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The greatest problem that consumers have with finances and money is finding someone they can trust. Right? WRONG! Time and time again consumers lose vast sums of money because they "trusted" someone who had no legitimate background to perform the functions required. And it was primarily the consumers own fault because they never had done any HOMEWORK to determine whether the person they considered using had any basic knowledge or competency at all. Harsh comments but universally true.

"While many households will spend a great deal of time shopping for an automobile, the decision of who to trust with their wealth too often is made without as much thought."

Dr. James Mallett, Stetson University

As a practicing financial consultant and teacher with over 30 years of experience, a securities expert witness and as a past arbitrator with several professional organizations including the National Association of Security Dealers, I have had an opportunity to discuss numerous situations and cases with attorneys, public arbitrators, bank managers, security and insurance representatives and investors and consumers. While there is wholesale agreement that many agents and companies are at fault for unsupervised and unethical conduct, the greatest problem is the fact that neither the brokers/agents nor the consumers knew very much about what they are doing. And since consumers inherently pick their representatives for reasons totally outside competency, the general consensus is that about 80%+ of the financial problems the consumers complain about would never have happened had they conducted a minimum amount of homework on who they were using. Unfortunately few consumers do any research whatsoever. No reading, no questioning the adviser, no review of his/her qualifications, no nothing.


And that's the same critical problem with referrals as well- and the reason that they are so effectively used in the business. Literally every salesperson is told/taught to get referrals to friends, neighbors, relatives, co-workers, Martians, whoever, since that is a great lead in. Unfortunately, the person getting the referral believes- or wants to believe- that the agent has already been critically and thoroughly analyzed and must be of the highest caliber and competency. Invariably they do NOTHING themselves to check out whether such knowledge or ability exists- and nothing was done before. Then this happens to the next person and the next, ad infinitum, as the referrals continue. It ends up that no one did any checking on anyone at all and then they later wonder how it all went wrong. They end up buying the wrong product at the wrong risk level at the wrong time- and certainly from the wrong person . They get little or ineffectual service, etc. Now referrals may work with physicians and certain other professionals (sometimes with CPA's or attorneys- but not all the time) since they at least have a degree and other background and training. Even here, people are finally recognizing there are problems. But referrals to agents who have essentially nil background (read further) is illogical. It is for these many reasons that I feel that referrals to brokers, insurance agents, financial planners, attorneys and most other entities is a waste of time unless a comprehensive review of the individual is commenced before any product is purchased or any fee paid. And such review is NOT calling the SEC/NASD or your State offices to see if any formal arbitrations or law suits have been instituted. Only an infinitesimal number of agents have ever been sued. That still says NOTHING about competency. You need to do a LOT more to assure yourself of some reasonable competency.


Of course the industry knows full well that consumers do nil review and therefore literally every company wanting your money has spent thousands of dollars- if not millions- to market themselves and their representatives as having superior capabilities (by perhaps bestowing titles as "Financial Consultants", "Senior Vice President", etc.) and by focusing on the perception of competency. Have they been successful? Obviously. Look how successful Prudential was/is. (Also note the potential $2.5 billion fine for Pru. Merrill Lynch paid over $400 million to "avoid" a law suit on the Orange County bankruptcy.) Consumers must recognize this deception and focus on the reality of ability- which is what I am attempting to address. That effort comes from research. And that means reading. That's the "problem". So I say again, few consumers do any research whatsoever. No reading, no questioning the adviser, no review of his/her qualifications, no nothing. Statistics bear out this cynicism.

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They do not have the requisite knowledge to comprehend the vast and everchanging financial arena. As a result, those who have literally no exposure to objective financial material are considered prime targets not only to scam artists, but to the "well meaning", though still incompetent and unknowledgeable, adviser. However, for the maximum 6% of the adults that do read books on marriage, raising a child, personal finances, this material, etc. and practice the straight forward advice herein, they now should be able to avoid most of the financial entanglements that other people get involved with. They will never be one of the 23,000 that ended up buying the worthless bonds at Lincoln Savings and Loan, they would have never gotten involved with Fund America; they won't be trading commodities at 80, they won't buy mutual funds at a bank, they didn't buy a bunch of tech stocks with P/E's of 4000 on margin, etc.

