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Your Best Interest...NOT!!

March 21st, 2008 at 04:09 pm

There's a lot of talk about doing what is in the 'client's best interest' when it comes to financial advice. But when I saw what 'financial advisors' were doing to people, I started seriously questioning what it means when a 'financial advisor' says he is a 'fiduciary' and acts in the 'client's best interest at all times'.

From what I dug up, when it comes to financial advice 'fiduciary' pretty much means nothing except that legally an RIA has to disclose his conflicts of interest, not verbally and with clear explanation, only in print (which most clients don't read and/or understand). If the 'financial advisor' isn't registered as an RIA, then all bets are off.

Here's how this is worded:

"Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest."

But read on: "Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement."

This is a glaring contradiction!

Ameriprise, for example, claims their 'advisors' fall under the fiduciary
standard. However, they are involved in 'revenue sharing' - a practice where they get kickbacks for recommending certain funds.

"...certain aspects of our relationship with the fund families in the Program may create conflicts of interest or incentives
for Ameriprise Financial to promote, and for an advisor to recommend, a fund from a family that participates in the Program over a fund from a family that does not participate in the Program. In addition, among fund families participating in the Program, we generally have a greater incentive to offer funds from Full Participation Firms than funds from Limited Participation Firms. As further described below, these conflicts and incentives may arise from the marketing and sales support provided to our financial advisors by, as well as the payments we receive from, fund families participating in the Program, and our other relationships with fund families, including our affiliation with the RiverSource Investments family of funds."

This way of doing business made me wonder if 'fiduciary' applied when a general plan was being written but did not apply when the selling started. I think this might be the case but can't get to the bottom of it.

But, per the above, it really doesn't matter: A 'Fiduciary' does not have to do what is in the client's best interest if he simply discloses somewhere that he has conflicts of interest. Ameriprise clients usually don't know they are paying any fees at all, let alone know about and understand 'revenue sharing.

I don't think paying a 1.5% (or even 1%) wrap fee year after year after year is in the client's best interest. Most of the work is done the first year. And that wrap fee comes off the TOTAL assets under management, not just gains. The 'financial advisor' will NEVER, EVER show the client a chart like this one:

A 'financial ADVISOR' should be showing his client this chart and keeping fees as low as possible. Otherwise, calling himself a 'financial ADVISOR' is simply fraud, IMO.

I also wondered how a broker/financial advisor/planner could do what is in the client's best interest if he doesn't have a firm grasp of how to properly invest. I've seen many portfolios set up by RIAs - and none of these portfolios had index funds, just expensive, actively managed funds. That's not in the best interest of the client. Asset allocations were poorly done. Some people had been sold complex and very expensive variable universal life (VUL) policies when they hadn't maxed out other tax-advantaged accounts. The advisor was either dishonest or ignorant.

Then I found this: "I am a Registered Investment Advisor (RIA) with the Securities and Exchange Commission. Are you impressed? Don’t be. Just about anyone can become an investment advisor. Simply send in a form to the state or federal government with a modest filing fee, and you can join the club. You don’t need an MBA or a college diploma to apply. Heck, you could have flunked out of the third grade, gone bankrupt seven times, lost everything you ever owned to a Ponzi scheme, and still make a great living managing other people’s money.

In this surreal world of investment advice anyone can claim to be an expert and get paid for it. This is why most stockbrokers, financial planners, and insurance agents are in the business, and why accountants, attorneys, and bankers want in as well. The problem is, most investment advisors are borderline incompetent. Thousands of them lack the basic investment skills and knowledge of a first-year business
student." - Rick Ferri

That cleared it up even more and I realized that 'client's best interest'
begged the question of the 'advisor' even having a clue what was in the client's best interest!

The final 'ah ha' moment came when I read this:

"In essence, the talk about ethics, fiduciary responsibility, integrity, etc. is primarily a marketing gimmick designed to lull the unsuspecting client into the perception of trust." (EF Moody, PhD, MSFP, LLB, MBA, BSCE, CFP)

It put words to what I was thinking based on a LOT of research.

So much for 'fiduciary'.

