Smart Couples Finish Rich, Revised and Updated

by David Bach

  Past performance is no guarantee of future performance!

  An advisor you can trust talks about “reality investing.” Although stocks have generated an average annual return of close to 17 percent over the last five years (remember the chart on this page), that doesn’t mean that the stock market will continue at that pace. In fact, I am pretty darn sure it won’t. Which is why you need to work with an advisor who discusses realistic returns and shows you history. A good advisor will go over historical returns of the stock market, not a positive snapshot in time. The return over 90 years has averaged right around 10 perent for the stock market and around 8 percent for a diversified balance account. There have been good times and there have been average times, and there have been plenty of years—even decades—in which stocks didn’t make money.

  RULE NO. 6

  Go with your gut.

  Your first meeting with a financial advisor is like a date. And much as with dating, you typically know right away if there is a connection. There will be a little voice inside you that says, “I trust this person, it feels right,” or “I’m not sure,” or “No way, José.”

  Go with your initial gut feeling. I usually know in the first 10 minutes whether or not I want to work with someone. In fact, I can usually tell over the phone when they call to make the appointment whether this is someone with whom I’d enjoy having a long-term relationship. Every time I’ve gone against this gut feeling, I ended up with a problem client.

  Remember, when you hire a financial advisor, you’re looking for a long-term relationship. Ideally, he or she will be helping you with your money for decades. If you start off with someone you don’t have a good feeling about, the moment something goes wrong (like the market dropping), you’ll be looking to bail out and find a new advisor.

  RULE NO. 7

  Be prepared to pay for the advice you get.

  Professional financial advisors do not normally give you free advice. You’d think this would be obvious, but in this “free” Internet world where we’ve gotten so used to everything being given away (or at least offered at steep discounts), many people actually think they can go into a financial professional’s office and get the benefit of his or her experience and knowledge for nothing. Sorry, but it doesn’t really work that way. You will be offered in most cases a complimentary review meeting to go over your situation. Then if there is a fit (you want to move forward) and the advisor feels that he or she can help you, the advisor will offer to provide you with a detailed financial plan. The advisor will normally present this in a second follow-up appointment, at which point, if you move forward, you will pay for the advice proposed. Some advisors charge for this financial plan up front, whether you move forward or not. Make sure to ask them if there is a fee for the plan.

  So how do you pay for your advice if you move forward? The financial-services industry has been going through massive changes in recent years, but there are two basic fee structures used by most professional financial advisors.

  COMMISSION-BASED ADVICE—BROKERS

  A commission-based advisor earns a fee each time he or she buys or sells an investment for you. For the past hundred years or so, this is how the majority of stockbrokers (now called financial advisors) have worked. This type of advisor is quickly becoming extinct. The simple reality of life is that very few advisors today are still pure commission-based advisors. Instead, they are becoming what is known as a fee-based advisor or fiduciary. Or in some cases a “hybrid” advisor or dually registered—earning both commissions and fees. We’ll cover that next.

  FEE-BASED ADVICE—REGISTERED INVESTMENT ADVISORS, A.K.A. “FIDUCIARIES”

  When I wrote this book originally, I said that I thought fee-based advice was where the industry was headed, and without question it did. Today RIAs—Registered Investment Advisors, known as “fiduciary advisors”—who charge a flat fee on assets are where the industry has moved to. With an RIA, you are hiring a fiduciary who charges a fee on the assets he or she manages for you. With fee-based advice, you pay an annual fee for all the services your financial advisor provides, including all your trades, meetings, proposals, performance reports. Generally speaking, the fee is a set proportion—normally between 1 and 2 percent—of the amount of money the advisor is managing for you. So if you have $100,000 to invest, the advisor will charge you $1,000 to $2,000 a year.

  Today every major brokerage firm and independent firm in the country is embracing the model of the fee-based payment structure. And because of the competition, the price of fee-based advice is quickly coming down. The fee structure will almost always depend on the amount of money managed. The more assets, the lower the fee.

  As far as I’m concerned, this structure has a lot of advantages. For one thing, there is now no possible conflict of interest. Since the advisor’s pay depends on the value of your assets, it’s in the advisor’s interest to see your assets grow. Moreover, fee-based advisors get paid only if their clients are serviced well and kept happy. If they invest their clients’ money and then forget about them, the clients will leave and the fees will stop coming. For this reason, fee-based advisors tend to be more service-oriented. To fee-based advisors, new clients represent more than a one-time sale; their businesses are based on long-term relationships. (By the way, if you hire a fee-based advisor, make sure you tell your tax accountant, because under some circumstances the fees you pay may be tax-deductible.)

