firms may do a great job for you, but be certain their firm has created a system of incentives and pressure for them not to do so.

It is time for the American public to understand what is going on behind the curtain. Demand good financial advice! Demand financial advice be given in YOUR best interest! Take these companies to task for their deceitful, anti-consumer positions!

Please share this with everyone possible. This is a message I believe everyone should hear, despite my rough delivery. It is time everybody knew!

The Financial Wisdom of Benjamin Franklin

I am unexpectedly traveling to Washington DC today and find myself without much time to write. Therefore I thought I would take a short intermission from my usual writing and instead share an excerpt from Benjamin Franklin's autobiography. I just began reading this book and have been struck by the nuggets of knowledge including a remarkable amount of insight into financial awareness. Without further ado, the excerpt:

"I began now gradually to pay off the debt I was under for the printing-house. In order to secure my credit and character as a tradesman, I took care not only to be in reality industrious and frugal, but to avoid the apprearances to the contrary. I dressed plain and was seen at no places of idle diversion. I never went out a-fishing or shooting; a book indeed sometimes debauched me from my work, but that was seldom, was private, and gave no scandal; and to show that I was not above m business, I sometimes brought home the paper I purchased at the stores through the streets on a wheelbarrow."

Franklin makes clear that he believes greatly in being frugal, a theme which he carries throughout the autobiography. However, he recognizes that he values deeply reading, books and education and is willing to spend money to pursue these values. Financial awareness helped a man who came from modest means to become one of our most famous founding fathers.


On Why I Love Buying Tech Gadgets – A Lesson in Financial Awareness

Reading about the latest Android smartphone, new Blackberry operating system or next great computing platform really gets my fingers itching to dip into my pocketbook. I love tech gadgets and am always ready to consider a new purchase. A recent tech encounter provided me a great lesson in my own financial awareness.

A couple days ago Dell ran a 20% sale on  outlet netbooks, laptops and desktop computers. I have been watching for a netbook for some time and found a great deal on a beautiful, alpine white Dell Mini 1012. My inner geek was running wild. I quickly emailed my wife to see how she felt about purchasing the netbook, and then began to put together my reasoning that doing so would be a good idea. My rationale was based in truth and very effective on me.

I have been doing some contract work during my unemployment which causes me to travel away from home. During this travel, I require a laptop for the work. I have been taking the family laptop, leaving my wife only the children's older desktop computer to use. So I told myself purchasing this laptop was necessary to continue this contract work. It was better sized for travel yet still gives me the computing power I need. The purchase would allow me to leave the family laptop at home, so my wife would have a decent computer to use while I was away. Since this purchase would be made for use during my contract work, I reasoned I should be able to write off at a least a portion of the expense to offset some self-employment income. And the price was unbeatable for Dell's latest generation of netbooks.

The arguments to purchase were all valid, reasonable and convincing to me. However, they were not the true reason I wanted to buy the netbook. I was actually acting on a subconscious script that I had formed during childhood. I turned 30 a couple years ago and at about the same time realized that my weakness for tech gadgets was increasing with age. That is when I recognized the script I believed in. I recall as a child hearing people whom I thought old talking about new technology as inaccessible and unnecessary and simply not for someone their age. The lesson I learned and script I created was that interest in and adoption of new technology indicated being young. As I have gotten older, I have become more active in keeping up with technology and my desire to adopt new technology has increased. This has resulted in my wanting to buy more, newer and pricier gadgets. The arguments I made to purchase the netbook were justification in order to allow me to act on my script: owning the latest and greatest netbook means I remain young.

Recognizing the script I was acting on allowed me to make a more informed decision. I could still have chosen to purchase the netbook. What I realized, however, was that my rationale, while good, was not enough to justify spending the money while I remained unemployed. It allowed me to consider the decision more clearly. The family laptop is absolutely suitable for the contract work and my wife actually prefers using the desktop computer. A new, great deal on a better computer (running Chrome OS possibly?) will be available 6 or 12 months from now. We are also preparing to complete some work around the house and, given our constrained budget, our money would be necessary for those endeavors. Not owning the netbook would not increase my age by one day more than it increases each day anyway.

