Are young investors terrified of the market? This is a question that a lot of experts are asking after a recent study showed that 43% of investors aged 18 – 34 consider themselves to be conservative investors. Christine Dugas, a personal finance reporter with USA Today, asked what I’m seeing from my young clients when it comes to investing.
“They are scared of the market and understandably so,” says Alan Moore,a financial planner and founder of Serenity Financial Consulting in Milwaukee. “Many have seen their parents lose 50% of their retirement savings in six months.”
The real issue is that the number one advantage young investors have is time; Time to recover from losses, and time for compounding interest to have a dramatic effect. Being invested conservatively at a young age means making financial sacrifices .
Moore understands the problems that Millennials face because he is 25 and many of his clients are members of his own generation. And if they are only willing to invest 40% of their savings in stocks at a young age, vs. 80%, he tells them that they will have to consider other options to boost their retirement savings, such as saving more, buying a smaller home, or working longer.
There is a trade off with every financial decision. It is my job as a financial planner to help educate clients on those trade offs, and then work with them to implement the option they feel is best for them and their family.
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After a recent presentation to AARP for their Ready for Retirement series, an attendee asked how to find a quality financial advisor. This is a great question that is unfortunately difficult to answer. Why? Because certain parts of the financial community have spent a lot of money lobbying Congress to keep it that way.
If you frequent this blog, you know that I believe:
- Your financial advisor should be fee-only; no other compensation structure is acceptable. This eliminates a lot of the conflicts of interest that exist in the world of financial product sales.
- Your financial advisor should always be a fiduciary, which means they will always make recommendations and act in your best interest.
- You should always ask a lot of questions when interviewing a financial advisor. You need to know a lot about the advisor before turning over your life savings to them.
- You should do a background check on the advisor. FINRA & the SEC have made this process much easier in recent years.
All of these recommendations take a lot of time and energy. What if you just want to find out really quickly if it’s worth digging further? Just ask “Do you have a license?”
What is a license?
All salesmen must be licensed by FINRA to sell financial products, such as mutual funds and annuities. There are different licenses to sell different products, and all are labeled “Series” such as the Series 3, Series 6, & Series 7. These licenses means the holders can transact (sell) financial products. Why is this a bad thing? Because when selling a product, the holder of a license doesn’t have to act in their client’s best interest – they are free to act in their own best interest. I know this sounds absurd, but it’s true.
What about the Series 65?
If you do a FINRA check on me, you will find that I hold the Series 65, which is sort of the odd man out when it comes to licensing. It is the one in the series that allows the holder to give investment advice, but doesn’t authorize the holder to sell any products. It is required in almost every State, so every fee-only advisor you talk to will either have it, or will have exempted it.
Look out for salesmen wearing an advisors hat
Unfortunately, some salesmen are allowed to be both salesmen and advisors for the same client – we call them dual-registered (Some call them double dippers – I typically call them crooks, but I know that isn’t nice).This means that when they are giving you advice, they are acting in your best interest, but when selling you the product they recommended, they act in their own best interest. This is incredibly confusing, and something several other countries have made an illegal practice. If your salesman tells you they are also an advisor, walk away… If they have a license to sell ANY product, go find someone else.
So what do you think? If you ask if your advisor has a license, I would love to hear from you! I may feature your story in an upcoming blog post (Anonymously of course).
When answering a prospective clients questions about my financial planning firm, I was reminded how difficult it is to interview a financial planner. Asking the right questions is important, but so is knowing what the answers mean. The terms “financial planner”, “financial advisor”, and “financial planning” are not protected by any type of regulation, so every professional has their own interpretation of what it means to be a financial services provider. Some financial advisors are not advisors at all, but merely salesmen using the term “advisor” to fool their customers into thinking they are clients. Others may only provide investment management, insurance products, or another singular focused service.
What questions should you ask when interviewing a financial planner?
NAPFA, the largest national organization of fee-only financial planners, has put together a wonderful guide with 26 questions to ask every financial advisor you interview. Feel free to send these questions to financial planners you are considering interviewing, so that you don’t waste your time interviewing service providers that don’t meet your needs.
Before selecting a financial advisor, you should have the answer to every single question in this guide. Most importantly however, read through the “Answer Key” on pages 9-11. This key will give you some context about each question, so that you know what the financial advisors answers really mean. Many financial service providers are great salesmen, and can make things sound much better (or different) than they really are. Stick to this guide, get all of the questions answered, and you will be armed with the knowledge you need to hire a financial planner.
In my opinion, the most important question in this guide is Question 9
Will you sign the Fiduciary Oath below?
The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest which will or reasonably may compromise the impartiality or independence of the advisor. The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.
What the Fiduciary Oath means to you – the client
• I shall always act in good faith and with candor.
• I shall be proactive in my disclosure of any conflicts of interest that may impact you.
• I shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product.
Although many advisors will tell you they will act in your best interest, only a small percentage of them would be willing to print and sign the above oath on company letterhead.
You worked very hard to get to where you are today financially. Don’t just turn over your finances to an advisor before you have all the facts.
Have you ever asked your financial advisor these questions? Would your financial planner sign the Fiduciary Oath? Are there any additional questions you think should be added to the guide? Feel free to share your thoughts!