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.