These types of scripts affect everyone's decision-making about money. We each have a set of subconscious money scripts which impact how we think about money that we learned at some point in life. Some we were taught directly such as being told "a penny saved is a penny earned." Others are created by interpreting a lesson or experience in our own manner, such as my script. Money scripts are not in themselves bad or harmful. However, these scripts impacting your decision-making without your knowledge in deficient ways can be very harmful. What is important is to learn what subconscious thinking is occurring when you make financial decision and then take that into account as you make your decision. The recognition of my script allowed me to think more clearly about my decision.

I will share more of my scripts as I encounter them. I hope you are able to identify some of your own as well. If you want more information about money scripts and how they impact you, I suggest reading Conscious Finance: Uncover Your Hidden Money Beliefs and Transform the Role of Money in Your Life by Rick Kahler, CFP® and Kathleen Fox.

How Bad Were Your Taxes?

Now that we have passed the tax filing deadline, I thought it important to address one of the concerns I often encountered when working with clients who were not high net worth individuals.  Wealthy or not, high income or low income, individuals frequently wanted to discuss the impact of income taxes on their finances and how to mitigate that impact. While a valid concern, I often learned that many individuals were not aware of their tax situation. Today I would like to urge you to understand your tax situation so that you can be more aware of the impact income taxes are having (OR NOT!) on your financial well-being.

According to The Tax Foundation, a non-profit tax research organization, for the most recent data available by the IRS (2007 Tax Year), the average income tax rate for all taxpayers was 12.68%. Drilling into the numbers deeper, however, shows that a great number of taxpayers pay taxes at a far lower rate. The bottom 50% of taxpayers paid an average income tax rate of only 2.99% and the next 25% of tax payers paid an average income tax rate of 7.01%. It is fair to say that 3/4 of all taxpayers in the United Stated had an average income tax rate of about 7% or less in 2007! What I would like you to consider is where do you fall in this range?

I often worked with clients who desired to reduce their income taxes and suggested strategies they read about to do so. What they did not realize and what I tried to make them aware of was that many of these strategies could cost far more in the long run than any small tax savings they may be able to obtain.

For example1, clients often wondered about using a variable annuity solely as a tax-sheltering vehicle to protect income in excess of IRA contributions they could make. Assuming a reasonable 1.65% total annual annuity expense (made up of several charges) and an investment of $100,000, the annual fees for owning that annuity would be approximately $1,650. If that money had been held in an account which did not offer tax-deferral, taxes would have to be paid on realized income. Assume the $100,000 were invested in an interest-bearing savings account paying 3% interest, total income would be $3,000. Even if taxed in the 25% tax bracket, the total income tax would be only $750…far less than the annuity charge. Plus the annuity income likely would be still be taxed in the future at time of withdrawal! Other tax-sheltering strategies can have similar costs.

My point is, know your income tax situation. If you are one of the 75% of taxpayers discussed above, many tax-sheltering strategies actually could harm you financially. You may have political reasons to feel strongly about reducing your taxes, in which case, these strategies could make sense to you even though there is a cost associated. I would then advise you to consider this a goal you have based on a value which can be planned for. But know the costs and potential benefits of pursuing this goal. I submit that you might find yourself surprised.

A point of note: I have in this piece only focused on income taxes. For the 75% of taxpayers discussed who receive employment income, the heavier tax burdens are frequently in the form of employment taxes and real estate taxes. Unfortunately, the tax strategies often employed to reduce taxes do not impact these tax burdens.

1This example has been greatly simplified including a simplification of the actual mechanics of a variable annuity which are far too complicated for this simple discussion.  Frankly, this complexity is a major criticism I have of variable annuity products. An annuity can offer other benefits in addition to tax-deferral which should be considered, however, which may satisfy some of your goals. 

Money is Worthless: Giving Money Value

"Does money have value?"

That is a question which has bothered me for quite some time. I have watched as clients packed money into savings and investment accounts, mattresses and coffee cans well in excess of what they might need to achieve their goals. In many cases, this saving was to the detriment of a lifestyle the client hoped to live by making sacrifices they often regretted. As I watched this, I wondered if the saved money itself had value?

