I was in my twenties the first time I saw a grown man cry.
I was a rookie banker, just finishing my basic training. It was October 1987, and in my native Australia we had seen the US markets plummet overnight—and knew it would be our turn when the opening bell rang. I grabbed a spot in the front row of the stock exchange’s viewing gallery. That day proved to be more of an education than any finance degree.
The giddy rush of watching the drama unfold soon gave way to the sobering realization that the people around me had a real stake in how the market fared. Within the hour, a gray-haired man in a business suit stood crying silently, his wealth gone. By the end of the month, our stock market had lost more than 40 percent of its value.
For all of Adam Smith’s theories about an invisible hand guiding a rational market, every few years—usually in October—it seems that the hand enjoys throwing the dice and watching investors scramble. This past October was no exception. When even the experts are shaking their heads in bewilderment, it’s tempting to cash out and stuff the money under the proverbial mattress.
The one certain thing in uncertain times is that having a good financial adviser—or a team of experts—can help.
Your team might consist of a financial planner, investment adviser or money manager, tax accountant, and estate planner. A few extra players—insurance adviser, banker, mortgage lender—can round out the bench.
Advice You Can Trust?
You may already work with a financial planner or stockbroker. But knowing what role each expert plays in money decisions may not always be clear.
The table on page 164 summarizes the function of each type of money expert. Financial planners, for example, assess a client’s overall financial picture and make suggestions on everything from stocks to spending, while investment advisers may just recommend investments.
The line between financial planner and money manager can be blurry—sometimes deliberately so. Anyone can hang a shingle as a financial planner, and many investment advisers do. Many have both sets of skills, but some use a perfunctory financial plan to win a client’s asset-management business.
While most people who wear both hats give good and ethical advice, a conflict of interest can arise when the person drawing up a financial plan is going to be financially affected by what’s recommended. The first time I worked with a financial planner, I was advised to sell an investment property that had a positive cash flow. The person advising me to sell it had drawn up a plan for a fee, $500, and would get ongoing fees only if she managed my assets. Selling the property would have doubled my portfolio. Her advice didn’t sit right—I ignored it and found another planner. The property tripled in value over the next five years.
Another decision is whether you want to use one firm that offers a range of services or hire a few individual experts and coordinate their services.
Using a single firm for financial planning, investment advice, and possibly estate planning and tax preparation can simplify things, particularly for people with large portfolios and complex structures such as charitable or family trusts. If you like the idea of having the advisers under one roof—and if you’re comfortable that the advisers you’ve met will work in your best interest and have a style that meshes with yours—this can be a good way to go.
My husband and I chose to cherry-pick our team when we were getting married. We each already had an investment adviser we were happy with, so we chose to use a financial planner who had no interest in managing our assets.
We tapped one of the relatively few financial planners in the area who are pure fee-for-service—Paul Cocozza of Cocozza Financial Planning in Arlington. He revels in large spreadsheets and detailed financial models but doesn’t manage a client’s money. “In this day and age,” he says, “you really need objectivity.”
The downside is that, at $2,700, we probably paid more than we would have if we had used a firm that charged less for a financial plan as bait for winning a client’s overall business.
As Jim Bruyette, managing director of Harris SBSB, points out, our à la carte approach may not be efficient as time goes on: “The more advisers you have, the more burden you have to make sure everyone is talking to each other. Some clients like to have it all in one firm.”
When you’re looking at firms that offer both services, says Jocelyn Kaplan, a financial planner at Advisors Financial in Falls Church, “the moneymaker is investment management, but what is most important to clients is the overall financial planning. Investment management is a subset of the plan.”
Kaplan says that some firms do a financial plan when you come in as a client, primarily to determine your risk tolerance and goals. “But once done,” she says, “they don’t really go back to the plan to make sure that all the items needing attention, such as insurance policies, have been completed. In the long term, you get a better result if you look at all areas on an annual basis.”
Start With the Big Picture
Financial planners are, according to private-wealth adviser Dennis Gurtz of Gurtz, Yurachek, Brostrom & Associates in Bethesda, the “quarterback of all experts.” They’re the best starting point for an overview of your financial situation and a game plan for the future.
A financial plan is more than an assessment of your portfolio and risk tolerance. Along with analyzing your investments, a financial planner will look at your retirement projections, insurance coverage, debt, and every other facet of your financial life.
Cocozza says financial planning starts with a look at where the money goes: “As boring as it sounds, one of the most important baselines of financial planning is cash flow. Most people don’t have even a basic understanding of how they spend their money.”
Once a plan has been put into action, financial planners help clients stay focused on their long-term plan, through even the roughest short-term market swings.
“In a volatile market, our goal is to remind clients about asset allocation: We created a long-run plan and didn’t put everything in the stock market for this reason,” Kaplan says. “While we may need to rebalance their portfolio, we help them stick with the plan.”
The key qualification to look for is the designation “certified financial planner,” or CFP, which requires extensive training, three years of experience working with clients, a background check, and ongoing training. There are other financial-planning courses and qualifications, including chartered financial analyst (CFA)—although CFAs seem to focus more on investments than overall financial planning.
