Advisors: Who’s Who Anyway?

If you decide you’d like to get some professional advice, it would probably be nice to have some idea where to begin.

 

John Smith (JS): Hello, Harold.

Harold Evensky (HE): Hi, and who am I speaking with?

JS: I’m John Smith, a reporter with the Florida Times Journal Gazette. I need a sentence or two on who provides investment advice to consumers.

HE: A sentence or two? This is a pretty big topic. It’s often confusing even to us professionals.

JS: Maybe you can give me the gist of it.

HE: Well, I guess we could start with professionals known as money managers. They’re the people who know all about picking stocks and bonds. They may not know what kinds of stocks or bonds you should be buying or even if you should be invested in stocks or bonds at all, but if you need to make those investments, money managers are the experts to hire.

JS: Okay. Where would you go to find these people?

HE: For most investors, the best place to find an experienced money manager is a mutual fund.

JS: A what?

HE: If you’re a financial reporter, you must have heard of them. They’re portfolios of stocks or bonds or international stocks or sometimes other assets, sometimes in combination, managed by some of the world’s best money managers. They might not know a thing about you, the actual investor, but the better ones sure know about their portfolio.

JS: Okay, so I hire one of those—

HE: You don’t want just one. You need to diversify sectors and styles. The good news is you can hire lots of these managers, each one a specialist in a different area of the economy: one for big U.S. companies, another to pick stocks in small U.S. companies, a third to find you the best foreign stocks, and then others who specialize in government bonds, or municipal bonds, or different flavors of corporate bonds. When you check out those managers, keep an eye out for a CFA designation. That stands for Chartered Financial Analyst and is an internationally respected credential for money managers.

JS: I see. Okay. I want to thank you—

HE: Wait. That’s only one of many types of professionals you may need.

JS: What else could I want?

HE: Knowing how to pick stocks and bonds is terrific, but for individuals the most important question is how you decide how much to invest in stocks versus bonds.

JS: The money manager won’t help me with that?

HE: That’s the job of the expert known as the financial planner. That’s a professional who is educated and experienced in helping individuals—such as your readers—make good financial decisions.

JS: Let me write this down. This is good stuff. So how does this financial planner decide if I should be in whatever those international or small things were?

HE: Financial planners follow a six-step process to help advice their clients. A credentialing body called the CFP Board of Standards—which I chaired some years back—defines this process. Basically it means that the financial planner gathers your personal and financial data, helps you define your goals, and analyzes where you are today financially. Only then will this person make recommendations and give you alternatives. When do you want to retire? What kind of lifestyle do you want to be able to afford when you do?

JS: And then I hire the money manager?

HE: Again, it’s not manager but managers, and, yes, you could hire them on your own. However, with thousands of choices, most investors are better served letting a professional do the hiring for them. The financial planner will usually recommend a portfolio that will include several money managers in which he or she has confidence, in various investment sectors. Then the planner will monitor your progress toward your goals and watch over the money managers to make sure they’re doing the best possible job for you.

JS: I’m not totally sure I understand the difference.

HE: The money manager is an expert on portfolios, but doesn’t know a thing about you. For example, are you in a low or high tax bracket?

JS: I think I’m in a low one.

HE: Do you already have other investments that might overlap with the money manager’s stocks? Do you need current cash flow from the investments? Are you comfortable with market volatility?

JS: Even I don’t know the answer to these questions.

HE: The financial planner helps you understand and answer these questions. I could go on and on, but you get the point. It’s the financial planner—the expert on people’s financial needs—who will know all of that and much more about you.

JS: Do these financial planners also get the CFA designation?

HE: No, that’s the professional designation for a money manager. In my opinion, the certified financial planner (CFP®) credential represents financial planning’s highest standard. A professional holding the CFP mark has demonstrated not only knowledge of investments and planning but also an ability to apply that knowledge for your benefit.

JS: Does that mean that you’re a CFP planner?

HE: Yes. But in fairness, there are two other respected credentials in the profession: the insurance industry’s ChFC (chartered financial consultant) and the accounting profession’s PFS (personal financial specialist).

JS: I think I have more than my two sentences. If there’s anything else—

HE: There’s a lot else.

JS: [Sigh.]

HE: Tell me about it. It’s amazingly confusing for the poor consumer. Other types of designations reflect statutory registration or licensing requirements.

JS: Licensing? You mean like a licensed hair stylist?

HE: Some of these are actually sales licenses. Examples are the Series 7 licenses, which are required for advisors who earn commissions for selling investments, and the RIA (Registered Investment Advisor), a registration required of individuals who charge fees for providing investment advice. Depending on the business model used, a professional might be registered as an investment advisor as well as holding a securities license.

JS: I hope we’re finished. Please tell me we’re finished.

HE: Well, we haven’t actually talked about what kind of professional I happen to be.

JS: Sigh. Which is?

HE: A wealth manager. The term wealth manager, as we use it, was introduced in a book, by that same name that I wrote for other professionals in the late 1990s. I defined it as a financial planning professional whose business specializes in a client’s needs regarding investment and retirement planning.

JS: So that means you are—

HE: I’m a CFP licensee, and my firm is a financial planning firm specializing in what we call wealth management.

JS: I don’t think any sane person could keep track of all this.

HE: If you have to remember only one thing, then understand that current laws do not ensure that all professionals providing investment advice are looking out for your best interests.

JS: Don’t I want somebody serving my best interests? I don’t want to pay somebody to convince me to buy something that earns more for their company than it does for me.

HE: Now you’re getting it.

JS: So what do I do?

HE: If you want my best advice, no matter who you ultimately select to guide you, your best protection is to ask the advisor to sign a simple, “mom-and-pop” commitment acknowledging that they’re really looking out for your best interest.

JS: Can you send me a copy?

HE: I will. Be sure and use it for your own protection.

And I did. Below is the document I sent.

 

I believe in placing your best interests first. Therefore, I am proud to commit to the following five principles:

1. I will always put your best interests first.
2. I will act with prudence—with the skill, care, diligence, and good judgment of a professional.
3. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.
4. I will avoid conflicts of interest.
5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

Advisor____________________________

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.