My answer is that money does not have any value. Money is only a representation of some other value. A $20 bill is not worth anything, but it could represent taking out a friend to lunch which is of great value to me. A million dollar investment account has no value itself, but some purpose (e.g. retirement fund) can be assigned to that money so that it will represent value.

My belief is that every penny earned and saved should be immediately and consciously “spent." Value should be assigned to each dollar. This need not be a tangible item, however. You might choose to save heavily because it represents security to you and you wish to have a large emergency fund.  What is important is that you determine what you value greatly, how you most want your money to be used and then assign your money to those items identified.

Be conscious about the value your money represents, it will help you become more financially aware and help you use your money how you most hope to. Budgeting is easy when you have already set aside money for things you truly value.

My purpose with this post is to share my thoughts, but more importantly to pose the question. I would love to hear if you think money has value?

Friday Financial Feeds

Every Friday I post links to a half dozen or so articles and online discussions related to personal finance and financial awareness from the previous week which I have found particularly interesting and useful. Budgeting is definitely a theme this week. I ran across several great articles on this subject, but begin with a “rant” by financial planner Russ Thornton.

This week’s Financial Feeds:

-  Pardon Me, But… Russ Thornton

My favorite blog post of the week. Russ attacks some of the improprieties he sees in the service delivered by many financial advisors. Russ seems not to do too much editing of his thoughts and simply says what he feels. I agree with everything he writes.

-  It’s Not What You Earn, It’s What You Spend – MyTwoDollars

     A short piece about focusing on spending instead of income and that doing so can positively impact your life. By refocusing, the pursuit of more money can be reduced and life can be lived more freely and fully.

     -  If Budgeting Isn’t Fun, You’re Doing It Wrong – WiseBread

If you have struggled to put together or keep to a budget, this is the article for you. This includes a great description of how to get started budgeting and how to do it in a way that will increase the likelihood you want to follow it. Great stuff, and simple.

-  Saving For the Future When You Can’t Afford To Save – Financial Awakenings

Financial planner Rick Kahler delivers some old fashioned, simple living frugal advice. This includes ideas to reduce spending for someone just starting out or on a small income.

-  Why You Never Make Time To Start a Budget – FinanciallyPoor

Here a short piece discussing some of the difficulty in creating a budget, whether there is a subconscious recognition of overspending you do not want to face or a conscious belief that you already control your money well.

I have been enjoying writing posts to my blog tremendously. It has helped me regain a sense of professional purpose and a reconnection with colleagues in the financial planning profession.

I hope you learn something and enjoy reading the blog as well. If so, please share with other’s whom you believe will enjoy or gain value as well. I would love to help as many people as possible.


Financial Advisor, Investment Advisor, Wealth Manager…What’s With All These Titles?

In my opinion, the financial services industry is in many ways designed to confuse the public and give the appearance of more complexity than exists.  The titles used by individuals delivering some form of financial advice are among the ways confusion is created.

I am painting in broad strokes today; the following is not true of everyone in the industry. The difficult is recognizing the truthful from the deceptive individuals.

I have been using the phrase “financial advisor” to describe an individual providing financial advice. The problem is, financial advisor has no clear definition and there are no requirements to use that as one’s title.  I use the phrase as a catch-all and add no value to its use. Being a financial advisor does not describe an individual as having any particular training or expertise…it simply means they provide financial advice.

At times, I will use the phrase “financial planner.” Again, there is no definition of what a financial planner is and what a financial planner provides. When I use this title, I am indicating an individual who believes in more than managing investments and whose service is designed to help you reach your life goals by helping you with your whole financial life (see this post.) In the industry, a financial planner could be an individual providing a true financial planning service, but it could also be an individual only providing investment or insurance advice.

Other titles with equal ambiguity include financial counselor, financial adviser, wealth manager, investment advisor and many others. There may be some regulatory requirements to use a certain title, but the hurdle is generally very low to achieve those requirements. When speaking with a financial advisor, do not assume their title indicates their specialty or expertise or job function.  A wealth manager could actually be an insurance sales person. A financial adviser may actually be a stock broker.  

