Beware of Lipstick on a Pig: Choosing a Financial Adviser

Putting "lipstick on a pig" describes the process of dressing up dodgy merchandise to make it more appealing to buyers. It's a cynical old expression that is especially common in situations where there are, as economists call it, "informational asymmetries." In other words, one party to a transaction, typically the seller or seller's agent, has more or better information than the other party.

That is often the case when it comes to matters of money, and Wall Street is notorious for its persistent attempts to capitalize on the inherent knowledge differential between those on the inside and those who come along looking for help managing their finances. One way the brokerage industry goes about this is by giving the impression that their army of commission-based salesman -- er, financial advisers -- are knowledgeable experts.

Unfortunately, what this often means is that they are extremely well versed in the art of "selling," but not necessarily in the ways of economics, finance, and markets. While stockbrokers are required by law to pass an exam that demonstrates they have a minimal understanding of the basics, from that point on they are generally on their own when it comes to acquiring the sort of knowledge that might benefit clients most. More often than not, they are order-takers, cheerleaders, and conduits, passing along information and analysis provided by others that may or may not be worth much to those who are ultimately paying the bills.

Frankly, there is really nothing wrong with this, as long as clients are fully aware of the fact that they are getting "advice" from people who might not be experts in the sense that a lawyer is with regard to legal matters, and that many "advisers" are compensated in one way or another based on turnover. But as Bloomberg columnist John Wasik notes in "Financial Titles Can Mislead, Entrap the Unwary," there are certifications, endorsements, and titles popping up nowadays that obfuscate the issue and further the illusion that Wall Street is filled with whiz kids whose primary concern is the financial success of their customers.

What's in a title when it comes to selecting a financial adviser?

There are now more than 90 designations conferred by 72 associations. Many of these certifications are little more than correspondence courses while others ensure that the professional has studied and practiced financial planning for years.

How do you separate the cream from the crud? It isn't easy with so many titles starting with "certified," "accredited" or "chartered." It can be an alphabet soup of deception.

After the U.S. Securities and Exchange Commission's May 14 decision not to appeal a ruling throwing out the "Merrill Lynch rule," you may have to look elsewhere for financial advice if you have a fee-based brokerage account. The U.S. Court of Appeals for the District of Columbia Circuit ruled on March 30 that the SEC's broker exemption from registering as investment advisers if they offered "incidental" financial-planning advice wasn't valid.

Does that mean it's time to find a "wealth manager" or "financial consultant"?

Keep in mind neither term, nor many similarly sounding titles, is regulated or requires any specialized training. While many of these professionals may offer perfectly valid services, you have to look beyond their resume to discover what they do.

Troubling Titles:
Uunless you do some research on your own, you can be easily misled by a raft of titles.

Some of the most rigorous financial training is offered through the Certified Financial Planner program. Those completing the comprehensive college coursework aren't even allowed to call themselves fully fledged certified financial planners without passing a two-day exam and having three years' experience under their belts.

Often accountants can offer you qualified planning services. Certified public accountants who take additional planning courses and an exam through the American Institute of Certified Public Accountants can be accredited as personal financial specialists.

Personal specialists need a bachelor's degree in accounting, they have to be a state-licensed CPA and have at least 1,400 hours in financial-planning experience. They are rare birds, as there are only an estimated 2,500 of them, compared with more than 55,000 certified financial planners worldwide.

Even better are CPAs, lawyers or other advisers who also have the certified-financial-planner designation.

Other certifications require considerably less training and the successful completion of self-study courses.

Questionable Certifications:

There are a host of designations with "senior" in the title. What do they do? Presumably, they specialize in the financial needs of the elderly, though it's doubtful they will acquire all of the knowledge needed in estate/financial planning, health care and retirement portfolios in just a handful of courses. They will need additional training.

The Certified Senior Specialist designation, for example, involves five course modules containing eight to 12 lessons each.

Offered by the Center for Senior Studies Inc., in Coral Springs, Florida, the program claims to provide "a strong foundation upon which to assist people in the 50-plus market with all aspects of the financial and retirement planning process from life insurance and annuities to estate and trust planning to long-term care insurance and government entitlement programs," according to the center's Web site.

That's a tall order for five course modules. Can these professionals create detailed estate plans? It's not likely, since you will probably need the services of an elder-law or estate-planning attorney.

Licensing Needed:

You can protect yourself and your family by asking a few key questions:

-- How are they compensated? "Fee-only" certified financial planners typically charge by the plan or the hour and don't make money from commissions.

-- If a professional is earning a commission, they should disclose that upfront. All broker-dealers, insurance agents and registered representatives earn a commission. Since their business is based on selling products, they are often poorly suited to create objective, low-cost financial plans.

-- Are they selling mutual funds, insurance products, securities or real estate? They need to have state and often federal licensing.

-- The best protection is an adviser who is a fiduciary. They must say in writing they are legally responsible for making recommendations exclusively in your best interests. Making you sign a binding arbitration agreement in the event of a dispute isn't the same thing. Keep in mind that most agents, financial consultants or brokers aren't fiduciaries.

Disclosure Duty:

-- Just need a portfolio manager? Registered Investment Advisers are subject to state and federal registration and disclosure requirements. Along with chartered financial analysts, they are often best suited to managing money. But don't expect them to do comprehensive financial planning.

Most certified, fee-only financial planners act as fiduciaries. The key advantage of these professionals is that they are obligated to disclose all conflicts and compensation.

Suppose you don't need a professional to take legal responsibility for advice. Then there's much to choose from provided you understand you are getting specialized help and you aren't relying on these people to create comprehensive financial or estate plans.

In that case, feel free to contract with certified college planning specialists; chartered advisers in philanthropy; certified financial gerontologists; certified pension consultants and yes, even certified divorce planners.

You may not always get what you pay for, so have a list of items you want answered before contacting these professionals. Sometimes the best question is: "What can't you do for me?"

Of course, during the coming economic unraveling, when financial pressures may induce otherwise trustworthy and well-meaning individuals to engage in all sorts of bad behavior, the price for not engaging in comprehensive due diligence that goes well beyond titles and certifications could be extremely high.

Comments

[Worried?:]

Well put Michael.

I'm relatively new to the fee-only profession, and am looking for material that I can use to help "market" the benefits of using a CFP vs a B/D or financial advisor. I'd like the message to have a POSITIVE spin rather than it sounding like a NEGATIVE political campaign.

Do you know of any site that offers this kind of information / approach?

Feb 23 08:38 AM

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Jun 09 11:37 AM