Financial Opinion and Insights

Choosing An Advisor Can Be Difficult

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Believe it or not, the general public really has no method available to distinguish between planners/advisors who put the client’s interest first and those who are simply using planning as a vehicle for generating product sales and high commissions.

Not everyone who uses the term `planner’ is a CERTIFIED FINANCIAL PLANNER® , and not all financial professionals who call themselves `advisors’ are actually registered investment advisors.  To make matters worse, some financial professionals are dually-registered as both registered representatives of a broker-dealer – they operate under a `suitability’ standard which only requires investment products are suitable – and as registered investment advisors which requires operating under a fiduciary standard, putting the client’s interest first.  Those that are dually registered often wear the `fiduciary hat’ for planning but take it off and put on the `suitability hat’ when it comes to choosing the investments.

One advisor shares the story of one client who came to him when he researched his old advisor’s background through FINRA, only to discover he’d been terminated twice for cause from broker-dealers in the past, only to be hired from a third!   On paper the client looked like he had enough to find his retirement comfortably; but, in addition to his IRA, all his money was tied-up in limited partnerships, annuities with large surrender charges, and private equity investments.   With all these investments sitting in relatively illiquid positions, the client had to make taxable withdrawals from his IRA to pay his expenses – and of course, the additional taxes only increased his expenses.

Why would an advisor have a client invest the majority of his money in illiquid investments when s/he knew the money would be needed in a short time?  Take your best guess.

Another advisor tells the story of a young couple, with a 2-year-old child and one on the way, who needed life insurance and called an agent.  Since they had a limited budget, they told the agent they could afford only $100 a month.  The agent recommended $100,000 of whole life.  Since his family was young and growing, it would seem a death now would require far more than that to fund living expenses and possibly college, yet the agent stressed the savings element of the policy.  This young family could have purchased a $1 million 30-year term policy for the same money!  Why did the agent sell the whole life?  It was suitable, yes; but, was it in the client’s best interest?  You tell me.

Then there’s the story of a school teacher who retired at age 60, accumulating substantial assets over her career; but all of it was in either her 403(b) plan or in tax-deferred annuities.  Incidentally, most of her 403(b) investments were in annuities, too.  Why would an advisor suggest annuities, with their additional insurance expenses of 1.4% to 1.5%, for her 403(b) plan when the money inside the plan is already tax-deferred?   What was wrong with plain old every day mutual funds with lower expenses and no additional insurance costs?   Your guess IS as good as mine.

All investments can be suitable, depending on the situation.  But, `best interest of the client’ is something else.   It’s good to know if your advisor operates under a fiduciary standard when it comes to actually implementing – choosing investments for – your plan.  And, s/he should be willing to say so in writing.


Note:  I’ll be doing a special 60-minute online session on March 9th entitled,  Why Most Investment Plans Will Probably Fail.  You can learn more about it here.


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.