Overcoming the Fear of Financial Advice

People need financial advice. People don’t trust financial advisors. That’s the unfortunate conundrum facing most Americans these days.

Americans now are responsible for much of their support during their post-career years. Employer-provided pensions and medical expense reimbursements are fading into the past. Even those who retire with those benefits should expect them to be reduced over time. Government benefit programs are in trouble and have seen cutbacks. They’ll see more. You need to save, invest and make good financial decisions to have financial security.

Yet, they don’t teach how to make good financial decisions in school. Even if they did, the constant change in the financial world would make much of that education obsolete in a few years.

So, most people need help making financial decisions. The problem is most people no longer trust financial professionals. According to a recent survey of investors ages 28 to 64:

? 60% of all investors said their greatest fear is being cheated or scammed by their financial professionals;

? About 50% of those in or near retirement said they were afraid of being cheated by their financial advisors;

? About 54% of investors says they are self-directed, compared to 29% in 2008.

Blame it on Bernie Madoff, numerous other scams, the tech stock bubble and meltdown, the financial crisis that began in 2007, the various conflict-of-interest scandals involving the big financial firms in recent years, and more.

It’s healthy to be skeptical and questioning about financial advice. But your reaction to all the financial problems of recent years shouldn’t be to “go it alone.” You need assistance and advice from people whose day jobs are to spend their time studying financial issues and applying that knowledge to your situation. You can have access to the quality advice you need without the risk of falling prey to scams, crooks, and frauds.

Take these actions.

• Avoid firms and advisors with conflicts of interest. The major, full-service financial service firms often paid their advisors more money for selling in-house products than for selling outsiders’ investments. Those products gave the firms a higher profit margin. Even apparently independent advisors can have conflicts of interest.
• Don’t be afraid to ask how someone is compensated, if there are sources of revenue other than fees you pay, and if the compensation varies by the advice you take. When someone manages money, ask if their money is invested in the same strategy. You want to take financial advice from someone whose interests are aligned with yours.
• Be sure there’s an independent custodian of managed assets. Ponzi schemes and most other scams occur only because the “investment advisor” has full control of and access to the assets. Bernard Madoff, Charles Stanford, and the other crooks could spend investors’ money on personal expenses only because they had custody of and access to the money.
• A legitimate financial advisor uses a custodian that is a regulated broker dealer or trust company, that is audited, and that usually is independent. The advisor has only a limited power of attorney allowing him to buy and sell securities in the account. The advisor is not able to make or authorize distributions of cash or assets from the account. In the accounts I manage for investors through TJT Capital, for example, the assets are held in custody by Charles Schwab & Co. and other brand-name brokers. The clients are the only ones who can take or authorize distributions from the account.
• Use more than one source of information and advice. As you’re told with medical decisions, seek a second opinion. Most people are suspicious of financial advisers when they think they’re hearing only one side of the story. Overcome that feeling by receiving information from more than one source. Wealthy investors, for example, usually spread their investment assets among more than one investment manager. You might not have enough assets to do that. But you have Retirement Watch as one source of independent, objective investment advice to compare with an investment manager or financial planner. You also can bounce ideas off a tax advisor and consider using other newsletters or web sites. Another good check is to talk with friends and associates who use different investment advisors. Compare the recommendations and explanations you’re both receiving.
• The best way to avoid becoming a victim is to stay informed. First, you need to stay informed about what an investment advisor is doing with your money and what his investment strategy or theory of the markets is. You don’t have to agree with everything. You hire an investment manager because he has experience and expertise and judge him by the results. But the advisor should be able to explain and articulate what he’s doing and why in a way you can understand. Most victims of scams artists had only a vague idea what the advisor was doing with their money and why. All they really knew was the returns being reported to them.
• You also should stay informed about what’s happening in general in the financial world. For example, when a new estate tax law is enacted, you should know that and set an appointment with your estate planner. Then, you should compare the advice with the other sources you’re using. You also should know the general direction of the economy and markets and how your portfolio is reacting. Fraud victims, for example, never asked why their accounts were doing so much better than the markets.

You’re right to be skeptical, but you shouldn’t let news of frauds and bad advice keep you from using professional advice. Select your advisors carefully and be sure you have more than one source of information, and then you should be fine.

RW March 2011.