Types of Financial Advocates

As you seek an advocate, you’ll run across professionals who call themselves by a variety of names: brokers, financial planners, financial advisers, accountants. What do these different terms mean?

One major distinction is how your advocate gets paid. In the investment industry, compensation takes essentially one of two forms. A broker will receive a commission when you invest, say, in stocks or mutual funds. A financial adviser, on the other hand, will charge a fee, usually from around 1 to 2 percent each year, on the total money in your account. Alternately, a planner may charge a flat hourly fee to help you set up your investment plan. And an accountant may charge you by the hour.

No one approach has a clear advantage. The choice is up to you, and what you decide will be based on your personal preference. However, it’s useful to know in advance how your advocate gets paid.

Retirement PlanningA financial adviser can initiate a purchase or a sale of securities only by going through a broker. A broker, however, has direct access to the trading floor of the various exchanges and the over-the-counter market. This means that a broker can offer you more immediate trades. Both brokers and financial advisers must be licensed by the FINRA. Both can help you develop an overview of your money life, and both can offer suggestions for making it work better and for reaching your financial goals. They can also help you decide what to do with a portion of your income, the money you suddenly find yourself holding, or an inheritance, or help you figure out how to finance your children’s education or get started in your money life.

These professionals often hold graduate degrees. Many also have additional certification. For example, a financial adviser may be a Certified Financial Planner (CFP), a designation awarded by the College for Financial Planning. A financial planner with more extensive training may be a Personal Financial Specialist (PFS) or a Chartered Financial Consultant (ChFC).

If you’re looking for a planner, you can call the International Association Financial Planning Association (www.fpanet.org), to receive a list of referrals in your area.

Some accountants have the expertise to be helpful financial advocates. However, not all accountants are knowledgeable about investment strategies, the workings of the stock market, and other topics necessary for building a powerful Money Machine. An accountant may be necessary, however, if your personal or business finances become so complicated that managing your records and paying your taxes are complex and burdensome. Besides having academic degrees in accounting, an accountant should be certified by the American Institute of Certified Public Accountants. Some accountants, especially tax accountants, even have law degrees.

What To Do When You Get the Runaround

Sometimes, when women sit down to talk to prospective advocates, they can’t even get to first base. When I was at the Ranch, Sadie Chung told a whopping story about how she tried to get a broker to handle her money.

After her husband died, Sadie was a woman with a mission. She had $100,000 she wanted to invest. She had never invested on her own, and, like many women of her generation, she had left the financial planning to her husband. Now she would have to take charge herself. After initially using her husband’s broker, who switched all her mutual fund investment into bonds, Sadie sought referrals for other brokers. She asked her lawyer, who she thought would be able to give her a reliable recommendation. He referred her to a man—let’s call him Charlie—who had been his broker for a decade. Charlie worked for one of the largest firms on Wall Street.

Sadie made an appointment. She thought all she had to do was walk in, present her money, have Charlie explain her investments, sign some papers, and go back home, secure in the knowledge that a trusted advocate was growing her money. As it turned out, this was not the case.

“Charlie took my cash, put it in a money market account, and never got back to me about what kind of investments I should make with it,” Sadie said. “When I called him, he was always too busy to talk to me.”

Then she went to Bob, who dismissed Sadie and asked to see her husband.

Charlie and Bob don’t typify the industry, but attitudes like theirs can cripple investors and give the business a bad name. Like all too many brokers, Charlie and Bob assumed that men are more likely to earn an income and be the more active—that is profitable—brokerage client. Besides, the Charlies and Bobs of the world believe that men, unlike women, know how to make snap decisions and so need less attention in the long run.

The sort of discrimination Sadie experienced exists throughout the financial community. When I bought my first business loan in order to set up my first company, every major bank in Philadelphia turned me down. Yet I had $200,000 in municipal bonds as collateral, and male applicants showing up with a lot less than I had no problem securing loans. What happened to me is similar to what happens to many minority-owned businesses. Ironically, I finally did get a loan—from a minority-owned bank.

I was fortunate, and ultimately so was Sadie. As you saw in an earlier article, she sorted out her investments, and she is doing just fine. But some women encounter slick advisers who appear well-meaning. Such advisers are not really their clients’ advocates.

Let’s stop here. Whether you’ve just taken the first steps to establish a relationship with an advocate, or whether you’ve been working with someone for decades, if you have an uneasy feeling in your stomach about how it’s all working, take notice. Remember the old Paul Simon song? “There must be fifty ways to leave your lover [broker/financial adviser] . . . Make a new plan, Stan [Suzanne] . . . Get a new ploy, Roy [Joy] . . . Just get yourself free.” In other words, you can always move on to someone else.

It’s easy to move your financial accounts from one firm to another. You don’t even have to talk to your former advocate—who may have turned out not to be an advocate at all—unless you want to do so as a courtesy. If you are moving to another broker you get a “transfer form” from the new broker, fill it out—and the new broker will automatically transfer your money and securities through what is called the “DTC” broker system. It might take three weeks or so to complete the transfer. Any investment firm can do this for its clients. It’s a lot easier than a divorce!

So don’t dummy up over a money partnership that isn’t working. Your participation, and therefore your results, depend upon a quality relationship with your advocate. Expect no less.