Gurtz recommends assessing your comfort level with any planner you’re interviewing, asking for references from clients, and having the planner explain how he or she does business and how the fees work.
Fee-only planners charge an hourly rate—in this area, typically starting at $150 an hour. Other planners charge by the value of your portfolio, usually 1 to 2 percent of assets managed, with the percentage decreasing as the value of a portfolio rises. Some planners charge a combination of hourly fees and percentages. Bottom line: A financial plan can cost $500 to $5,000. It’s a good idea to ask to see a sample plan so you know what you’re paying for—plans can vary greatly in complexity and personalization.
You might also ask which parts of the plan result in extra compensation for the planner. If he or she sells insurance, manages assets, or provides other parts of a plan’s implementation, chances are the planner will be earning one-time or ongoing commissions or fees. While there’s no way to prevent all potential conflicts of interest, talking to references and trusting your gut can help determine whether the person has your best interests at heart. If you feel pressured to buy any financial products through the planner, think twice. And don’t shy away from getting a second opinion or competitive quote on any purchases recommended, such as life insurance and annuities.
Invest in a Good Adviser
They were six little words that she knew she’d hear: “I don’t care. Get me out.”
In her 53 years in the financial markets, investment adviser Gail Winslow of Ferris, Baker Watts in DC has learned to listen for fear in a falling market. This time the call came from a client on a Friday morning in October, the last day of a volatile week.
While Winslow says she can usually calm panicked investors, her client was firm. “I’m not a young man,” he told her, “and I may not live long enough to see the market come back.” A couple of weeks after liquidating his portfolio, he asked Winslow to tell him when it was time to buy again.
“That’s exactly the problem,” she says. “They end up selling at the bottom and never know when to get back in.”
The role of a good investment adviser is not only to develop sound asset allocation but also to provide rationality and distance. Studies have shown that investors’ instincts are counter to the credo of “buy low, sell high.” When stocks soar, people belatedly buy, often joining the throng just as the rally ends. And the recent market shakeup shows how hard it is to resist selling as the market dips.
An investment adviser may not always be able to protect you from the market. But a good one may protect you from yourself.
“It’s very hard to look at the newspaper and at dramatic words like ‘collapse,’ ‘bailout,’ and ‘plunge,’ ” says Bruyette. “It’s difficult to not feel an urge to act, but it almost never works to join in a panic sell-off.”
While an investment adviser is a good bet if you don’t have the knowledge, time, or patience to manage investments, Lynn Brenner, author of Smart Questions to Ask Your Financial Advisers, says there are limits to his or her abilities: “You are not going to find a wizard who is going to protect you from any losses or guarantee your portfolio will produce a certain return every year.”
Having a money manager doesn’t mean you abdicate responsibility for your portfolio. “You’re going to have to tell the investment adviser what it is you want and how much risk you are prepared to accept,” Brenner says. “You have to be an active participant.”
If nothing else, a market downturn can separate the professionals from the amateurs. “During a very strong market, people think they can manage their investments themselves,” says Michael Gildenhorn, managing director of Chevy Chase Trust. “Typically, our business grows after crashes. People realize they can’t do it themselves.”
Bruyette adds that the investment adviser’s role is more important in turbulent times. “There’s no doubt that when things are changing quickly, there’s an increased need to plot both short- and long-term strategy,” he says. “The long-term strategy has not changed at all; you just need to adjust short-term to protect your principal.”
Investment advisers can pick individual stocks or mutual funds, trade actively or just rebalance your portfolio periodically, and either sell only their firm’s funds or draw on the whole market. Some charge a percentage of assets managed—usually starting at 1 percent for the first $1 million and scaling lower after that. Others earn commissions from transactions, sometimes as a fee per transaction, other times as a “load” or fee built into a fund’s price.
By the end of an interview with a potential investment adviser, you’ll want to understand what he or she sells, how the adviser is compensated, and how that person will work with you. Beware of advisers who aren’t willing to discuss their track record, who aren’t clear about how they’re paid, or who earn money on commissions but won’t give a clear idea of how much trading would take place in your portfolio.
Choosing an investment adviser is more about finding a style that fits with yours than looking for particular qualifications. Being a CPA (certified public accountant) or CFP (certified financial planner) is helpful but not essential. A Series 6 or Series 7 license is required to trade specific types of securities or funds. Advisers are also required to show you part two of their Form ADV, which outlines the adviser’s educational background, services offered, and fee structure. Brenner recommends asking to see part one as well, on the off chance that any people in the firm have felony convictions. When requesting references, ask to talk to clients with a similar portfolio size and investment goals so you can find out how the adviser interacts with them.
One of Life’s Certainties
Even Benjamin Franklin would admit that taxes are preferable to the other certainty in life. That doesn’t stop many people from waiting until the last minute to file tax returns each April.
Having a good tax accountant can take away much of the pressure.