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Financial Advisors Eat Your Nest Egg

March 18th, 2008 at 06:13 pm

Ahhhh...retirement. Those fun-filled golden years. Dennis Hopper telling us to live like we are 16 again with the help of Ameriprise financial planners.

But something isn't quite right here. Leaving aside that while you are working and saving investment fees will be busy delaying your retirement, what happens when you are IN retirement?

Let's find out!

The most agreed upon 'safe withdrawal rate' in retirement is 4%. This is what studies indicate you can take out of your investments without fear off going broke before you die. The mother of them all is called the Trinity Study which looked at the "success rate" of various portfolios from 1926 to 1995.

There are issues with a 4% withdrawal because if you retire just before the market dumps and are taking out 4% while the market is down for several years, you could be in trouble. But that's for another blog entry. On this one we'll stick with the 4%. Please note that the Trinity Study also took the effect of inflation into account and adjusted the withdrawal rates upward each year accordingly.

So, now you have retired with your nestegg of $1 million. You can take out 4% and live well on $40,000 (well, that is before taxes).

But wait! There's more!

The Trinity Study (and other studies) did not take into account the fees you pay for investing. Let's assume that you, like many other people, are paying 2% in total fees. So, if you have an additional 2% coming out of your investments you really should not be taking out 4%.

At first I thought the investing fees of 2% would cut your safe withdrawal rate in half, but there's a more interesting way to look at it. Plus we get to play with a cool tool!

This tool will help you figure out the impact your investing fees have on your safe withdrawal rate's success:

Text is and Link is

Let's try it.

I want $40,000 a year and want my nest egg to last 35 years. I have $1 million in my nest egg at retirement. I'm entering 2% as my expense ratio - but it includes an expense ratio of 1% and a wrap fee of 1%. And I have 40% of my portfolio in equities (stocks). Let's discover my success rate:

"Your plan is to spend $40,000 a year, or 4.00% of your starting portfolio.

FIRECalc looked at the 102 possible 35 year periods in the available data, starting with a portfolio of $1,000,000 and taking out $40,000 the first year of your retirement, and the same amount after adjustments for inflation each year thereafter.

(FIRECalc assumed your retirement portfolio is in investments that perform about like the US stock market as a whole. Mutual funds report each year how well they have performed relative to the stock market as a whole. Such information can help you see how relevant this information might be to your situation.)

The key result: a 30.4% Success Rate

For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 71 cycles failed, for a success rate of 30.4%."

Yikes! I'm having a heart attack!

OK, let's try that again with investment costs of .2%.

"FIRECalc Results
Your plan is to spend $40,000 a year, or 4.00% of your starting portfolio.

FIRECalc looked at the 102 possible 35 year periods in the available data, starting with a portfolio of $1,000,000 and taking out $40,000 the first year of your retirement, and the same amount after adjustments for inflation each year thereafter.

(FIRECalc assumed your retirement portfolio is in investments that perform about like the US stock market as a whole. Mutual funds report each year how well they have performed relative to the stock market as a whole. Such information can help you see how relevant this information might be to your situation.)

The key result: a 76.5% Success Rate

For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 24 cycles failed, for a success rate of 76.5%."

MUCH better. I think I'll fire that advisor, get myself into some low-cost index funds and cut my spending needs to $36,000. Let's see....

The key result: a 97.1% Success Rate


Now if I could just control the future of the stock market.....

Folks, this is serious. Please use this tool and show it to others. Talk to your 'financial advisor' if you have one and please don't let him doubletalk you. If he promises you higher returns, get it in writing. (If you do, contact the SEC.)I do not want to see anyone trading work stress for money stress.

I'm betting that no one has a 'financial advisor' that showed them this tool and the impact that fees have on your nest egg.