This confusion is often intentional and meant to make it difficult to determine whom you are working with.  There are financial planners who deliver tremendous, powerful services that can greatly impact your life. Then there are others in the industry who would like you to believe you are receiving the same services, but are actually using financial planning as a means to sell you additional financial products

As I have previously advised, know what you want in an advisory relationship. If you want someone to help only with your life insurance needs, work with a life insurance agent. If you want someone who provides true financial planning services, make certain this is the service they actually provide.  It can be tricky. How a financial advisor is compensated can help decide what service they actually provide, but it is not the full story. Designations such as CFP®, ChFC and others can also provide some help, but often are more confusing than helpful (a topic for a future post.)

Unfortunately the burden is strictly on you to determine who delivers the service you desire.

Financial Planning Is About Decision Making And Awareness

It dawned on my this morning that over the past several posts I have spent a lot of time discussing issues and problems in the financial advisory world. I do strongly believe what I have written to date, but I also strongly believe that financial planners who do their work well and who have proper training can have tremendous positive impact in people's lives. I strongly believe in financial planning as a catalyst to help people reach their deepest goals. Therefore, I thought I would share a story today to help you understand the importance financial planning can have in your life.

I would like you to picture the following scenario and really try to visualize as you read this.  This it likely something which has happened to you and something you would rather not experience again.  Picture yourself at the end of a business trip, driving to the airport in a city you are not familiar with.  You purchased a map to get to the airport, but forgot it at the hotel.  When you arrived into town, it was late at night .  Everything looks so different in the daylight and you do not know how to get to the airport.  As you are trying to find your way, deciding whether you are headed in the right direction on the highway, you hit a detour which sends you off the highway into what appears to be a shady looking part of town.  As you exit the highway, you must immediately make a decision.  You can turn right, which heads into this part of town but also feels like the correct way to go.  Or you can turn left, which heads into the country, but is almost certainly away from the airport.  If only you had remembered that map, you would know where each road led and which should get you to the airport more quickly.  Now you are left to make a decision based on only the small amount of information you have; visually you can see some landmarks and the gut feeling that one way is the right way and the other the wrong way.  You have to make a decision on which direction to drive based on short-term information and emotion (you don't really want to head into that scary-looking part of town).  You have no way of knowing the long-term implications of your driving decision...and you are going to be late for your plane if you go the wrong way!  That map would have helped you make this decision, you should have looked at it prior to leaving and made a plan.  Your decision would have been based on better information and you could feel far more comfortable moving forward.  Now you are stuck, fearful to go one direction although it seems right, and hesitant to go the safe direction.  This indecision is going to make you miss your plane home, but you really want to see your family.

This is a harrowing experience whenever it happens.  It has happened to me on more than one occasion, and each time I remind myself never to forget the map again.  I do not want to miss the plane again, and I do not want to have to make that decision with little information.  This is a potential scenario many people can relate to and try not to relive.  Yet every day, people live the same scenario as they drive down the road of their financial lives.  People constantly make decision with only the information immediately in front of them, only considering the short-term impact with some small idea that the decision could have a long-term consequence.  They often have not considered where they want to end up financial and, if they have, even more frequently have not looked at a map to guide them there.  In fact, many people have no idea that this kind of map even exists.  Providing this type of financial road map is one of the greatest benefits of using a financial planner.

You can benefit both in the short- and long-term by having a financial planner at your side. In the short-term, a financial planner can  help lay out the pros and cons of a decision and how the decision will impact you over the next several days, weeks and months. A planner can offer alternatives to the choices you see.   A financial planner can also act as a guide to help you  make these decision while reducing some of the impact of emotion on your decision-making.

In the long-term, a financial planner can help you figure out where you really want to go by guiding you through a deep goal-setting process. Your financial planner can help you see the long-term impact of a short-term decision and help you recognize the worst case scenario and ways to reduce the likelihood of that scenario.  Finally, a financial planner can help you understand the milestones which indicate you are on the right path and assist you in develop the benchmarks to help you recognize that you have reached your goals.          