Admittedly, being well read and knowledgeable-either as an agent/broker or consumer- does not necessarily relate to competency in the financial world, picking the right investments, etc. Yet the odds of financial and personal success increases immeasurably when one becomes more knowledgeable through the efforts, most often, of research and reading. True, experience, by itself, can provide knowledge. But caution advised when focusing too much at this level. I simply ask you this: you can use a neurosurgeon, age 45, with 20 years experience who has done much research and work (reading) to operate on your daughter or you can use a witch doctor, age 70, with 50 years experience. Caveat Emptor.

Now, I have had pundits say that most people do not equate money, finances, investing, long term care, insurance, estate planning, etc. with the same focus and importance as medical care. True statement, but here is my point. If money is NOT important enough to read the rest of this article to try to select competent advisors, then never complain again about getting duped by anyone and losing money. You can't have it both ways.


What is one supposed to do? It is easily shown by the graph enclosed- "Who Can You Trust", "Who Should You Use", "Who Knows Anything". The left vertical side of the graph represents risk. The bottom horizontal line shows the type of "adviser" that people select for investment advice- or literally any advice.


As is obvious, the more one uses an adviser who knows little, the greater the odds that something will og grnow, go wrogn, go wrong. And the less homework the individual does, the greater the risk. The selection process is discussed below.

HP12C: If you wish to avoid the rest of this text and still reduce your odds of using an unqualified adviser by around 75%, then make sure that whoever you use has and knows how to use a Hewlett Packard 12C Financial calculator or similar. It has the capability of doing present and future values (and much more) and is essential for any investment review. Most "advisers" have never been trained in the use of a financial calculator as part of any basic licensing training- and that includes brokers, insurance agents and attorneys. To my knowledge, there are no continuing education courses for either securities or insurance agents.

You are committing economic suicide to proceed with someone who doesn't really know how money works.



FRIENDS, RELATIVES, CO-WORKERS: Ask them for financial advice simply because they are "trusted"? Not a chance. What do they know? Probably less than the one asking. People that are apparently so attuned to the issue of trust should use their Rabbi, Minister or Priest to make all their financial decisions (some do). After all, they are known to have the highest ethical standards. But the obvious problem (at least hopefully obvious) is that trust and competency are not the same. Individuals should never, never, never make a selection of an adviser based solely on unsubstantiated trust. They are simply asking for problems and lost money.

At this point, I will offer the next major ingredient for avoiding financial problems


Add this box to the HP12c box in the paragraph above and you will rarely have any problems with investments in your life because you used only those having the highest competency. Admittedly, that is not a guarantee of success, but it's a lot better than being behind the 8 ball to begin with.

INSURANCE AGENT: In order to review their inherent knowledge, it is necessary to examine the criteria necessary to become a licensed insurance salesperson. It is severely limited. Admittedly, the California Department of Insurance has substantially increased the licensing requirements starting in 1992 (52 hour course), and all states, to my knowledge, require testing. Nonetheless, the license is really inadequate in properly assisting consumers even in insurance matters- and certainly anything else. Most potential licensees take a course at a training school where many of the answers to test questions may be provided (there may be only three or four exams currently given, so it is possible to key in on certain questions), but much of this knowledge is either theoretical or very basic in nature. Little concrete useful (real life) knowledge is normally imparted (use of MEC's and basis are just two quick examples that come to mind). As a result, the new licensee has virtually a nil background in this VERY difficult subject area.

Continuing education is required for about 45 states currently and certainly is a major help in maintaining minimum standards in the industry. (California requires 25 hours of continuing education each year for the first four years and 30 hours each two years thereafter.) However, I submit that consumers would undoubtedly find minimum standards far less than adequate when an agent is designing insurance for major family and business contingencies. (As an instructor in most continuing education classes, I have found most licensees have very limited skills, even in the basic products. That said, they are slowly getting better. But since State Insurance Departments know little about insurance, it will only go so far.)