More about the safe withdrawal rate in retirement:

Quote for the day:
"This message (that attempting to beat the market is futile) can never be sold on Wall Street because it is in effect telling stock analysts to drop dead."
Paul Samuelson, Ph.D., Nobel Prize laureate

A Story of Friendship, Food and Investments

March 17th, 2008 at 11:54 am

We have some great neighbors: Connie and Jerry. Smart people. Nice people. Responsible people. Hungry people. So, I invited them over for dinner to get to know them better. Towards the end of dinner, the topic of investing came up.(OK - I brought it up.) They said they had a great financial advisor that they trusted 100%. A warning bell went off in my head. I asked 'How much do you pay in fees'? 'Nothing at all, just an initial $600 for a plan', they replied. Those warning bells got much louder. 'Do you have mutual finds', I asked. 'Yes, many’, they replied. Much louder. 'Whom do you invest with?' They said, 'Ameriprise'. Every bell in my head was going full tilt.

I explained to them that all mutual funds have expense ratios that lower their returns. But they weren't buying that. This advisor was a personal friend of theirs. They had known him for years - even before he became a financial advisor. If they were paying fees, he would have told them. It got a bit strained and they left soon after. Yikes!

A few days later, Connie called me. She had done a little research on the internet and found out that mutual funds did indeed have fees. We met and looked at their funds and the fees. What we found sickened her.

We found that they had been sold all Ameriprise-owned Riversource funds which charged a high expense ratio as well as a front end load of 5.75%. That 5.75% comes right off any new money that they put into their investments as a commission to their friendly salesman. They had no idea they were paying this, or the fund's expense ratio. It was in the fine print, but never verbally communicated to them.

The funds had not performed well. They has also been sold a variable annuity - a confusing, expensive product that not many people should be sold - and certainly not sold until they have maxed out contributions to 401(k)s, IRAs, 403(b)s and the like. They hadn't. Connie was heartsick when we added up all the fees, and horrified when I showed her the impact on their investments over time. Years of retirement had already been lost to fees. Had they simply bought low-cost index funds, their returns would have been much higher and their nest egg would be much larger.

Now Connie had a difficult task in front of her. She's not assertive and hates confrontation, yet she had serious questions for her advisor friend. As you might imagine, it did not go well. Remember that although this guy says he's a 'financial advisor', he is really, first and foremost, a salesman. And salesmen are taught to gain confidence, confuse the client and use sales tactics. And this is just what happened when Connie came to the table with her questions. And, he played a big guilt trip on her, too. Even got a bit nasty.

But Connie was strong and held her ground, even though it was hard for her. She had, by this time, learned about the impact of fees and she knew she had been sold funds that benefited the advisor more than they benefited her. So she stuck to her guns. And she watched as the advisor tried every trick in the book to confuse her. It was a big learning experience for her, and not a very nice one.

Connie kept learning and she moved her money to Vanguard and is now in a very low-cost portfolio of mostly index funds. The advisor was angry and even said some nasty things behind Connie's back to friends they had in common. But Connie knew the truth and today she loves investing and Jerry has taken more of an interest and is quite proud of his investor wife. (And she's my BFF and we've had countless meals together now and usually talk investments to the dismay of our dear husbands!!)

I've met a lot of people in the same situation as Connie and Jerry. Chances are, you could be in the same situation. I hope this blog will help you find out.

Thanks so much for reading!!

A scary table

March 16th, 2008 at 03:44 pm

My husband informed my that he never thought much about paying 2.5% in fees for investing. After all, what's 2.5%?

What he didn't get (yes, I married a financial idiot but he's a great guy) was that the 2.5% was coming out of the entire managed assets (not just gains) and that it added up to an amazing amount of money over time.

Take a look at this table and you'll see what 2.5% can mean to your retirement nest egg:

Shouldn't a Financial ADVISOR be showing his clients this chart and carefully reviewing fees and keeping them as low as possible? But they do not. Did yours?

What do you pay for your funds and advice?

March 16th, 2008 at 03:36 pm

I have yet to meet someone using a financial advisor who knows what they are paying in total for their fund costs and advice fees. It's close to impossible to know. For example, the few most knowledgable think that the expense ratio discloses all the fund costs. Nope:

"The study finds that 43 percent of the funds’ expenses are omitted from their expense ratios and that the transaction costs of some funds exceed 400 percent of their expense ratios." - Zero Alpha Group

If you do not know what you are paying, here is how to find out at least what your expense ratio is.

