In the world of financial planning, it appears that Father really does know best — if he’s a qualified advisor.
Financial planning writer Emily Guy Birken reminisced recently on personal finance website Wise Bread about the money wisdom that her dad, a certified financial planner, passed on to her before he died earlier this year. Birken’s father, Jim Guy, a first executive vice president and chief marketing officer at Cambridge Investment Research in Fairfield, Iowa, joined Cambridge’s executive group in 1999, and served at the broker-dealer level while continuing to lead his Baltimore-based independent practice alongside his wife and business partner, Helen.
What strikes Guy’s daughter today, even though she is now a 34-year-old woman who “grew up imbibing financial wisdom with my applesauce,” is how incredibly intimidated she felt the first time she met with an advisor who was not her father.
“No matter how much you may already know before you set foot in an advisor’s office, you will still probably encounter unfamiliar financial jargon and advice whose soundness you feel like you have no way of judging,” Birken writes in “Investment Advice You Should Never Hear From Your Financial Advisor.” “Trusting an advisor with your finances is no time to pretend you have knowledge that you don’t.”
Birken’s first advice for investors is to arm themselves against bad or inappropriate advice by asking a lot of questions before making a decision.
“My dad really taught me to be cautious,” Birken said Monday in a phone interview with ThinkAdvisor. “I’m very cautious almost to the point of being paranoid about risk. You really have to know a person’s motivation to know why they’re offering you something.”
Clearly, her thoughts struck a chord: Birken’s blog post has already been shared 22 times on Twitter, and one of those tweeters is Rick Kahler, president of Kahler Financial, Rapid City, S.D., a well-known and respected name in the advisor industry.
“She nailed some major issues to look out for,” Kahler said Monday in a phone interview. “I’m in financial therapy, and I’ve seen tremendous sadness in people over what their parents didn’t tell them about money, and they feel totally unprepared for life in the 21st century, where money is so important.”
Kahler added that he also liked Birken’s blog post because she talks about the relationship that can occur between a child and a parent who is an advisor. “She said things my kids could totally relate to,” he said, then joked, “My kids will be doing therapy over the excessive amount of information I give them and the fact that their dad can turn any conversation into money.”
Keep reading to learn about Emily Guy Birken’s “Investment Advice You Should Never Hear From Your Financial Advisor” and Rick Kahler’s thoughts on Birken’s tips for investors.
1. “You can assume an X% return on your investment.”
“You may recall the brouhaha over financial guru Dave Ramsey’s claim that investors can expect a 12% return on their investment over time,” writes Emily Guy Birken in her Wise Bread blog post, “Investment Advice You Should Never Hear From Your Financial Advisor.” “While many have (rightly) criticized the math (or lack thereof) that Ramsey uses to make such a claim, the bigger problem with this kind of advice is the fact that it’s making assumptions that no one can guarantee. As every financial advisor worth his salt will tell you, past performance does not guarantee future results.”
Kahler Financial President Rick Kahler agrees that guaranteeing a return is always problematic.
“It depends how it’s framed, and it’s important to say there are no guarantees,” Kahler said in a phone interview. “To tell somebody you may expect a good return over 20 to 30 years if you have a diversified portfolio and leave it alone, that’s fine. But it’s another thing to say you can go to the bank with a 6%-8% stock fund, which Dave Ramsey still stands by today. I’ve taken him to task on that.” 2. “Don’t worry about the cost of this product! You pay nothing.”
“There is nothing wrong with working with a planner or advisor who is commission-based — but every client needs to know how their planner is getting paid,” Birken writes. “If all you hear from your advisor is that you don’t need to worry your pretty little head about payment, then it’s time to head off into the sunset. Because generally the only reason your advisor will harp on the fact that you pay nothing out of pocket is because they want to conceal their sales incentives.”
Kahler noted that every time he writes about annuities, he gets hate email from both advisors and clients who object to his assertion that it’s impossible for the cost of a financial product to be zero:
“I asked one advisor, ‘who pays you?,’ and he said, ‘the company,’ and then I asked, ‘and who pays the company?’ and he said, ‘it’s none of your business.’ I analyzed one annuity with an annual fee of 7.04% — and yet some people believe they’re ‘not paying anything.’ If someone says there’s no fee, it’s time to run away.” 3. “I can customize a stock portfolio for you.”
The average financial planner isn’t in the business of stock-picking, Birken writes. Even with mutual funds managers whose job it is to pick stocks, she adds, evidence suggests that in many years, passive investing in index funds can beat more than half of active managers.
“Stock picking is not an exact science, and even the people who do it (and nothing else) for a living are wrong about half the time,” she says. “If your advisor tells you she can do this for you, then prepare for disappointment.”
Kahler agreed with Birken, and like her pointed to the value of a good asset allocation strategy.
“I served on the South Dakota Investment Council,” Kahler noted, “and the analysts there followed 150 companies at that time, and they felt overworked, because the average Wall Street analyst followed only 20 or 30 companies. How can one retail broker advise anybody on which stocks to invest in when there are thousands of them? The research leans toward the best choice being a passive strategy in an index fund with periodic rebalancing of the asset allocation.” 4. “There is no risk!” or “You really need to act now.”
Both of these phrases are hallmarks of a hard sell rather than “legitimate advice you could expect to hear from a financial advisor,” Birken writes. “Saying that any particular investment strategy is completely risk-free is an out-and-out lie. All investing involves some risk, and a good advisor will help you to figure out your level of risk tolerance and customize your investment strategy based on what risk you are willing to accept.”
As for Kahler’s thoughts on the hard sell? “There is risk in everything,” he said. “There is risk in putting money in a bank. Maybe you don’t have a default risk, but you have inflation risk. Those are runaway words. Every guarantee costs you something.”
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