I do strongly believe in financial planning. I have experienced both good and bad in the financial services industry. One of my goals with this blog is to help you know what to watch for as you look to hire a financial planner and I hope to have provided some guidance in the past few post.  I also hope to encourage you to seek out a financial planner regardless of your financial situation. While it's true that many financial planning practices only cater to high-net worth individuals, there are practices that want to work with individuals of lower and mid-level incomes and net worth.  You can find a financial planner who's beliefs and focus fit you well, and the impact their service can have on your life can be positive and dramatic.

Income Tax Disconnect

I was not planning to post on my blog while traveling today. However, over the past several days I have watched an interesting set of income tax discussions which seem to show a real disconnect between a large portion of our population and financial advisors. So, here is my first Blackberry authored post. Please pardon any errors.

Last week a statistic hit my Twitter timeline that 47% of Americans pay no income tax (see here: accompanied by various opinions by financial advisors about this fact. Oddly, around the same time a Forbes article about how to plan for upcoming tax hikes was being discussed by financial advisors on Twitter (see here: This struck me as an unfortunate disconnect and a clear example of how a huge portion of the population is simply ignored by so many financial advisors. Nearly half the population has little tax planning to be concerned with, yet financial advisors tweet and retweet these tax planning tips in a spirited manner.

To be fair, many clients of financial advisors do expect a high degree of tax planning because these clients do fall into the group of highly taxed individuals. Therefore this article made sense to share. But that is my point. Who is providing financial advice to the rest of our population? Where do most Americans turn to for good, objective, low conflict financial advice? What can be done to better serve people who do not pay income taxes (or pay income taxes at a low rate?)

The arguments for why this population is not well served are many, very reasonable and the subject of a future post. Somehow, it strikes me, "the rest" could use the help of good financial advisors.

Friday Financial Feeds

Every Friday I will post links to a half dozen or so articles and online discussions related to personal finance and financial awareness from the previous week which I found particularly interesting and useful.

This week’s Financial Feeds:

A nice article including a chart comparing small-business employer retirement plans for the 2010 plan year. Brought to my attention by Chris Carosa.


On LinkedIn, Russ Thornton posted a great question discussing the disconnect between what financial advisors and clients believe advisors should be doing for clients. A great topic and a great discussion.

I referenced this article earlier in the week. This is a great article written by Oleg Mokhov on Wise Bread detailing the power that spending less had on making his life happier. Very relevant to financial awareness.


The Behavior Gap blog is one of my absolute favorites. Here a recent post discussing that we have a habit to forget bad times in the market when things are good. A great reminder.


Here an article from Roger Wohlner linked in an earlier blog post by me. This includes a simple, great explanation of the various ways financial advisors are paid and some of the advantages and disadvantages of each.

I hope you enjoy and find value in each of these articles and discussions.

I will be traveling at the beginning of next week and unsure about how effective I will be in writing new blog posts. Look for me to return with certainty by Wednesday. I wish a good weekend to all.

The Simple Dollar - The Mythology of Spending and Mental Anchors

Here is a great article describing very relevant problems in the process of trying to become financially aware. This is definitely worth sharing and reading. Anchoring not only happens in product prices (as described in the article), but is also a well-studied problem with investment management, even for professionals.

The Simple Dollar � The Mythology of Spending and Mental Anchors

I plan to write in the near future about the impact of these types of subconscious mechanisms on financial planners and investment advisors. For today, recognize that even professionals are human. If there are mental financial "errors" you make, feel certain that financial professionals often make the exact same errors.

The Primary Conflict of Interest

As follow up to my post titled Conflicted Advice - Why Fee Only is Not Conflict Free, I thought it important to discuss one additional conflict of interest present for all financial planners and investment advisors. A comment on my previous post mentioned that I had not made my case because I had not covered all fee-only advisors. I agree with this commentor in many respects, so believe it important to discuss this additional conflict which I think will drive my point home. There is likely new criticism to be made about this post specifically because I contradict myself in many ways, but I think this helps make clear how complex this particular conflict of interest can be.

I imagine you will have never heard a financial planner or investment advisor state the following, but there exists one fundamental conflict of interest which all planners and advisors always bear and cannot eliminate. This conflict is so basic and so fundamental to the financial advisory business process that it is generally overlooked, even though frequently indirectly mentioned by clients. Clients touch on this conflict by asking a question similar to the following: "Have you made me more money than I have paid you?"

