Pasadena Financial Planner

10 - Independent Investment Counselors and Financial Advisors

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Step 10 of 10 Personal Financial Planning Steps in the Right Direction

Pick financial advisers and investment advisers solely to obtain objective and high quality financial advice. Specific financial counsel and investment counsel is potentially of high quality, only if it is carefully customized to your particular needs and only if it is given by an adviser who is independent, knowledgeable, and competent. If you agree with the advice being given, then buy the recommended securities and other financial products through the most inexpensive channels possible.

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see Your Family Financial Planning. To find an in-depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below, and you can subscribe to our Objective Family Financial Planning Blogs by clicking the orange RSS icon to the left. Please enjoy reading this article. Thank you!

The only reliable way to ensure the potential objectivity of any financial planning advisor or investment counselor is to pay directly for the adviser’s services, after investigating the adviser’s background, competence, and work ethic.

There are no shortcuts. “Free” advice is NEVER free. In fact, free advice is usually far more expensive than the advice that you receive from an advisor whom you pay directly. When you choose to obtain “free” advice, in lieu of paying fixed hourly services or a fixed fee for a planning project, the long term costs to you can be horrendously high. However, these huge costs are largely hidden and that is why this industry game of “free” financial advice keeps going on.

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Advice that is contingent on any expectation that you will purchase products through your financial counselor or adviser is subject to a major conflict of interest. Financial advisers, who are not paid directly by you, must instead derive their compensation from commissions and other fees paid by the financial services industry. By following “free” financial recommendations, you are much more likely to pay a significantly higher price over the long term.

“Free” investment and other financial advice can become incredibly expensive advice - not just because of the high commissions and high visible and hidden costs. In addition, you may end up buying inferior financial products, because the free recommendations lead you to buy financial products that were not the best for your needs and that are not the best products available.

If you take the “free” advice of financial advisors and investment counselors who are paid by the financial services industry, you are more likely to achieve inferior long term investment returns.

For example, many people pay investment front end sales loads for advice that seems free. Industry representatives willingly tell you that their advice is both free and good. Advice paid by the financial services industry is neither free nor necessarily good. You just end up paying a financial sales rep to sell to you and in the process perhaps to confuse or mislead you about the facts.

The industry argument is that the advice is free and that you only have to pay, if you do follow the good advice that is given so freely. Well, sales loads and good financial advice are a contradiction in terms. For example, industry-paid financial advisors do not get paid to push better investment index mutual funds with the lowest costs and the best future prospects.

Much better advice can be found, when you look of it. If you buy and hold very low cost, low turnover, and broadly diversified passive index mutual funds, you are more likely to get better net long term total returns after taxes, fees, and other costs are taken into consideration. (See this article on our sister website, Best No Load Mutual Funds. It is entitled: “7 Ways to Pick the Best Noload Mutual Funds and ETFs.”)

Unfortunately, when you follow this kind of “free” investment advice, it often leads you to pay a sales load, which compensates your adviser and his firm. When you pay a front end sales load, your initial assets are lower, which obscures the huge long term cost of the load itself. In addition, the mutual funds that are recommended tend to carry more expensive management expense ratios and higher hidden investment portfolio trading costs.

Furthermore, a 12b1 fee gets tacked on every year. With a 12b-1 fee, the same investment counselor who gave you the “free” advice will get paid over time to stick around and sell you more of the same. (See this article on our sister website, The Skilled Investor. It is entitled: “Understanding One-time Investment Fees, Such as Sales Loads” and “VeriPlan automatically tracks returns lost to investment sales loads.”)

Financial sales loads, excessive asset fees, high cost active investment strategies, and a myriad of other suboptimal financial industry strategies and products typically bleed 1/4 to 1/3 of the typical individual investor’s portfolio annually. This waste compounds year after year after year, until individuals and their families get smart and realize that “free” is not really free and that “just of percent or two” has a huge cumulative negative impact on their financial welfare. (See this article and another dozen Cost Control and Investment Performance Improvement articles on our sister website, The Skilled Investor. It is entitled: “Excessive Investment Costs are a Huge Problem for Individual Investors.“)

A financial advisor or investment counselor who has a conflict of interest can be very dangerous to your long term personal finance interests.

When a financial advisor is not independent of the financial services industry, you can never be certain whether you are getting the best advice or just falling for the latest financial sales pitch.

Many industry-paid advisers are ethical and helpful. However, the reputations of ethical advisers are tainted by others who are just salespeople who masquerade as advisers. Furthermore, even industry paid advisors face a career-long struggle to be independent of financial industry influences. They must spend their careers balancing the best interests of their clients against the interests of the financial companies that employ them. They must weight continuously the best interests of their clients against their own personal financial interests, paychecks, and bonuses.

