Most Financial Advisors Suck

I’ve been seeing a lot a recent press warning investors about Financial Advisors.

Most FAs aren’t your advisors. They are just salesmen of financial products. The titles on their business cards don’t mean anything. Financial Advisor, Wealth Manager, Private Wealth Manager, Your Personal CFO….they’re just made up titles with no minimum qualification. See this article in the New York Times cautioning you against advisors with fancy titles.

For the most part, they’re brokers (and thereby fully commissioned salespeople), whose main objective is to make as much money for their firm and for themselves. They do this by “selling” you a financial product like a mutual fund or insurance vehicle with an investment component.

Only they don’t call this “selling”. They call it “investing” your money.

But when someone puts my money in a vehicle with high up-front fees and ongoing expense ratios, I call that selling. Plain and simple.

One of my friends recently had an “advisor” put him in a bunch of mutual funds offered by Mass Mutual. These funds all came with a 5.75% front-end load (or fee) and an annual 1.75% expense ratio. All of the front-end load and part of the expense ratio was a commission back to his advisor.

One of the funds was a unit trust and even came with an expiration date. After a couple of years the fund automatically sells everything and you get the cash value of the stocks at that time. At that point your “advisor” is free to put you in another fund with an upfront fee and restart the whole process again. Read this excellent article about the mutual fund industry’s rating scam.

It’s not uncommon for unsuspecting victims, I mean customers, of such “advisors” to pay 6% in upfront fees and 2% a year in mutual funds fees. And then pay an additional 0.5% or 1% as the advisor fee!

But that doesn’t mean advisors don’t add value.  Here’s a great piece by the White Coat Investor on the benefits of using a Financial Advisor.

Before hiring a financial advisor, or planner, make sure you ask a few important questions.

Are they your fiduciaries?
That is, do they have a a legal obligation to put your interests first? Or does their firm come first?

How are they compensated?
Do they get commissions from any of the products they sell? If so, will it be disclosed upfront?

Ideally, you’d want to use a fee-only advisor – they only get compensated by the fees you pay them and don’t except any commission. This removes any conflict of interest.

What’s their investment methodology?
Do they just put you in a bunch of stocks or mutual funds? Or do they use Modern Portfolio Theory to put you in a well-diversified portfolio where they show you (and take the time to explain) the portfolio’s alpha, beta, standard deviation and sharpe ratio (see definititions at If they use mainly low-cost ETFs instead of mutual funds, they might be able to pay for their services just by the reduction of fees alone. For example, if their portfolio of ETFs has an expense ratio of 0.4% and they charge 1%, that’s like you buying a mutual fund charging 1.4% on your own. But without the upfront load fees and mis-management that comes with it.

If you’re looking for financial planning advice then you want to make sure they have a background in finance, or a CFP to make up for it if not. Many ex-pharmaceutical sales reps (read pretty blonde women) make a career change and become financial advisors. Don’t just go for the cutest saleswoman. Make sure they understand investing and all the aspect personal finance like estate planning, and taxation.

When looking for a financial advisor, try looking for a Registered Investment Advisor Representative. People with this designation usually have a fiduciary duty and are more often than not fee-based instead of commission based. Go to and put in the advisor’s name and you’ll find out whether he’s just a Broker or an Investment Advisor Rep. If he’s both, you definitely want clarification on how he is compensated.Investment Advisor Reps are required to provide prospective clients with a firm brochure called the ADV-2, which describes the services they provide, how they are compensated, their investment philosophy. Brokers are not required to provide this document. Make sure you ask for, and get this document from your advisor.

A trusted advisor can be a great resource. A salesperson can be disastrous to your financial future.

Do you have any advisor horror stories to share?

The Biggest Fianncial Mistake People Make

I just read an article about a reporter who had his finances critiqued by a group of multi-millionaires. The results were surprising.

Tiger 21 is an investment club, where members get together once a month to discuss money. They share investment ideas and personal finance tips. Membership at the club costs $30,000 a year, so it’s definitely not cheap. But guess what, rich people love talking about money. Maybe, that’s why they’re rich to begin with?

The reporter submitted his personal finances and agreed to have the members give him advice. He thought they’d tell him to stop spending so much on eating out. Otherwise, he thought he was in good shape.

But they didn’t care about how much he spent on eating out.

Instead they gave him some really good advice.

One, start saving more.

Saving just 10% of your income isn’t enough. He could easily bump it up to 15%.

Two, stay liquid.

The reporter had a vacation condo in Florida. It was a money sink. Everyone thought is was a bad idea and told him to dump it. Sell, even if you take a loss, was their advice. Rich people are always concerned about maintaining their liquidity. Money-sucking “investments” kill one’s liquidity.

Liquidity helps you take advantage of real opportunities to make money.

For example, when the stock market crashed in late-2008. I know rich people were jumping in to buy great stocks at ridiculously low prices. You can only do this if you are liquid.

Additionally, liquidity provides a safety net in bad times.

Speaking of bad times, the best advice they gave was about his lack of insurance.

Most people are incredibly under-insured.  The reporter was no different.

I remember when my dad died. I can’t believe how little insurance my dad carried. It was absurd.