The Conflict

The financial advice industry finds itself in a very unique and difficult position. The value that many advisors profess to deliver is to help people protect and increase their wealth. However, in order for an advisor to deliver on this promise, a client first must be willing to give up a piece of that wealth in the form of a fee. An advisor's financial health requires that a client gives up a portion of their own financial health. This is an exceptional position to be in and creates a conflict of interest which will remain throughout any client/advisor relationship. Few, if any, other professions or industries must cope with this type of conflict. A doctor does not ask that you first pay for her services with a kidney or a portion of your good health. An attorney does not require you to shorten your life as payment in order to draft estate planning documents. A teacher does not ask that you pay for his lecture by turning over a portion of your IQ. But a financial advisor does ask that you turn over some of your money in order to improve your financial life.

With every service or product an individual must decide if the value received exceeds the price to be paid. If this were not the belief, no transaction would occur. The same is true when deciding whether to hire a financial advisor. But it is rare that the value and price be so closely tied... that the price immediately increases the value which needs to be delivered.

Understanding Value

How do you, as a consumer of financial advice, decide whether you are receiving adequate value and whether this conflict is impacting advice you are receiving? The answer depends on what you and your advisor set out for expectations from the onset of your relationship. What did they promise to deliver? If they stated that they would attempt to outperform the market, you could compare whether they have exceeded an appropriate index by more than what you have paid them. You could also simply compare if you made more money with your investments than you paid your advisor. This type of review is far too simplistic, however.

In fact, many advisors would not claim to be able to outperform the market with their investment platforms. Other advisors have relationships with clients which do not involve investment management at all and may only include portions of the financial planning process. And yet more advisors who do state they will outperform the market also provide many other services which they would point to as increasing the value delivered. Placing monetary value on these intangibles becomes exceedingly difficult, particularly as the layers of services increase.  How much do you value someone helping you become more aware of your cash flow and increasing your savings? What is the price tag for someone to help you articulate your best life and help you craft a path to live that life? What you pay the advisor is clear. There is a fee which they receive from you. But how they improve your financial situation and deliver more than the fee in return is not so easily determined. If your expectations about what is to be delivered in return for your giving up some financial health are not the same as the expectations of the advisor, the conflict grows and can become a significant problem in your relationship. These differing expectations can place you on opposite sides of the table from your advisor, creating an adversarial relationship where the advisor must continually prove his worth and prove that he has not, in fact, hurt your financial health in the process of improving his own.

Managing Expectations

Fortunately, keeping this conflict in check can be accomplished with clear communication about expectations early in the advisory relationship and frank assessment of delivery on those expectations throughout the relationship. Honesty and integrity sit at the heart of this communication. You, as the client, must be open about what you want from the relationship, and you must let your advisor know when they have exceeded or have fallen short of your expectations. The advisor must be forthright in their assessment about whether they are delivering the value they proposed to and whether they are meeting their own expectations. If they do not believe they are doing so, they must be willing to communicate this to you so that the relationship can be severed or new expectations can be agreed upon. None of this can happen unless these expectations are clearly articulated between you and your advisor.

The Silver Lining

Additionally, this conflict of interest has an opposite element for fee-only advisors. A fee-only advisor requires your continued agreement to pay their fees in order to maintain the income source your provide them. This can help place you back on the same side of the table with your advisor. If their advice were to send you into financial ruin, they would lose you as a paying client. If this happened to many of their clients, the advisor may find themselves in financial ruin. This provides the advisor incentive to give advice which should help you maintain the ability to pay their fee. This incentive may not help you reach your goals directly, but is should at minimum allow you to feel less discomfort about giving up some of what you hope to achieve by hiring a financial advisor.

Every financial advisor must work under this conflict of interest. In order for their business to survive and succeed, they require that you give up a portion of what they promise to deliver back to you. Only through a strong, open relationship with clearly established expectations can you feel comfortable that your advisor is acting first on your side of the conflict.  Be clear with your expectations and demand that your advisor be clear as well.  It may lead to a better advisory relationship or help you recognize you are not working with the right advisor.

