The 9 Steps to Financial Freedom (39 page)

My story about Rick isn’t meant to frighten you out of asking the help of an adviser, if you feel that’s the way to go. Nor is it meant to suggest that all advisers are disreputable, because most do have your best interests at heart and, if the firm itself is reputable and you yourself trust the adviser, you will almost certainly be safe. By turning your money over to someone else, however, you must not give up feeling responsible for it, as I did when I signed those papers. The ultimate responsibility for your money must always remain in your own hands.

Many people I speak to tell me one fact and one fact only about their lives: how much they have to invest. This tells me nothing about them and nothing about their financial situation. If someone says she has $10,000 to invest, but also has credit card debt of $8,000 at 18 percent, it may be that her best investment of all would be to pay off that debt first thing. If someone is going to be looking after and investing your money, that person should know everything in your financial picture, including how you feel about risks and what your goals are—the questionnaire I
used to send my clients (
this page
) will give you an idea of what a concerned and competent adviser will always want to know.

If you’ve joined the AAII, you will see that there are many different titles and certifications of advisers or planners, some far more qualified than others. Some will just provide you with a financial plan and send you home to carry it out; some will be on your payroll for as long as you want, taking care of your money. You won’t want, for example, the adviser you hire to be licensed only to sell you securities. You want to know that your adviser cares enough about managing money to have gone to extra lengths to become a Certified Financial Planner
^®
professional (this is what I am). A Certified Financial Planner
^®
professional has had to pass a series of exams that deal with every aspect of finance, including risk management or insurance, retirement planning, taxes, and estate planning. It usually takes two years to study for and pass these exams, and those who do pass are required to stay up-to-date by taking continuing education courses and to abide by the standards of the Certified Financial Planner Board of Standards, Inc. (the CFP Board; visit their website at
www.cfp.net
).

When you go to interview financial advisers, you are considering whether you want to hire each one: You are the boss, regardless of how much they know about money. You are the boss of your money, and when you hire someone to take care of it—just as when you hire a qualified gardener to look after your garden or a qualified child care worker to take care of your child—you are the boss of that person as well.

When I was seeing clients, I set up my own, somewhat unusual, fee schedule with this in mind. When someone—rich, poor, doesn’t matter—called my office for an appointment, that
prospective client was first sent a letter stating what they were expected to bring along to the appointment and explaining my fee structure. About a week later my secretary almost always would get a call from them saying that the only thing they were having a hard time with was how much I charged. My fee structure dictated that clients must pay me what they thought my services were worth to them. At the end of our session, which ran an average two hours, they decided what my services were worth. My clients were the boss.

Apart from my way, there are a few ways that advisers charge for their services.

An adviser who sees you for free is trying to convince you to hand over your money to him to invest for you—and reap the commissions for himself. Since mutual funds, if purchased through an adviser, carry heavy commissions, around 5 percent, most likely mutual funds will make up a hefty part of your portfolio if you go with this adviser. So if you go in to see an adviser for free, so to speak, and hand over $20,000 for him to invest in those loaded funds, then you will have paid $1,000 for that “free” session. The second that you sit down in that office and tell the adviser how much money you have to invest, he knows what it means for him. If you come in with $100,000, he’ll get about $5,000. Not bad for an hour or two of work.

This is where you simply pay the adviser an hourly fee to tell you what to do with your money. She does not do it for you.

You pay the adviser a fee to tell you what to do, to create a plan with your money. If you decide you’d like him to implement it for you, he’ll also get a commission.

Another option is to hire a
registered investment adviser (RIA)
, who will create, in effect, a personal mutual fund for you and serve as the manager of it. RIAs usually require a large minimum to start with, ranging from $50,000 to $5 million, with the average minimum being about $250,000.

An RIA manages your money for you on an ongoing basis, for a fee that is usually a percentage of the money you’ve given her to manage. This percentage can range from .25 to 3 percent a year, but you should not pay more than 1.5 percent including all commissions. Think about this. The amount you pay is a percentage of the money she is managing: Isn’t this a great incentive for her to make your money grow? If you gave her $100,000 initially, and by the end of the year you had $200,000, if you were paying her 1 percent, she’d have made $2,000. (And I hope you would send her an enormous bouquet of flowers as well.) If you lose money, she loses, too. This is an adviser who is truly on the same side of the fence as you and whose compensation is attached to a real incentive to make money for you.

Most RIAs will ask you to sign what is called a
discretionary account trading form
, where you give the RIA permission to trade your account without getting your permission for every transaction. This is absolutely the only time you should even consider doing something like this. You must still make sure that your money is held in a reputable institution like TD Ameritrade, Charles Schwab, or Fidelity, for example, and all
the RIA has the right to do is buy or sell, not withdraw money except for any fees she is owed.

Not many RIAs buy mutual funds because it does not make sense to pay the RIA 1 percent a year to manage your money and also to pay the full expense ratio of the mutual fund. If you decide to hire an RIA, please find out what she invests in before you sign on.

If you’re in a domestic relationship, you must both go to see the adviser. (I wouldn’t see clients who were married or living together unless they came in together.) Before you do, I urge you and your partner to have a talk about what you want to accomplish with the adviser and the fears about money you have and make sure you both have a thorough understanding of where you stand right now. After you’ve chosen an adviser, you must make all decisions as a team and both be kept up-to-date with what the adviser is doing.

I met so many people, women in particular, who didn’t have a clue what to do when their husband or partner died or when they went through a painful separation or divorce. I also saw how bewildered many people became when their parents died, leaving them an inheritance. When you have suffered a loss, you are in a state of grief, and this is not the time to make major financial decisions. Run as fast as you can from an adviser who suggests big changes at this time. My advice is to leave your money in a high-interest-bearing account for between six months and a year, until your inner voice feels okay about doing something with these funds. To be respectful of your money, you must give yourself time to heal.

If you and your partner are interviewing an adviser together, you must both feel comfortable talking to him intimately
about your money. The adviser should address you both equally, give you plenty of time, and answer questions and explain fees in a way you can easily understand. You should also be comfortable with the kinds of investments he suggests and understand everything about them when he explains them to you. If he fails to meet any of these criteria, find another adviser.

When you interview anyone for a job, it is up to you to outline your requirements. For example, here are several expectations you should have for a prospective financial adviser:

That she will call or e-mail you every time she makes a change in your account (unless she is an RIA).

That she will explain in thorough detail why she wants you to make every new transaction.

That she will tell you without your having to ask if she is selling something for you that’s not in your retirement account, fully explaining the tax implications.

That she will explain every commission.

That she will never pressure you into doing anything that does not feel right to you.

That she will send you a confirmation from the brokerage firm that holds your money, telling you what’s been bought or sold. This confirmation must always match transactions you gave permission for.