He had a 30 year Term-life policy which he had paid for 26 years. Unfortunately, he had never increased the policy to keep up with his increasing salary, or inflation. The death-benefit amount my mom received was about 6 months of my dad’s gross income at the time. It was a joke.

Luckily, we were able to sell his medical practice which provided a sizable amount to take care of her. But as soon as my dad was out of the picture, it was worth 50% less. If he had sold it himself, we would’ve received double.

Tiger 21 members said if you’re not spending 1-3% of your annual income on insurance, you’re not spending enough.

In addition to life, you need disability insurance as well. If something were to prevent you from making a living, you’d be surprised how tiny the premiums would seem.

I know a family that made over $500,000 a year. The wife was a dentist who made $250,000. At the age of 35 she developed a problem with her hand and was unable to work. For a few thousand a year in disability premiums, she could have collected $70,000 in tax-free money. Now, she can’t work, and they have to pay someone to take care of the kids even though she stays at home.

Like most things in life, insurance is a thing you miss the most when you don’t have it.

Get insurance folks, its cheaper when you don’t need it!

And if you need a referral for a good insurance agent, let me know.

Suzie Says “Pay Off Your Home Mortgage”

Suzie Orman is a famous financial planner who appears regularly on TV and is a prolific writer. I’m not a big fan, mostly because her ideas are too simplistic for me although they must appeal to a lot of people who have no knowledge of financial information.

But now and then she has a good nugget of information. Check out this short clip about paying off your home mortgage as soon as possible.

The only counter argument I can think of is inflation.

If you bought your house in 1980 for $50,000 and never paid off the mortgage (that wouldn’t be possible unless you refinanced the home loan along the way), the value of $50,000 today is a lot lower than it used to be 30 years ago.

But on the flip side, the mortgage interest tax deduction on $50,000 is rather small too. So maybe you should send in that extra $100 every month!

One resource I strongly recommend is How to Save Thousands of Dollars on Your Home Mortgage. You can buy the book used on Amazon for under $2.00 – possibly the best 2 bucks you’ll ever spend!


For many parents, savings for their kids education is a big concern. Many opt to put them in a tax-deferred savings vehicle like the 529 plan.

Not only is this a good way to save for children’s education related expenses like tuition, lodging, groceries, books, etc but there are some other loophole available too.

* You can change the beneficiary at any point to favor someone who goes to a more expensive school.

* You can use the money for your own education.

* You can give upto $60,000 to a single beneficiary in one go, although you can’t give that same beneficiary any more contributions for 5 years.(since the maximum gift amount is $12,000 per year)

* You can use it as an estate planning tool by moving money out of your estate (but not necessarily out of your control). If grandpa & grandma each gift $50,000 to each of their 5 grandkids, thats $500,000 out of the estate in one fell swoop! Of course, they better not die too quickly, else some of it may be taxable!

* Being able to change the beneficiary may also allows you to skip paying estate tax for several generations!

It might be complicated to understand and setup, but I think its definitely worth checking into.

Why You Need A Good Attorney

Even though Anna Nicole Smith’s husband (did they marry? I don’t really follow this sort of thing) Howard Stern was an attorney, her will was supposedly taken straight out of a textbook and wasn’t even proof-read. She apparently left everything to her son (who’s deceased) and specifically excluded all unborn future kids.

Don’t know why she’d write in something as wierd as that but apparently thats what you get when you pay $19.99 for your will. So not only will Dannielle Smith-Stern be dragged through a six ring circus of paternety suits, but her mom’s money will probably be dragged through the probate courts, the IRS and then finally through her legal guardian’s hands. (& maybe her attorneys too!) Good luck getting that dough!

When you die, the last thing you want is for your loved ones to
(a) fight over your money/possessions
(b) pay an obsene amount of tax – both inheritance and income tax
(c) be dragged through the probate courts to get it

Better you spend a little time learning about it and a little bit of money to make sure everything is sorted out before you die.

Getting Insurance

After playing phone tag for nearly 4 months I finally met with an insurance agent today. I’ve been meaning to get disability and life insurance for myself and the wife and today I got some good quotes.

For me a $1000/mo disability policy thats indexed to inflation costs only $29/mo. Term life insurance that starts out at $300k and eventually reaches $600k in the 10th year only costs about $248/year. It increase every year but its not a lot. In the 10th year it’ll be around $745/year. The advantage with this plan over a fixed premium product is that this plan is good until I’m 80. The fixed premium product is only good for 20 years.

The cost for my wife’s policy is cheaper by about $50-60/year. We’re not getting disability for her since her company has awesome coverage already.

Since I’m getting insurance as a safety net for my family and future kids, I want to keep up my policy until they’re atleast out of college. Since I don’t currently have any kids, we’re talking atleast 20-25 years. Getting a policy that lasts for nearly 50 years is a good way to ensure this, since I won’t have to go through medical check-ups again and there’s no chance of my failing to qualify for insurance because of bad health later on.

Insurance is cheapest when you don’t need it! If you’re planning on having kids you need to get life insurance. If you have a decent job you need disability. Get it now!