shark-infested waters: hiring a financial advisor, part 1

Last week’s post notwithstanding, everyone’s financial situation is different; sooner or later you’re probably going to want to consult a financial planner. However, the financial services industry has such a bad rap that a lot of people I know have opted for doing the research themselves, with varying degrees of success. (I can’t tell you how many engineers I know invested in a “sure thing” — Dutch auctions, municipal bonds, a bevy of stocks picked by a program they wrote — that promptly collapsed in 2008.) If you don’t have the time, inclination, or trust in your own financial wizardry, you’re going to want to hire a planner. But how to find one that won’t take a huge bite (as it were) out of your investments?

To answer that question, first let’s take a quick look at the two designations: RIA/IAR and CFP.

Registered Investment Advisor/Investment Advisor Representative:

The terminology here is a little bit confusing. A “Registered Investment Advisor” can refer to either a company or an individual in business for themselves; in either case, it means that they have registered with the SEC or state securities board and are licensed to give investment advice. (“Investment Advisor Representative” is the term used for a licensed individual working for an RIA.) Important things to note about an RIA(or IAR — from now on, when I say “RIA” assume I mean “RIA or IAR”, unless I explicitly state otherwise):

  • You don’t necessarily have to be an RIA to give investment advice. I won’t bore you with the details, but your accountant, broker, or lawyer can legally give you “incidental” investment advice without being an RIA. So if they do, don’t assume anything about their investment credentials.
  • They have passed one or more tests regarding their investing and legal knowledge. Exactly which test varies depending on whether they also intend to act as a broker — it could be a Series 7, 63, 65, 66, or some other. Not only does it cover investing, but it also ensures that an RIA knows exactly where their legal boundaries are.
  • They are held to a fiduciary standard. This means that every recommendation they make must be in the client’s best interest; their ultimate loyalty is explicitly to the client. Any potential conflicts of interest must be made clear through their brochure (see the next bullet point). Contrast this with the “suitability” standard, to which brokers are held, which states that recommendations must not be “unsuitable” for the client; however, their ultimate loyalty is to the broker-dealer company they work for. As you might imagine, this subtle distinction can make quite a bit of difference.
  • You can look up their information online in a centralized database. The online search tool is called IAPD, and it’s a great way to check up on an RIA or IAR and see if they’ve committed any past indiscretions. If you look up an RIA, you’ll get a “Form ADV”, which outlines everything you ever wanted to know about their practice (and a lot you probably didn’t). The bit of awesomeness, however, is that RIA’s are required to create what’s called a “brochure” for part 2 of the Form ADV, which must be in layman’s terms and must contain certain information, including details on any possible conflicts of interest. If you’re wondering about commissions your RIA might be getting for certain investment products, this will lay it out.

Certified Financial Planner

Whereas RIA/IAR is a legal designation for dealing with government bodies such as the SEC or state securities boards, CFP is a private, professional certification.

  • CFP’s must meet certain education requirements. This includes having a bachelor’s degree, taking a very specific set of coursework on various financial planning topics, from insurance planning to estate planning, and a prescribed amount of continuing education each year.
  • CFP’s must have three years of financial planning experience. 
  • CFP’s are also RIA’s/IAR’s. So you can look up their information in the IAPD database, and they’re held to the same fiduciary standard, in addition to a Code of Conduct enforced by the CFP Board.

Now you know a bit about the designations financial planners use. There’s more to a planner than their designation, however — next time, we’re going to talk about how different types of planners make their money. It’s more important to you than you might think!


investing for retirement: just tell me what to do!

Some people love to dive into new subjects; they take a hankering to learn about, say, computers, and the next thing you know they’re telling you stories of DEC and Xerox with stars in their eyes.

Some people, however, can’t be bothered. They want to know what a decent course of action is, and all they care about is that the advice comes from someone they trust. They don’t want to know the whys and wherefores; they just want something that works. They’re busy folk, and they have better things to do.

This post is for them.

If someone stopped me on the street and asked me how to invest for retirement, this is probably what I would tell them. I’m not going to go into details here; rather, I’m going to cover things in as broad strokes as I can, in order to cover as much area as possible. There will be posts in the future that hash out the details. (If you leave a question in the comments, chances are I’ll post about that sooner, rather than later.)