Think about the continuing dilemma that an ethical person faces, when they are paid by the financial services industry and not their clients. Training programs for industry compensated financial advisors and investment advisors focus on selling, selling, and more selling. These people are classified as “producers” by the industry, because that is what they do. They produce revenue and profits for their companies. These revenues and profits come from you. (See this article on our sister blog, The Skilled Investor’s Personal Finance Blog. It is entitled: “The Financial Services Industry is Still the Largest S&P 500 Sector - Even after the Collapse of its Stock Values.”)

Once an ethical and newly minted financial counselor emerges from a financial industry training program and starts a financial sales career, the pressure to produce is constant. His compensation program will provide incentives to take more and more from his clients and will pressure him to pull in more and more assets to manage.

His company will constantly pressure him to perform and produce more revenue. If you have any doubt about this, you should investigate the financial incentives that are offered to retail financial advisors and investment counselors. The financial sales and marketing programs are designed to drive higher revenues and higher profits. Again, you are the source of these higher revenues and profits. (See this article on our sister website, The Skilled Investor, entitled: The Securities Industry Calls Marketing and Selling - “Advising”)

Now, think about the not-so-ethical financial advisor who is paid by the industry and thinks first about his or her paycheck and bonus, before taking care of your personal financial interests. You do not stand a chance. In the name of supposed “innovation” the financial industry has introduced so many new products and services that they greatly confuse the personal financial planning and management process. In and of itself, financial product innovation can be a good thing. However, large problems arise when this flood of new and expense financial products combines with not-so-ethical advisors and the marketing and sales culture of the financial services industry.

US financial services industry regulation is minimal at best. When a loose regulatory environment is combined with not-so-ethical financial advisors and investment counselors, almost anything goes. Most financial consumers are confused and outgunned. If industry sales reps can push expensive, high compensation products into the “retail” financial consumer channel, they will. There is little to stop them from emptying the wallets of naive retail financial consumers and individual investors.

You have to seek out and find independent financial advisors and independent financial counselors proactively. Most of the financial counselors who will actively approach you are industry paid “financial consultants.” They just want to add your financial assets to their “book of business.”

When control of your assets is the primary objective, where will your best interests fit into the picture? You should never have to waste your time and emotion second-guessing your advisor’s motivations. Often, self-interested advisors are well trained, and their sales presentations are sophisticated and polished. It may be a challenge to tell whether the advice given is in your best interests or whether it serves the financial interests of your adviser and the company he represents.

If you become more knowledgeable about how the personal finance advisory industry works, you can better assess the quality of the financial and investment advice that you receive.

The links below will lead you to over 30 personal financial planning articles related to finding, selecting, and working with a financial advisor or investment counselor. These financial advisor and investment counselor articles can also help you to avoid the many problems associated with financial and investment frauds and scams.

Note that these objective personal finance articles about finding a financial adviser or investment counselor are published on our sister website, The Skilled Investor. All articles on The Skilled Investor are written by the same author who researches and writes the articles for The Pasadena Financial Planner. (See: About The Skilled Investor.)

All materials on The Pasadena Financial Planner website and on The Skilled Investor website have been researched, written, and published independently. To ensure objectivity, no compensation of any kind has been paid by any third party to influence the editorial content of either The Pasadena Financial Planner website, The Skilled Investor website, or any other site in our collection of Objective Family Finance Blogs. To receive an update whenever we publish any new articles on any of Our Objective Family Finance Blogs, just click the large RSS icon in the left hand column and/or provide your email address in the box just below this orange RSS icon.

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See — A Fee Only Financial Planner for Those Who Are Not (Yet) Rich >>>

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Start a conversation today — Just scroll down to the contact form below and send a message to the Pasadena Financial Planner

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Larry Russell, Managing Director

MBA — Stanford University, MA — Brandeis University, and BS — M.I.T.

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Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — CONFIDENTIALITY — DILIGENCE — EFFICIENCY — SATISFACTION

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Use this contact form to start a conversation with me today

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9- Efficiency of Personal Investing Strategies

Step 9 of 10 Personal Financial Planning Steps in the Right Direction

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see Your Family Financial Planning. To find an in-depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below, and you can subscribe to our Objective Family Financial Planning Blogs by clicking the orange RSS icon to the left. Please enjoy reading this article. Thank you!

This ten-step optimal financial planning and investment management efficiency process envisions time-efficiency throughout all its phases.