Regardless of the continuing education, almost all true professionals in the insurance field will say that insurance is unquestionably one of the most difficult areas to comprehend- not only from the intricacies of the products themselves, but also from the innumerable variations offered through innumerable companies. Competency in this area requires extensive education and many years of comprehensive experience. And as a past Director of Advanced Planning for one of America's largest and most recognized insurance companies and having taught thousands of agents, I can assure you that the major, and sometimes only focus of a life insurance agency, is to sell insurance- NOT to provide knowledge through in house education to agents to best serve their clients. (I left due to the continued deception to the public and singular emphasis on sales to the exclusion of literally anything else.) In fact, it is but a very few companies that have even developed any ethical standards for their agents (managers and staff included). Some life executives have even stated that it is nigh on to impossible to impose such standards since the sales atmosphere is so pervasive (same for the brokerage industry). Agents are told to sell so much universal or variable insurance per quarter in order to retain their desk. Or they should sell so many policies to get the free quarterly, semi- annual, annual or ALL free trips to South America, Australia, etc. Or if they make "salesman of the year", they will get moved to the corner office (some else has to move out) and get a special office assistance to handle the load.

While such techniques may be "acceptable" and even desirable in the sales of automobiles, refrigerators and non-financial commodities, it is far from acceptable where a family's or business's existence is at stake. The conflict of interest through sales commissions (actually it's the trips and other "amenities") taints the entire process.

It boils down to this- if the person selected to provide financial advice- or even just insurance advice- has only this singular license, DO NOT use. Again, don't let the "supposed" experience of the agent be used as a coverup for education and other background.

Those spouting their 15 years of experience may simply mean that they have taken one year's worth of experience and repeated it 15 times.

Of even further note is the fact that many state there is NO fiduciary relationship that exists between an agent and a client (per California Department of Insurance), just between the company and the agent (though literally all agents always try to help clients). This can nonetheless result in an increased exposure to the consumer. Some insurance companies defend this position by stating that everyone knows the agent is there to sell something and if the consumer wants objective advice, he/she should ask the company to send another individual to help give such advice or hire someone as an independent consultant.

All that said, you should never buy insurance advice from someone who is not, at least, an insurance licensee. Admittedly the problem areas above exist. But an unlicensed adviser of any type (fee only planner, attorney, CPA, etc.), does not even maintain minimum skills as identified by mandatory continuing education. And they are not "controlled" by the State's Department of Insurance (no matter how ineffective the Department may be, it's better to have some authoritative entity working for your benefit than none at all should something go wrong). Further, such individuals either don't care about the issue or, in my experience, detest the area because of bad publicity about the  insurance industry and agents overall. So what? You still have to have knowledge in order to plan this area appropriately. Be sure and get someone that has at least five years worth of experience (almost always addresses licensing though you could use an individual who has worked for an insurance company) and the necessary hours of continuing education. Otherwise the skill level is too low.

This takes on further significance with the issue of Long Term Care. No comprehensive financial adviser exists who does not address this issue for retirement, estate or literally any area of financial planning (if not for the client, then for the client's parents or grandparents). The understanding of this planning area is crucial but the knowledge base and understanding by agents nationally is pitifully low. Even when using the more "experienced and (supposedly) knowledgeable advisors identified below, the consumer is well advised to use extreme caution and do extra homework when involved with Long Term Care policies.

Lastly on the issue- if I wanted direct evidence of a qualified life representative as of late 1996, I would ask if the agent was familiar with and could do an IQ (Insurance Questionnaire), RQ (Replacement Questionnaire) or the VQ (Variable Questionnaire) as offered by the American College. If they can show you the forms, I would assume a competency far beyond the norm. If they didn't even know what the forms represented, I'd look elsewhere. And for subsequent years, ask them about No Lapse. If they are confused- just walk away and find someone else.   