  HYBRID ADVISORS—DUALLY REGISTERED ADVISORS

  A dually registered advisor is both licensed to sell securities through a brokerage firm and licensed to provide advice as a registered investment advisor, normally referred to as an RIA. Typically, you hire a financial advisor who explains that he or she is an RIA and does fee-based planning. The advisor will create a financial plan and ultimately provide you with an investment proposal. From there, the advisor will build for you a diversified portfolio of professionally managed mutual funds (as an example) and charge you a flat fee of, say, 1 to 2 percent on the assets managed (again, this is only an example). Then, if you need life insurance (the agent will have a license for life insurance) or you’re interested in an annuity (like a variable annuity), that product will be sold under the brokerage license, whereby the advisor is paid a commission. The bulk of advisors today are actually dually registered. The key is to ask whether the advisor is dually registered. It’s confusing, and you should know which hat the advisor is wearing when he or she provides you with advice that you pay for.

  WHAT TYPE OF ADVISOR SHOULD I LOOK FOR?

  I personally recommend that you first and foremost work with a fee based Registered Investment Advisor (RIA) firm—a “fiduciary.” As an RIA, the advisor has a fiduciary responsibility by law to put your interests first and disclose any conflicts of interest. For example, the advisor should not recommend an investment because he or she would be paid a higher commission or fee to do so. The financial services industry (particularly the large national firms) over the past few decades made a practice of pushing proprietary funds (their own products) to earn a higher fee. This practice has been substantially reduced in recent years as a result of lawsuits. I want an advisor who is independent and free of conflicts of interest. I want an advisor who is focused on what is best for me and is truly transparent. Which leads to the last issue: if the advisor is a dually registered advisor—that is, he or she is an RIA and a licensed broker—then I want to know that up front. I want the advisor to explain to me what that means. And I want that advisor to show me the fees and commissions that he or she is earning.

  THE VALUE OF HIRING A FINANCIAL ADVISOR

  The question is easy to ask yourself: Is professional advice worth paying for when it comes to your money or can you do this yourself? I’m going to be supercandid with you here—once you have over $100,000 to invest I think it pays to get professional financial advice. This book covers so much, and it’s not as simple as “click, click, submit.” Not yet anyway.

  Comprehensive financial planning if
done correctly is holistic and goals-based. That means the financial planner has really asked you a lot of questions based on your values (as we covered in Chapter 2). The advisor has looked at what is most important to you (and your partner) and then helped you BOTH think through your goals, dreams, and fears. The advisor has gotten to know YOU. And ideally he or she has helped you think through issues you may not have been thinking about. Finally, there is the money management aspect that is, again candidly, complicated. When the markets are not going up (or are going down rapidly), having a competent, calm financial advisor can be the difference between panicking and destroying your financial life and being okay long term. Lastly, great advice pays off.

  THE RIGHT ADVISOR CAN BE WORTH OVER 3 PERCENT ANNUALLY

  I’m often skeptical on specific data points around advice. Still, Vanguard is a very credible source, and this data comes from them. According to a Vanguard Research Report, the potential for an advisor to add value to a client relationship can be significant. In their words, it’s about “3% annually.” How?, you might ask.

  Lowering expense − cost-effective implementation = 45 basis points (0.45%) savings

  Rebalancing − your investments = 35 basis points (0.35%) savings

  Behavior coaching − helping you to not hurt yourself = 150 basis points (1.50%) savings

  Asset location − optimizing portfolio that minimizes taxes = 0 to 75 basis points (0.75%) savings.

  Spending strategy − the way you withdraw your money = 0 to 70 basis points (0.70%)

  If you add these up it comes to 3.75 percent. Vanguard is very clear in the study that this is not an annualized projection. If you want to read the detailed report yourself, Google it. It is sourced below.

  Source: Vanguard Research, Putting a Value on Your Value: Quantifying Vanguard’s Advisors Alpha. Authors: Francis M. Kinnery, Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering.

  WHAT ABOUT THE FIDUCIARY RULE?

  As I write this, the Fiduciary Rule is like the U.S. healthcare system: still up in the air. The Department of Labor (DOL) had a new Fiduciary Rule that was supposed to go into effect and completely change the transparency and rules around the way financial advice was given. The current administration has put this new regulation on hold. What matters for you is transparency and no conflict of interest. With or without legislation, you want a financial advisor you can trust, who is transparent and puts your interests first, not his or her own. This isn’t that complicated. From an advisor’s standpoint, it’s called “do the right thing, always, for your client.” The complicated part is finding that advisor. They’re out there. The best way, for now, to achieve that transparency is to work with an RIA who’s a fiduciary and use these rules.

  RULE NO. 8

  If you can’t get a referral, do your own research.

  There are many great financial advisors out there who are fiduciaries and are client-centric. This is what you want.

  Following is a list to help you get your search started.

  Financial Planning Association (FPA)

  (800) 322-4237

  www.plannersearch.org

  This site allows you to search by zip codes for the names of certified financial planners.

  National Association of Personal Financial Advisors

  www.napfa.org

  (888) 333-6659

  This site allows you to search by zip codes and offers links to fee-only advisors.

  CHECKING OUT AN ADVISOR’S BACKGROUND

  Financial Industry Regulatory Authority

  (800) 289-9999

  www.finra.org, go to www.brokercheck.finra.org [website no longer available]

  This is the self-regulatory organization for the financial services industry. Always start here.

