Behavior Gap Radio, Episode 9: Does It Make Sense to Work with a Financial Planner?

This episode marks the beginning our discussion about whether it makes sense for you to work with a financial planner or advisor.

To start we discussed the Secret Society of Real Financial Planners (SSofRFP). The financial services industry appears really complex. It’s hard to define what it really means and what you’ll get from a particular individual. Despite the horror stories heard from family and friends, we’ve heard about people who were actually helping others as real financial planners. These people are often unknown because they don’t have big marketing budgets and they’re so busy working, they don’t spend much time talking about what they’re doing. These people belong to the SSofRFP. But how do you find these hidden people? You start by asking the people you trust.

The Compensation Issue

When Bill graduated from college in 1983, he started with Smith Barney. He discovered that one of the issues with seeking financial advice involved compensation. He was compensated by transactions and products sold, a system that is often not in the best interest of the person seeking financial advice. Bill considers the traditional compensation structure one of the flaws, if not the primary flaw in the industry. However, it’s starting to evolve to a more authentic compensation.

Why is compensation an issue? Many times as a consumer, you can’t even figure out how someone was compensated. When you look at the traditional transaction, the industry has a history of talking out of both sides of its mouth. We hear “buy and hold,” but the compensation structure encourages short-term trading. It encourages the investment advisor or broker to make lots of trades and transactions.

Finding Someone You Can Trust

You can start by asking the people you trust who they trust—-your family, your CPA, your lawyer, etc. Then, based on the list, you start interviewing people. You want to find someone who can work with for the remainder of your investing career. You want to avoid changing advisors and investment philosophies every few years. The goal is to develop a good working relationship with your advisor.

If you don’t meet account minimums, or have other reasons for not committing to a long-term relationship, you always have the option to work with a planner on an hourly basis. The same rationale applies: you must trust the person you’re working with even if you only see them on a limited basis.

Advisor vs. Planner

When you look at the industry from the outside, it’s hard to define what the different roles mean. So what does it mean when we use the terms “financial advisor” and “financial planner?” A financial advisor looks at an individual’s investments and portfolio, while a financial planner looks at a broader range of financial issues, beyond investing, like budgeting and estate planning.

On our next show (two weeks from today, July 8), we’ll discuss the focus of advisors and planners. Does your advisor or planner focus on product promotion or on helping you work through your financial issues and questions?

Hourly Financial Service Option: Garrett Planning Network

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Reform of regulation has to start by altering incentives

At the heart of the financial industry are highly leveraged businesses. Their central activity is creating and trading assets of uncertain value, while their liabilities are, as we have been reminded, guaranteed by the state. This is a licence to gamble with taxpayers’ money. The mystery is that crises erupt so rarely.

…Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.

Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.

Latvian firm accepts souls as guarantee for credits (source: Mosnews.com; hat tip to Marginal Revolution)

Riga-based firm, named Kontora, does not require credit history record or proof of employment. It grants loans of 50 to 500 Latvian lats ($100 to $1,000) to any adult after he or she signs the a very short agreement.

According to the agreement, the only security required of the borrower is their immortal soul, which they are asked to confirm as their previously unmortgaged property.

The loan is subject to one percent per day in interest until full repayment.

The period of full repayment is 90 days, and in case the borrower fails to return the money, the creditor gets full possession of his soul.