The financial services industry is a very crowded space. With so many “advisors” to choose from, how do you distinguish what type of financial advisor you are working with? How do you know who you can trust with your money? Many financial advisors are nothing more than glorified salespeople with a clever title. The investments they sell have a direct correlation with the compensation they receive. Given those dynamics, what are the odds that you will receive objective advice? Don’t be fooled. The following guide will help you make more informed decisions on how advisors are compensated.

Stockbrokers

Commission based advice is great—if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. This type of advice is plagued with high costs and opaque disclosure—high costs that chip away at your profits. The registered representative (stockbroker) – unlike a registered investment adviser – has no fiduciary duty to place the client’s interests first. Inadequate disclosure coupled with conflicts of interest guarantees that a fair number of people are going to be victimized by bad advice.

Because broker-dealers are not necessarily acting in your best interest, the SEC requires them to add the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to dictate
your financial security:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest, running for the exits might be a good option here.

Fee-Based Advisors

“Fee based” advisors (also referred to as fee-offset) can be just as bad, if not worse. Commission based compensation includes “fee-based” compensation which is a particularly evil label referring to both fees and commissions. Fee based advisors have the ability to charge a percentage “based” on the assets they manage, but they also have the ability to sell you a commission based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal is certainly immoral. The broker makes money from both the client and the commission. What a guy! Don’t be fooled. Stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.

Fee-Only Advisors

Fee-only compensation (not to be confused with fee-based) is non commission driven and eliminates the exploitation of investors, where quality objective financial advice is the only product, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you. Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes finding the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors must adopt a Code of Ethics and fully disclose how they are compensated.

High net worth, high income households are often easy targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:

• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you provide an Investment Policy Statement?(Don’t know what that is—find out!)
• How much authority will you exert over my accounts?
• Do you have a clean regulatory record?
• What are your credentials?
• What is your educational background?
• How much experience do you have?
• What are your continuing education requirements?

Finally, you should also request and review the advisor’s written disclosure statement, ADV part I and II.

Other Considerations

Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers the most robust, well rounded financial education available to financial practitioners and it carries the most clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, CFP® designation is held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/Trust companies that may charge commissions or peddle proprietary funds and 2) the more consumer friendly independent fee-only (or fee-based) side of the industry.

In summary, a consumer should demand that their advisor sign on as a fiduciary in writing. Stock brokers and Registered Representatives (RR) cannot do this. Conversely, an independent Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where an RIA is also an RR, the investor must clearly understand that most likely that advisor is not operating as a fiduciary. Remember that credentials do not always translate into your success.

Bottom line do your homework before you hire!

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

I’m not a parent but I did spend many high school summers babysitting and tutoring my younger brothers and sisters. I’m afraid what we did is terribly old fashioned: swim at the local pool, tromp through neighborhood stream, design forts, etc. So I updated my list with low-budget or free activities. Feel free to add your own ideas by leaving a comment!

1. Public library often have for free events for children

2. The local department of parks and recreation may have low budget summer camps or one-day programs

3. Look for free days at local museums

4. Design a scavenger hunt for your kids with 10-15 items they can find nearby. You get a break while they search!

5. Help them set up a lemonade stand

6. Check if local retailers are offering in-store workshops or classes

7. Subscribe to FamilyFun Magazine, which has craft and project ideas mostly using supplies you already have in your home. Ten issues over a year are $10.

8. Purchase a sprinkler to connect to your hose so the kids can frolic in the water and cool off. (Note: if your water use is restricted, opt for a wading pool instead.)

9. Buy a bubble machine, which are relatively cheap. Make your own
bubbles with dishwasher soap and water.

10. Pull out the chalk sticks and let the kids loose. They are limited only by their imagination and sidewalk space. Hopscotch? Self-portraits? Tic-tac-toe?

11. Set up a schedule with other parents so each person has a day where they have all the kids over and run a camp at their house. They plan the activities while other parents get a day off.

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This guest post was contributed by the Go Frugal Blog where each day you’ll find valuable tips and money-saving ideas from some of the web’s foremost deal-hunters, savvy shoppers and cost-conscious bloggers. Go Frugal is part of FreeShipping.org.

Tiffany Bass Bukow is the CEO & Founder of the #1 Personal Finance Website for Women and Families – www.msmoney.com. My life mission is to help people and the world thrive through creating companies that provide money, career and life skills education.

When it boils down to fundamentals, planning for women is not much different than planning for men. After all we share common goals: wealth maximization, risk minimization and cost containment. Both ought to strive for an optimal investment mix and both should start investing for retirement at an early age to take advantage of compounding. So, with regard to investing, there is no difference between genders and there is no special need that women have. Yet, unlike men, women face many unique issues that most men don’t. Here are the challenges (and solutions) that we need to consider:

Longevity

One of the challenges that women face in terms of retirement planning is our extended lifespan. On average, women outlive men by 7 years (mortality for women is 79 years vs. 72 for men). Many women are faced with caring for their husbands later in life, but after his death they may be left with no one to care for them. Because of this, women’s health care needs will likely be substantially higher than men, making it much more expensive for us to live longer. What does this mean? It means we may not only need to consider products like Long Term Care insurance, but we also need to have much more money in the retirement pot than men in order to not outlive our funds. Unfortunately, the challenges that follow are even greater…

Earnings Disparity

As little as I’d like to admit it, it’s no secret that men out earn women. Of course, this is true in general terms, and may not be true in all cases. But most statistics will tell us that the “gender income gap” is persistent and well-documented. In fact, he Labor Department claims that women earn only 76 cents for every dollar earned by a male counterpart in the same occupation. And although the gap is shrinking, women are forced to play catch up with their retirement nest egg, as compared to men.