Conflicted Advice - Why Fee-Only Is Not Conflict Free

During my time working for financial planning firms, I have been employed predominantly by fee-only advisors. A fee-only advisor provides financial advice without receiving any commissions for products recommended, as opposed to a commissioned advisor or fee-based advisor. (For a good, simple explanation of the three predominant compensation models in the financial planning world, I recommend this post by Roger Wohlner, CFP®.) I am a believer in the fee-only model as the best current compensation model to deliver financial advice. However, I want to make you aware that even this model has conflicts of interest and then compare this conflict to the conflicts of the the other two models. 

The Fee-Only Conflict

The fee-only model does remove the conflict of interest created by wanting to sell products which pay commission. My belief is that this can increase the quality of advice delivered to a client. There are still very important conflicts which remain, however. The predominant potential conflict of interest arises if you pay your fee-only advisor a fee based on assets under management. A conflict exists when you ask questions about removing investment assets to make purchases or pay off debts. As an example, if you have investment assets to pay off your mortgage and ask your advisor whether you should do so, the advisor has financial incentive to find a case for you not to pay your mortgage. By paying your mortgage off and reducing assets under management, your advisor could receive less revenue from you. Furthermore, under this scenario it is very easy, and often correct, to make a case to maintain a mortgage. Your advisor is performing this analysis, however, from a conflicted viewpoint. You must consider whether you believe the advice to have been put together with an understanding of your beliefs and values around debt and your appetite for risk. This conflict exists with any question pertaining to consuming or saving investment funds which could create income for the advisor.

The Conflict Impact

Fortunately, a state or SEC registered investment advisor is required to put your interests ahead of their own when a conflict exists. This means that even in the mortgage scenario above, the advisor should provide you advice which is correct for you. And, from my experience, I believe advisors generally try to do this. Nevertheless, two questions exist on which you must pass judgment. First, the financial incentive to advise against removing assets could be working on a subconscious level with your advisor. They may have preconceived ideas about paying off mortgages which can be justified with financial projections, but are partly based in the need to maintain income sources. Second, there can be an argument made about what is in your best interest. One advisor can point to a financial projection showing that you come out ahead maintaining your mortgage and keeping your money invested even if you would feel more comfortable with the debt eliminated. They can rightly argue that they are acting in your best interest to maximize your financial wealth. A second advisor can argue that you should pay off your mortgage despite the risk that you may lose some financial wealth because you do not have the risk tolerance to maintain the mortgage and you value highly being debt-free. Neither opinion is incorrect. You should have a clear understanding about what assumptions your advisor makes when providing advice. Are they trying to maximize your financial wealth or taking into account your beliefs and values? My goal is not to take a position on that question, but to make you aware of the thinking behind the advice and that this conflict does exist.

Other Models

How does this conflict of interest compare to those conflicts which commissioned or fee-based advisors are presented with? I believe the fee-only conflict is a far more transparent and manageable as long as your advisor makes clear to you what assumptions they use when providing their advice. A commissioned advisor must sell products which pay a commission for them to earn a living. They can discuss this conflict of interest with you, but they have no way of minimizing the conflict. If they hope to get paid, they are limited in the advice they can provide. A fee-based advisor is in a seemingly better position. They can provide you advice based on the fee without having to push commissioned products. Commissions are only a portion of their income source.  Their conflict is minimized. However, they do still derive some of their income from commissions and are therefore given incentive to offer commissioned products and make a case that these are equal to non-commissioned products. Secondarily, the fee-based advisor has the same conflict of interest as described above for a fee-only advisor. This fee-based advisor works under two sets of potential conflicts.

Conflicted Advice

What this means to you as the client of financial advisors is that there really is no conflict-free advice under any of these three compensation models. My belief is that the fee-only model provides the most manageable conflict of interests and that the legal requirement to put a client's interest first provides a layer of legal protection to clients. What is important is that you understand these conflicts and how they may be impacting the advice you receive. It is also important that your advisor be clear about the conflicts of interest they operate under with you. If they have not been, ask them. Be direct... and if your advisor is not forward or is unclear about their conflicts of interest, be very wary, regardless of compensation model.
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