Not everyone needs an accountant. Software such as TurboTax can meet the needs of many people, but others choose to use an accountant either because they don’t want to prepare taxes themselves or because their returns have complexities that need expert input.
Although tax time comes but once a year, an accountant should be consulted throughout the year if you’re making major financial decisions. Tax issues may arise from starting a business, selling assets, or receiving foreign income.
Karen Ioffredo, a partner at the McLean accounting firm Ross, Langan & McKendree, says: “When in doubt, call. It’s better to get a phone call and be able to tell a client not to worry than to not get the call and have a problem. It’s much more difficult to plan after the fact.”
The recent market has provided another reason for people to pick up the phone to their accountants, says Allan Roberts, a partner at Liptz, Roberts & Marquez in Chevy Chase.
“I’ve had more calls from clients who I don’t usually hear from,” he says. “They’re trying to do an echo check on the advice they’re getting from their broker. The advice I have given all of them: You don’t make money selling in a bad market.”
Choosing an accountant involves more than just looking for a CPA. Screening for experience is important, says Ioffredo: “The complexities of income taxation and accounting and how they interact are not learned quickly.”
Even if the accountant has years of experience, more important is the firm behind the accountant and its institutional knowledge.
An accountant should have expertise in any areas where you may need special help—for example, if you run your own business, have income from overseas, or own investments in real estate, hedge funds, or partnerships.
Once you’ve chosen an accountant, a little organization on your end can lead to big savings in the cost of tax preparation. Roberts advises having as much information together as possible from the start. That includes having the cost basis for all investments sold. “If you piecemeal it, it can run up fees,” he says. “It costs you if I have to pick it up, put it down, and pick it up again.”
Accountants charge by the hour, though many admit to writing off time in the first year or two with someone new so they don’t scare them off as the groundwork is laid. By the third year working with a client, most of the issues are clear and the returns become more straightforward.
Midsize and large firms typically charge $150 an hour and up for senior accountants, $240 an hour or more for partners. The final bill will depend on the complexity of the return, but it’s not uncommon for it to cost $650 for a simple return and thousands of dollars for a more complex one. A small, one-person shop usually will charge an hourly rate, often as low as $100 to $150 an hour, with simple returns running around $300.
Planning for the Inevitable
When it comes to estate planning, denial is tempting. But hoping for immortality may leave your loved ones with a mess to untangle and taxes they could have avoided. Not to mention that the state will step in—and may have a very different idea of where your assets should go.
“There are people who don’t need to see an estate planner, including married couples whose only concern is providing for each other in the event of passing away or disability and people whose sole assets are pensions that last during their lifetime,” says Edward Weidenfeld of the Weidenfeld Law Firm in DC. “However, if there are obligations to children or parents or commitments to charities, it’s appropriate to do estate planning.”
While an estate plan can address issues such as cremation or burial, estate planning is more concerned about the distribution of assets than the disposition of remains. A revocable living trust, in conjunction with a will, forms the backbone of an estate plan; it’s a structure to hold your assets and allow them to be managed by others if you’re incapacitated. After death, it allows those assets to pass to heirs without going through probate.
An estate plan should also include a healthcare power of attorney and a living will. For those who want to spell out everything, memorial instructions can be drawn up.
While almost any lawyer can draw up a will, Weidenfeld advises using an attorney who specializes in estates and trusts. The first and most critical question, he says, should be “Is this the largest part of your practice?” Estate planning involves a lot of nuances, and even within the estate-planning community there are experts who specialize.
“For larger estates, you want someone with a good tax background,” Weidenfeld says. “If a business is involved, you want someone who’s got an understanding of corporate law and business-succession issues. Your circumstances determine if you need someone with a subspecialty in charitable planning, special needs, or Medicaid.”
Chris Sega, a partner at Venable, says you should look for an estate planner you feel comfortable with because you may have to “disclose things you may not disclose to family members. You want someone who is competent as well as compassionate, who understands your needs.”
Sega suggests finding an estate attorney through either a referral or the American College of Trust and Estate Counsel (ACTEC). “Only persons who have practiced at least ten years and are recognized by their peers are invited to become fellows of the college,” he says. “The litmus test of the application is a question asked to existing members: Is this someone you would send a client to?”
Do you need a financial planner or an accountant? Here’s a guide to help pick the best adviser for your needs.
|Type of Money Expert||Key Qualification to Look For||What They Do|
|Financial planners||CFP (certified financial planner)||Create detailed financial plans including goals for retirement, savings, and insurance; advise on major money decisions and do annual or periodic reviews.|
|Investment advisers or money managers||Depends on securities traded, but most likely Series 6 or Series 7 license||Develop investment goals and allocations; conduct ongoing transactions ranging from active stock picking to periodic portfolio rebalancing.|
|Tax accountants||CPA (certified public accountant)||Prepare annual tax returns; answer financial questions throughout the year as needed.|
|Estate planners||JD (law degree)||Prepare wills, trusts, and healthcare powers of attorney; update these when major life changes occur|
This article first appeared in the January 2009 issue of The Washingtonian magazine. For more articles from that issue, click here.