  Certified Financial Planner Board of Standards

  (800) 487-1497

  www.cfp.net

  This group sets and enforces the standards advisors must meet in order to call themselves certified financial planners. The site allows you to check the status of a CFP certificate.

  National Association of Insurance Commissioners

  (816) 783-8500

  www.naic.org

  This group is an organization of state insurance regulators. Through its online National Insurance Producer Registry (NIPR), you can find information on more than 2.5 million insurance agents and brokers, including their licensing status and disciplinary history.

  BECOME AN “A” CLIENT

  It is not enough simply to hire a good financial advisor. You want whomever you hire to pay attention to you—ideally, to consider you one of his or her most important clients. Most people think that in order to be important to a financial advisor, you need to have lots of money. Nothing could be further from the truth. I have had clients with assets that range from $1,000 to $100 million, and I can assure you that some of the smaller ones are just as important to me as the biggest ones.

  The fact is, it’s not just money that determines how much your financial advisor cares about you. It’s how you treat your financial advisor that matters. As an example, I have a client, Francine, who opened an account with me with just $1,000. I put Francine’s money into a stock that tripled in value, so all of a sudden she had $3,000. I also bought this stock for more than a half-dozen other clients. Most of them made significantly more money than Francine because they had more invested. Unlike any of them, however, after the stock took off, Francine showed up at my office one day with four bottles of wine as a gift for me and each of my assistants. Now, I don’t know what the wine cost Francine. I don’t even remember whether it was red or white. What I do remember is that this small gesture of hers was talked about in our office for weeks. We couldn’t believe how special it was. I’m still talking (and now writing) about it years later.

  So when your financial advisor makes you some money, take a moment to say “thank you.” Sure, it’s his or her job to make you money. But that’s no reason not to show your appreciation. No matter how small your portfolio, a small gesture like a simple thank-you note or a bottle of wine can transform you to an “A” client.

  Another great way to say “thank you” to your advisor—and become as a result an “A” client—is to refer the advisor some new business (that is, to recommend that a friend hire your advisor). Not only will this show your advisor how much you appreciate what he or she has done for you, it may turn out to be just what your friend needs to get his or her financial life together.

  And it’s not just financial advisors who should get this sort of consideration. When Francine gave me that little gift, it made me realize that I had never once expressed my appreciation to any of the professionals on whom I depend: my attorney, my CPA, my doctor, my haircutter, the mechanic who looks after my car—the list goes on and on. So three years ago I started sending them all thank-you notes and in some cases a gift basket at Christmas. The first time I did this, my doctor called me personally to say “thank you.” Guess what? Even though my doctor is routinely booked up three months in advance, I never have to wait for an appointment anymore. I just seem to get right in. My car mechanic framed my thank-you letter and posted it on the wall of his waiting room. My CPA seemed to find more deductions the next year.

  I’m not kidding. Because of my small gifts and notes, my relationship with all these professionals is now different. They remember me because I made a small gesture to say “thank you.” Try it. Our parents were right: saying “thank you” goes a long way.

  RULE NO. 9

  Make sure your check goes to the custodian—not the advisor.

  This is, candidly, the most important of all these rules to protect you from a Bernie Madoff situation, Ponzi scheme, or theft of your money. Never write the check directly to the financial advisor. Never! The advisor should be working with a major brokerage firm. If the advisor is a fiduciary, he or she will be using what is known as a “third-party custodian.” The largest brokerage firms that hold RIAs’ assets for clients are Fidelity
, TD Ameritrade, Charles Schwab, and Pershing. Your money will be held at the brokerage firm, and you will sign a limited power of attorney that gives the advisor or money manager the ability to manage the money. You never want to give an advisor the right to “write checks” or make “withdrawals.” Never, ever, ever. This is a very important level of security for you and your money. Take it seriously. Ask the advisor whom they custody with. And, remember, that’s who you write the check to. Finally, remember to go online at these firms—and see that your money is there. I always say: Trust but verify.

  WHATEVER YOU DO…DON’T GIVE UP!

  There’s one other big mistake that investors often make—and it may be the biggest one of all. They give up.

  Back at the beginning of this book, I told you the story of how my grandmother lost all the money she had saved her first year of investing. That experience could have easily convinced her that she should just stop trying. She could have decided that it just wasn’t worth it. After all, she had made some huge mistakes. She had invested on tips, used a mediocre broker, failed to do her own research.

  When she told me the story, I asked her what had kept her going after that disastrous first year. She smiled and said, “David, I looked at my life and said, ‘Rose Bach, if you want to be rich, don’t you dare quit now.’ ”

  Imagine the strength it took to make that decision not to quit. Her friends teased her constantly. “Oh, Rose,” they’d say, “come to lunch with us.” “Oh, Rose, you don’t need to worry about retirement—you’ll have Social Security.” “Oh, Rose, why do you worry so much? The future will take care of itself.” Why were her friends so unsupportive? Maybe because they were afraid of what she might accomplish—that she would become rich and they wouldn’t.