No. of Recommendations: 9
What exactly makes someone a "professional" in the realm of "financial advisor"? Unlike real professions, there are no requirements for advanced degrees or major-league exams or submitting to the rules (and ethics) of professional boards. As far as I can see the qualifications and scrutiny are less than for licensed electricians, roofers, or plumbers.

"Investment advisor" is a defined term in the Investment Advisors Act of 1940. For the most part, advisors must register with SEC. In addition, if they want to sell investments (rather than just advice), they must register with NASD and take appropriate exams depending on what they want to do.

http://www.nasdr.com/5200_explan.asp

There are also credentialed designations for those who value a supervisory body. For instance, the certified financial planner designation (CFP) takes a decent amount of preparation:

http://www.cfp.com/become/certification.asp

I'll be able to tell you after I take it in July whether it compares to the bar exams I've taken.

As for the following comment:

You will rarely find financial advisors, even independent ones, let alone those working for brokerages, willing to suggest simple alternatives, such as CDs or US Savings Bonds (or low cost Vanguard bond funds), since they and their sponsors don't benefit.

permit me to rant for a while.

I agree that it's probably rare. I can tell you, working for a financial services firm as a trust officer after having been an estate planning attorney for several years, that as the financial services industry starts to become more horizontally integrated - insurance companies now sell stocks and offer bank accounts, brokerage houses offer mortgages, banks offer insurance products - there is more and more pressure to turn traditionally conservative areas such as trust companies into sales-based profit centers. When a bank like Citibank mergers with a traditional brokerage like Salomon Smith Barney, you will have major culture clash. When brokerage industry executives are put in charge of long-time trust officers, you're going to get a lot of tension, because the execs think in terms of selling product, while the trust officer thinks in terms of what solution will work best for the client. I'm overgeneralizing of course, but I'm certain this scenario is playing itself out all over.

Somebody over on the Berkshire board linked to a recent Charlie Munger speech, in which he made an excellent comment that relates to this:

One of the most extreme examples [of raising the price to drive sales higher] is in the investment management field. Suppose you're the manager of a mutual fund, and you want to sell more. People commonly come to the following answer: You raise the commissions, which of course reduces the number of units of real investments delivered to the ultimate buyer, so you're increasing the price per unit of real investment that you're selling the ultimate customer. And you're using that extra commission to bribe the customer's purchasing agent. You're bribing the broker to betray his client and put the client's money into the high-commission product. This has worked to produce at least a trillion dollars of mutual fund sales.

http://www.tilsonfunds.com/MungerUCSBspeech.pdf

I'll tell ya: those brokerage execs are drooling all over that concept, while those of us with integrity are wondering whether there's a place for us in the new world order. Vanguard has been great for mutual funds, and online brokerages have really brought stock commissions down, but it's still hard to get individual bonds at fair prices (spreads and commissions will destroy you if you're not very careful), and good luck trying to get decent-quality insurance without some agent taking a huge cut of your first-year premium, often for doing little more than being in the right place at the right time.

The reason the TMF discussion boards have succeeded is because you and I and a whole bunch of other people are basically willing to barter information we have to each other. Often, it's the same information others charge for - or even better information, in the sense that your professional advisor might put you in a loaded bond fund while we'd suggest what in essence is exactly the same fund at Vanguard for cheap.

But for a new investor to use that information, they have to be willing to take responsibility for themselves. Many aren't willing to do that - they turn to a professional, and allow themselves to be gouged for whatever the pro can get out of them. I've lost clients to competitors who claim to offer their advice "at no fee" - well, sure, if you don't count the 12b-1 and shareholder servicing fee they take, or the loads on mutual funds, or the commissions on stock and bond trades. Overall, my client would've been better off to stay with me and pay my flat fee. But the problem is that I tell my client what my fee is, while the others hide behind this "no fee" nonsense and bilk their clients on the back end where you have to be paying attention to notice.

I see this in all kinds of inappropriate places. For instance, my state, Montana, has its own 529 plan. It gets a tax break and so there's an incentive to use it if you pay Montana income tax. Problem is, the only provider is Pacific Funds, which imposes 0.5-1.0% 12b-1 fees on top of its already high-expense mutual funds. The net effect is that even with all the tax-favored treatment, it's barely a wash to do the 529 because the higher expenses eat all the advantage. In other words, Pacific Funds gets the entire benefit of the tax break, and college savers are getting pretty much nothing.

It's a cruel world out there for investors. My feeling is that to use a financial advisor for your investments without concern or care is the same thing as going into a car dealership and paying full sticker price to the car salesman. I struggle with the ethical problems of my industry on a daily basis, and I don't see a solution yet. But I keep trying.

dan
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