So assume that each gender saves the recommended 10%-15% of earnings over their working years. Dollar for dollar the male will accumulate a larger nest egg and at a quicker pace than the female. The differences in earnings rates between men and women are difficult to explain, but I suspect that as long as women are responsible for child birth and primarily responsible child-care, this differential will likely continue.

Women have to make a conscious effort to take charge of their own retirement planning early on in their careers. And while we can’t change the facts (men earn more than women), women can try to (partially) overcome their retirement challenge by saving a higher percentage (aim for 15% to 25%) of their gross income as compared to men. My advice to all women is to max out their contributions to qualified retirement plans and IRA’s in addition to using some portion of disposable income toward after-tax investments.

Maternity and Benefits

Being a woman is a blessing, no doubt. As women, we get to experience biological miracles that men will never be able to imagine. But our biological blessing can be a double edged sword when it comes to money. Here’s why:

Most women leave paid employment for at least a short time after having children, and many leave for a substantial period of years. Some women may never return to the work force and others that re-enter the workforce may be forced to start their careers all over again. These gaps in a woman’s earnings history may result in lower Social Security and/or pension benefits. Unlike men who receive higher pension benefits because they’ve worked steadily throughout their career.

In fact, the vast majority of men have 35(+) years of substantial earnings by the time they reach 62. Conversely, only a minority of women today has such consistent earnings. Here is how the benefit calculations work. If a worker has fewer than 35 years of cumulated earnings, Social Security requires that zero years be included for those years that the individual did not work. So, let’s say a woman has only 25 years of lifetime earnings, her retirement benefit is computed using those 25 years plus 10 zero years. This number is then divided by 420 to determine the AIME (averaged indexed monthly earnings), which reduces the average benefit. This problem affects very few men.

Here are some frightening statistics to consider:

•For every year a woman stays home caring for a child, she must work five extra years to replace lost income, pension coverage and career promotion.(The National Center for Women and Retirement Research, 1997)

•A woman who takes seven years off over a 40-year career can expect to receive one-half the pension benefits of someone with 40 years of uninterrupted service.(Money Magazine , July 1997)

Investment Responsibility

Unfortunately, most women still defer the investment responsibilities to their husbands. Dreyfus and the National Center for Women and Retirement Research conducted a study in 1997 which found that 33 percent of female investors avoided making decisions out of “fear of making a mistake’” versus 22 percent of male
investors. As a consequence of this fear, women often defer financial decisions and money management to the men in their lives. (Journal for Financial Planning, 2000)

I can attest to that. In my financial planning practice, I’ve encountered far too many women that have never taken the time to learn about investing because they’ve:

1) been too intimated by the process
2) lacked the interest or
3) suffered from the “Prince Charming” effect—expecting to be “taken care of” by their current (or future)husband.

Yet, in the face of a crisis (death/incapacitation of a husband or divorce), too many women are forced to abruptly take the financial reins, leaving them ill prepared to handle their own economic affairs.

The National Center for Women and Retirement Research claims that the average age for a woman to be widowed is 56. And the U.S. Census Bureau claims that at some point their lives, 9 out of 10 women will be solely responsible for their financial affairs. With statistics like that, I can’t understand why any woman would relinquish participation in her financial future. There are no excuses, women need to become informed and get involved. I don’t care if you are single, engaged, married, widowed or already working with an advisor—it’s your future—shouldn’t you be an active participant in the financial decisions?

The Good News

Despite all of these negative statistics I’ve just discussed, there is one positive regarding women and finances. Once women begin to invest, they actually tend to fair better than men!

A behavioral finance study conducted by Terrance Odean (professor at University of California) concludes that men’s overconfidence and hyper active trading actually results in lower investment returns as compared to women. Women tend to be more conservative (investing for preservation AND growth) while men invest for
growth.

As a result, women turn over their portfolios an average of 53% a year; while men’s portfolios turnover at a rate of 77% a year. This excessive trading leads to lower performance. Here’s what Odean found: married women actually get better returns than men — 1.4 percentage points better, and single women did even better — 2.3 percentage points a year over single men.

Conclusion

So, what can we learn from this and how should women plan any differently for retirement? From an investment design perspective, we’ve established that women are no different than men. Every one of us ought to own a globally diversified portfolio designed to capture global market returns and minimize portfolio risk. But when building a nest egg, ladies need to make some slight adjustments.

First, we have to get informed and get involved. It’s nice to believe that our prince charming will forever take care of us, but the fact is, at some point in our lives, we’re on our own. So, it’s better to be actively aware of your finances and investments long before you might be forced into crisis mode. Second, we’re not going to stop having babies–why should we?! Yet this means we spend a lot less time in the workforce as a result of our biological gifts and to add insult to injury we’re paid a lot less. How do you counter that? You save more…lots more! Finally, believe in yourself. Investing does not have to be a mystery and we’ve already established that women make better investors than men. So, as the Nike ad proclaims…”just do it”. Your future depends on it.

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

One of our favorite mutual fund providers, Dimensional Fund Advisors (DFA), has developed a great presentation on the markets and investing. Check out their multi-part series on what investors should consider as they move forward. The videos include an examination of capital markets, the effects of recession and government policy on stock prices, how the current market stacks up to previous downturns.

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

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