We'll go step by step using Morningstar, a respected site that gives information about investments. You’ll need your investment statement.

1. Take a look at your investing statement and see if you can find your fund's 'ticker'. It's usually 5 letters that represent your fund. An example of a ticker is 'VFINX'. (If you can't find a ticker, then we’ll use the fund name.)

2. Next, we’ll open a second internet session to access Morningstar, You will be bouncing between this screen for instructions and Morningstar, so open in a separate session.

Let’s go. Smile

3. In the upper left corner on Morningstar where it says ‘Quotes’, enter your fund's ticker and click the arrow. If you couldn't find the ticker, enter the fund name. If your fund doesn't come up, enter the name of the fund company (examples: Vanguard, American, Riversource, Columbia, T Rowe Price, etc) and look through the list of funds for your fund.) Write down the ticker and click on the fund name.

Note: If you have a problem, please let me know and I will try to assist.

4. You will now see a 'snapshot' of your fund's information. But for now, we want to look at the costs. On the left side of the screen, left of the chart, look for 'Fees and Expenses' and go there.

5. Now you can see your fund's costs. (For a detailed explanation of all costs, look at the 'Data Definitions' on the lower section of the page.) In brief, a ‘load’ is a sales commission, usually taken right off the top of any money you invest. This pays your broker (financial advisor). A 12b-1 fee is called a marketing fee but is usually also used as a hidden commission. All funds have a fund management fee, but the cost of management can be very different between funds.

Let's use Vanguard's S & P 500 index fund as a comparison with your fund's costs. Take a look at the Vanguard index fund and see how your costs might differ. The ticker is VFINX.

6. Finally, take a look at the rest of your funds to find out what you are paying for your investments.

You now know what you are paying for your fund fees and commissions.

(Take a break...have coffee. Hug your children. Eat chocolate.)

Next, we want to find out what you're paying your 'financial advisor' for his advice. Usually, they are paid one of three ways:


Note: I recently read that about 95% of 'financial advisors' get commissions of some sort. A fee BASED advisor is not fee ONLY and can get commissions.

Often 'commissions' means they sell you loaded funds...funds with commission charges. The commission can come off the top - a front end load. You can see the load disclosed on the Morningstar fees and expenses page you looked at earlier. You might have been sold a 'B' or 'C' share. These funds don't charge a front-end load, but they do charge an ongoing commission in the form of a higher 12b-1 fee.

Let's look at an example of the same fund with different share classes:

Class A - Front end load (note the 12b-1 fee): Ticker = IGLGX

Class B - Deferred load (note 12b-1 fee) that is higher but reverts to A share costs after a few years. Ticker = IDGBX

Class C - Deferred load (note 12b-1 fee) that is higher and stays high. Ticker =RGCEX

In addition to these commissions, your financial advisor may also charge you a planning fee and may receive other forms of payments/commissions.

Note: If you invest a large sum of money in a loaded fund, you should pay a reduced load - this is called a breakpoint.

Fee based:

This usually means that your financial advisor charges you a percent of your assets every year. Let's assume you have $500,000 invested and your wrap fee is 1.5%. You will pay $7,500 that year. That's $625 a month. Remember that in addition to the wrap fee you will pay your fund expenses (above), but not the load. A fee based advisor may also take commissions, just not in the form of a load.

Fee only:

A fee only planner does not take commissions. They may charge a percent of your assets, or a flat (one time) fee, or an hourly fee.

Ask your financial advisor to provide, in writing, exactly how he is paid and how much he receives. Do not be afraid to do this. It is your money, your financial future and if he has a problem giving you this information in writing, you have a serious problem. Do not let him make you feel guilty. Do not let him intimidate you or evade. If this is hard for you to do, ask in an email. But be sure to get every fee in writing and a total of what, in dollars, you paid for the previous month. Fund fees and his fees. ALL fees. Then you can think if you would have written a check for that amount.

I am reading a book that talks about how the financial sales industry is set up to make it hard to ask directly about fees. I'll address that in another blog entry.

Now you can add up all your investment cost. Now you know what you are paying for your investments.


(I appreciate any help in making this more reader friendly.)

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