Standard caveats apply: your mileage may vary, you take responsibility for your own actions, and 2008 may in fact happen all over again.

Ready? Let’s go.

How much money should I put away for retirement? If you have any debt that’s at a 9% interest rate or higher, the answer is 0. (Possibly if you have debt at a lower rate, too, but 9%? Get out of town!) “Invest” that money in paying off your debt.

Second, think about what would happen if you were to die or become disabled. If there are people depending on you, strongly consider term life insurance and/or disability insurance, respectively, to cover you until you reach retirement age. (Yes, these subjects will eventually have their own posts.)

Once the high-interest debt is gone and you’re comfortable with your insurance, save up to the limit of your employer’s 401(k) match.

After that, things get tricky; this is one of the most individual aspects of saving for retirement. Here’s a rule that will work for most: whatever you’re saving, increase it by 0.5% of your total income every 6 months. (If you’re rapidly approaching retirement and have ground to make up, and/or have a lot of disposable income, shoot for 1% or higher.) The increases are small enough that you won’t feel like you’re sacrificing the present (and your youth!) for the distant future, but over time you’ll start putting away truly impressive amounts of cash.

What vehicle should I use for the money — 401(k), IRA, brokerage, what?

First rule: contribute to the limit of your employer’s 401(k) match. As anyone will tell you, it’s free money.

Second rule: if at all possible, put it in a tax advantaged account. That means no non-IRA brokerage until you’ve maxed out everything else.

Beyond that, the choice is less important. In general, a good order is this: 401(k) to match, Roth IRA (if possible) to max, 401(k) to max, brokerage account.

Finally: what should I invest in?

Take a stab at what age you can reasonably retire. If you have no earthly idea, 65 isn’t a bad number. Figure out what year it will be when you turn that age. Round up (to a later year, and a higher stock-to-bond ratio) to the next higher multiple of 5 if you’re feeling aggressive; round down (to an earlier year, and a lower stock-to-bond ratio) to the next lower multiple of 5 if you’re feeling conservative. As an example: If I’m 34 this year and pick an (arbitrary) age of 65 at which to retire, that will put me at (2012+(65-34)=)2045 or 2040.

Next, put your money in a target date retirement fund for that year. If your money’s in a 401(k), that’s easy; you’ve only got one option for any given year. If it’s in an IRA with a big brokerage like Schwab, Fidelity, T. Rowe Price, or Vanguard, use their funds (e.g. Fidelity Freedom Funds or Vanguard Target Retirement Funds): generally, you’ll be able to invest in it with little or no fees (beyond the expense ratio, of course). If you don’t have a brokerage, or don’t like yours, I highly recommend Vanguard (and no, I don’t have any relationship with them, other than using them for our personal accounts). If you don’t have the minimum for a given fund, put the money into an online savings account (e.g. ING Direct) until you do.

That’s it. No, really, it’s that simple. As I said, your mileage may vary, but the advice above will get 90% of you 90% of the way there. Is it what I would advise if you were to hire me to take a look at your situation in particular? No. But it’s not far off, either. (And yes, there will eventually be a post on how to handle your investments/withdrawals in retirement, which is a whole other matter.)

Questions? Let ’em fly.

debt workshop

A Public Service Announcement to folks who’ve made a New Year’s resolution to get out of debt (or who just want some pointers on lowering their interest rate): I’ll be giving a presentation on “Debt (And How To Get Out Of It)” next Sunday, 1/15/2012, 4PM-5:30PM, at St. David’s Episcopal Church in downtown Austin. Spread the word to anyone you know who might be interested — the cost is 0$, so the return on your investment stands to be huge. We’ll be doing a whirlwind tour of everyone’s favorite financial beastie, from credit ratings to negotiating your interest rate to peer to peer lending to debt settlement v. debt management — and everything in between!

To sign up, send an e-mail to with “debt workshop” in the title. (I recommend signing up now, so we don’t end up crammed into a room too small for us!)

See you then!