August 01, 2016

Behind on Retirement Planning? 4 Steps to Get Started

By Warren A. Ward
Life is what happens to you while you’re busy making other plans.

—John Lennon

You’ve been practicing law for years, staying busy keeping up with your specialties, taking care of your clients, and developing new business. Then one day, you realize you’ve shortchanged yourself as far as developing your own financial plan.

If this describes you (or even one of your clients), here are four tips that’ll help you find an advisor to protect your interests, just as you protect those of your clients.

1. Locate an advisor. I suspect that, over the years, many clients found their way to you through a referral. So asking a colleague or friend for a referral to a financial advisor may feel natural. However, just as the law has specialties, so does the investment world. A well-intended recommendation may be based more on the person making the referral’s friendship than it is on your specific needs. So appropriate due diligence is still in order.

Begin with a visit to the Financial Industry Regulatory Authority website, finra.org. Click on the “Broker Check” link for a sketch of potential financial advisors’ compliance history. If you’re checking out a registered investment advisor, or RIA, you can find the same information at the U.S. Securities and Exchange Commission’s website, Investor.gov.

It’s the very rare professional existence in which no client has ever been dissatisfied. So don’t disqualify an advisor from consideration based on one blemish on a record. But a pattern of problems does suggest you should look elsewhere.

2. Understand advisors’ fiduciary duty of care. Most aspects of financial planning and investments are governed, at least to some extent, by the Investment Advisor Act of 1940. Under the act, RIAs are charged with the same fiduciary duty of care attorneys owe their clients.

However, salespersons of brokerage firms (legally, they’re classified as registered representatives) aren’t because it was considered obvious that a conflict exists between sellers and buyers and that each should look out for their own interests.

Thus, brokers and insurance agents owe their own duty of care to their employer. They’re not allowed to recommend an investment that’s obviously unsuitable, but they’re free to suggest that clients purchase high-cost products that primarily benefit their employer. Over the years, advertisements attempting to blur this relationship have proliferated. Simple solution: Ask potential advisors if they’re willing to sign a fiduciary pledge.

3. Know what industry designations mean. Most people know what MBA, Ph.D. and J.D. stand for. The initials behind a broker’s name? Not so much.

Of the 157 designations FINRA tracks, 110 begin with the word accredited, chartered, or certified. But only two of those related to general financial planning actually denote professional competence. Those are the accredited financial counselor and the certified financial planner.

Earning the AFC requires completion of one or more self-study courses followed by a three-hour proctored exam. The CFP® requires seven master’s-level courses followed by a two-day proctored exam that has an overall pass rate of around 55 percent. (Attorneys are allowed to challenge either exam without having to complete the coursework.)

According to FINRA, most of the other designations basically exist to imply competence and further blur the fact that the holder is licensed to sell securities, not give advice.

One more note: Although the certification isn’t tracked by FINRA, any CPA holding the additional credential of personal financial specialist would certainly be capable of assisting in your retirement planning.

4. Know how advisors are paid. In his 1966 sci-fi novel The Moon Is a Harsh Mistress, Robert Heinlein famously (and ungrammatically) stated, “There ain’t no such thing as a free lunch.” Since all financial advice and products come at a cost, the question becomes how much to pay and to whom or, perhaps, how.

The vast majority of financial professionals (one source estimates it’s 98 percent) are licensed as salespersons so are paid by commission. Following the deregulation of brokerage commissions in 1975, selling individual shares of stock to customers became a much less lucrative way to earn a living, so packaged products became more the norm. These include mutual funds and insurance-based contracts, generally annuities.

All these involve payments to salespeople out of the amount invested. Commissions range from around three to as much as seven or eight percent, although it’s often difficult to discern the percentage. There’s nothing wrong with paying a commission for financial services as long as you know how much you’re paying and how well the product you’re buying satisfies your needs.

Advisors regulated as RIAs don’t receive commissions. They charge a fee for their services, generally either hourly or project-based, and are generally known as fee-only advisors. You can find them through their association’s website, NAPFA.org.

As consumers have come to appreciate this distinction, brokerage firms have rolled out fee-based compensation models. Although this is commonly a flat fee in lieu of specific commissions, the salesperson still owes a fiduciary duty to the employer, not you, the customer.

Perhaps the most important rule to understand is that caveat emptor applies to financial services as much as it applies to other aspects of modern life.

Warren A. Ward

By Warren A. Ward, CFP®, is the founder and senior planner of WWA Planning & Investments in Columbus, Ind.