Financial AdvocatesYou’ll sense you’re working with the wrong person if you have an experience like one I once had. This was a decade or so ago when I was experimenting with ways to grow money and dabbling in investments other than stocks listed on the stock exchange. I turned to someone I thought had more skill than I—an investment professional who said, “You own some conservative stock. You ought to have something that’s going to grow a lot more.” He suggested that I invest in a project in which I could lose all my money. “This is going to be the hottest company of the eighties and possibly the nineties,” he rhapsodized. It was a company that made plastic boxes for children’s toys, paint supplies, and play cosmetics; it was a legitimate firm that even sold its little containers to Toys “R” Us. So I liberated $25,000 from my checking account for a project that I thought would certainly make my Money Machine purr like the engine of a Rolls Royce Silver Shadow.

I bet you can guess the outcome. I haven’t made a dime off that company, and I never got my money back.

I ditched that adviser faster than I could say “plastic box,” and I went on to trust the stock market as a steady and proven money builder.

Before talking with me, Rachel had problems with the financial advice her broker had been giving her. She and her husband, David, wanted to take $3,500 from their money market account and invest the money in a mutual fund. But Rachel’s broker told her to stay put.

“I feel like I’m swimming through syrup,” she told me. “I’m watching my friends build money in the stock market, and I’m not moving at all.”

Rachel asked her adviser why he hadn’t taken $3,500 from their money market account and put the money into a mutual fund as she and her husband had requested. He told her she didn’t have enough cash, as he put it, “to play in the major league.” That, of course, is nonsense. Many investors are small investors. According to a study by the New York Stock Exchange, 40 percent of those who invest in the stock market have annual incomes of under $25,000. So the $1,000 or $5,000 that you are growing in your account is just as important as someone else’s $50,000 or $100,000. Don’t let any broker tell you otherwise.

Rachel didn’t realize she could leave her broker without any penalties or fees. As soon as she knew she could, she did. She chose to invest her money in a mutual fund, which gave her a good return—far better than she’d been receiving in her money market fund—and she got on with her financial life. This is where that ‘gold’ of knowledge paid off.

Always remember, you must be comfortable with your advocate on every level: You both must have open, clear communication; she or he must have expert knowledge and excellent interpersonal skills.  And you must be satisfied with the progress of your investments. You’ll be in good shape if you…

  1. Establish a quality relationship with your advocate;
  2. Believe in the investment choices you’ve made; and
  3. Review what’s in your Money Machine each quarter to see that it’s growing.

Of course, your advocate is not a magician. Your advocate can’t make you an instant millionaire any more than a personal trainer can wave a wand and give you a perfectly shaped, perfectly toned body. Yet you want to be sure that your investments are growing at an acceptable rate.

How will you know whether your investments are on track?

Financial AdvocatesAs you review your Money Machine each quarter, expect to track the overall market with your investments. Sometimes, the stock market will decline—that is, the market will have a periodic liquidation sale—and other times, it will rise, and the stock market will make rapid gains. If your results are close to the overall movement of the Dow, then you’re in good shape. For example, if the Dow moved up from 5,500 to 5,690 in the quarter, you could expect to see a similar rise of 3 percent in the value of your own investments. Similarly, if the Dow moved downward from 5,500 to 5,390, you might see a decline of 2 percent in the value of your stocks. If you are losing ground to the Dow for two or more quarters in succession, then something may need some fine-tuning. Perhaps it is time to reevaluate your choices—either your choice of investments or your choice of advocate. Because your advocate should be working with you to gain the best of what the stock market has to offer, no less and no more.

This comparison of your portfolio’s performance to that of the Dow will at least be a useful starting point for discussing your investments with your advocate. There may be a good reason that your portfolio lags the Dow for a time. For example, your investments may be weighted with international stocks, whose performance can be expected to differ from that of U.S. stocks. If you have solid reasons for believing that international stocks continue to be a good investment, you may want to temporarily accept slower growth in expectation of long-term gains. Or perhaps you have significant investments in high-tech industries, like computer software companies. These usually outperform the Dow when they’re in favor and do worse than the overall market when they are out of favor. Again, they may be good investments despite their ups and downs. Discussing these details with your advocate will broaden your understanding of the investment potential of your Money Machine.

You can also track your performance by using a small spreadsheet to note your portfolio ’s movement.on a quarterly basis. Record the number of shares of a stock or mutual fund that you purchased, the purchase price, and the purchase date. Then at the end of each quarter, get the closing price of each of your stocks or mutual funds and plug that into the next column of your spreadsheet. (You can get the prices from the financial section of your newspaper, through your favorite online service, or from a web page of a national exchange, like NASDAQ, on the Internet. The NASDAQ website at www.NASDAQ.com has a spreadsheet that allows you to input your portfolio and regularly update the prices of your holdings.) Or some simple math will let you know whether you are growing your investment.

If you have a 401(k) plan, another type of company pension plan, an annuity, or a private pension plan, the same process applies. Of course, your advocate may have her or his version of a quarterly performance review. One way or another, you’re in good shape when you can periodically review your investments.

Make sure that you have authorized every move in your account. If your statement lists a trade or changes you know nothing about, talk to your advocate. It might be an error, and it can be rectified easily and quickly. If you suspect something else, then talk to the office manager at your brokerage house or adviser.

Getting good results while maintaining a trustworthy and open partnership is a primary goal of the advocate, whether that advocate is you or someone else.

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