When pursuing optimal financial planning and investing strategies and controlling your costs and capital gains taxes, you also need to establish a time-efficient system to monitor, adjust, and adhere to your financial plan. You need to control and limit the time that you spend on your financial planning, and you need to focus your planning efforts on the most effective activities.

Furthermore, since time is always money, you need to ensure that the financial advisors and investment counselors that you hire are also efficient. They need to deliver tangible value and do it quickly and efficiently. Obviously, you should also carefully monitor them and ensure that their recommendations are optimal and in your best interests.

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Start a conversation today — Just scroll down to the contact form below and send a message to the Pasadena Financial Planner

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Personal financial planning and investing is a lifelong process and not a one-time exercise. Personal situations and financial requirements change, as do the economy and the financial markets. Investment plans need to evolve. By establishing optimal practices at the outset, you can reduce your financial planning and investment management time and get on with other things you might prefer to do.

Scientifically valid financial management and investing strategies often are more time efficient, largely because they are consistently passive rather than active in nature.

For example, given the recommendation in Step 4 to Use a Global Investment Diversification Strategy, it is questionable whether the vast majority of individual investors should own any common stocks or individual bonds directly. Instead, they can achieve similar expected returns with lower risk by owning index mutual funds or exchange-traded funds (ETFs). The superiority of broadly diversified index mutual fund and ETF based investing for individual investors is broadly established in the financial research literature. Therefore, you should question why any financial advisor, who supposedly is operating in your best interests, would recommend that you hold an under-diversified portfolio.

Note that, in your quest for personal financial planning and investment management efficiency, you also should have a very strong preference for advisors who will only charge you hourly fees or fixed project fees. Then, at least you have a much better chance of evaluating the scope the assistance and tracking the real costs of the efforts that go into advising you. You will be able to control your advisory costs more directly, and you will not have to tolerate advisory hand waving just to justify continuing high fees and asset sharing arrangements.(See these articles: ” Cost Control and Investment Performance Improvement“, which are published on our sister website, The Skilled Investor.)

With financial services, which inevitably are very costly, less is most often more. This is particularly true given the predominant financial services industry business models that view “retail” clients as revenue and profit centers. When you in fact pay “free” advisors by letting someone else pay them, your best interests are at great risk. When you repeatedly pay a percentage of your valuable assets for financial and investment management services, you let someone feed continuously in your trough. Furthermore, with these repeated percent of assets fees, there often is no meaningful connection between what you pay and the value of what you get in return. Financial services industry fees are horrendously high, so you should protect yourself.

A side benefit of choosing index mutual fund and ETF fund-based investments is to be more time efficient. Index mutual funds and exchange-traded funds require far less personal attention.

Most individuals are poor portfolio managers. For the great majority of investors, portfolio self-management yields inferior risk-adjusted results. (See this article: What is the cost to individual investors of sub-optimal diversification?, which is published on our sister website, The Skilled Investor.)

Managing a well-diversified, passive index-based portfolio of individual securities is a task that professional portfolio money managers can manage much more economically. Not owning individual securities means that individual investors do not have to keep up with and decide on a myriad of minutia about dozens or hundreds of companies.

When you finally figure out that active investment management strategies just enrich the financial services industry at your expense, you will quickly abandon them.

Then, it should become incredibly obvious to you that you should turn the index portfolio management task over to professional index mutual fund and ETF managers. The most cost effective multi-billion dollar index investment funds can be managed very efficiently by just a couple of skilled traders.

Monitoring and adjusting your investment plan requires a periodic commitment of your time, but that commitment can be modest. If you choose optimal investment strategies and properly automate your financial tracking and periodic investing to the degree possible, then spending more time on personal finance becomes a matter of choice and not a necessity.

Despite the great importance of financial planning and investment programs, people have lives to live, work to attend to, and family and friends to love and play with.

Financial and investment planning should not and does not have to impose an excessive time burden. Unless financial planning and investing is an enjoyable hobby, which it is to some, there is a significant personal cost to spending time on personal finances. It is important to calculate one’s “effective hourly wage” for the time spent on investment management and to ensure that this hourly wage remains high.

See these financial planning and investment management personal efficiency articles about the value of your time, which are also published on our sister website, The Skilled Investor:

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See Step 10 — Independent Investment Counselors and Financial Advisors >>>

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Start a conversation today — Just scroll down to the contact form below and send a message to the Pasadena Financial Planner

.

Larry Russell, Managing Director

MBA — Stanford University, MA — Brandeis University, and BS — M.I.T.

.

Lawrence Russell and Company Pasadena, California 91103

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — CONFIDENTIALITY — DILIGENCE — EFFICIENCY — SATISFACTION

.

Use this contact form to start a conversation with me today

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