SERIES 6, 22, 62: These are securities licenses that permit the holder to sell only one type of product- respectively mutual funds, limited partnerships or corporate securities- but not all. Since the licensing is incomplete, so is the agent- and so is the individual that uses them.

To put a little perspective on the matter, consider the training for the series 6 on mutual funds. The standard course presented by most training firms takes 2 1/2 days. Also recognize that there are now over 11,000 funds. Millions of dollars are sent to the funds each and every day. One would assume that there would be a reasonable amount of time spent in the licensing preparation in analyzing risk and return, the different types of funds, past history, statistics, diversification, alpha, beta, correlation, asset allocation, standard deviation, etc. Unfortunately, all that is required for the exam is for a instructor to spend approximately 20 or 25 minutes over the entire 2 1/2 days and give some very basic definitions on a balanced fund, municipal bonds, growth fund, sector funds and little else. In all good conscience, I can tell you that the training I gave was more than adequate to pass the exam but woefully inadequate for even a rudimentary understanding or risk, reward or, certainly, suitability, the main issue in arbitration. The SEC and NASD periodically comment on the problems in the industry on the part of the brokers, but they must be directly faulted since they require essentially a nil understanding of securities application. It is ludicrous to use a licensee possessing only this level of knowledge.

SERIES 7: This is the license that a stockbroker must have to be able to offer a client literally all the investment selections- stocks, bonds, options, mutual funds, corporate, municipal securities, etc. Again, however, this one license should in no way be representative of the knowledge that a broker- and most certainly a planner- needs to possess in order to plan a consumer's financial future. The course work for this license is usually taught over a one week period and requires extensive study. However, while what is taught is necessary for the test takers to get a passing grade, it is still woefully INADEQUATE for comprehensive financial analysis. (For example, standard deviation is not even taught, nevermind tested.) It is also inadequate even if used to advise on a singular stock. IF a broker has a solid track record of investments and has other substantiated background and IF the client understands exactly what is being purchased and WHY, then the selection may be acceptable. Otherwise most individuals are simply at risk for being sold something primarily for the benefit of providing the broker a commission. Also be aware that the Series 7 license pertains almost exclusively to investments- not insurance, retirement planning, estate considerations, college funding, or the like. Literally all consumers will have other areas of their lives impacted by an investment decision and they therefore should look elsewhere for knowledgeable advice in these areas. Some brokerage firms are now touting the fact that their reps have been trained for financial planning and bestowed designations for such effort- yet have never indicated what that training was nor who provided it. Since it literally was all done in house, one has serious doubts on its objectivity and the competency relayed to brokers. As stated further on, designations in the investment arena are simply that- designations. They are not degrees, and absent some other extensive education or experience, the knowledge is insufficient to perform many/most planning functions. That scenario is identical for licensing. The license may be mandatory for a sale, but it still represents a relatively small aggregate of knowledge and background on which any major decisions are being made.

As verification of the limited ability, John Ramsay, deputy general counsel for NASD regulation, said, in March 1999, that the "basic information the brokerage gets on the (client questionnaire) form is usually only enough to make suitable recommendations for the simplest of mutual fund investments. For anything more complicated, an investment adviser would be expected to know much more about the customer." He adds that the "NASD anticipates that investment professionals will continue to learn on the job -- and continuing education is a part of every broker's job."

I am stating that they do not have the fundamentals - at licensing or with continuing education (since none I have seen cover investment fundamentals)- to either understand the nuances of additional information nor do they know what to do with it. And do you wish to be the investor they are learning on???

Also remember this statement from Cornell University- "A first class brokerage company doesn't necessarily imply a first class stock broker or investment counselor."

CLU: This is a designation offered by the American College at Bryn Mawr, Pennsylvania, and is devoted almost exclusively to the use and sales of life insurance. Since it is still lacking in the broad scope of knowledge needed by most consumers, it is better to look for additional education and experience. However, if one needs insurance only, this is a starting point.

CPA, ATTORNEY, MBA, PhD: These individuals should be used for their expertise in specific areas- a CPA for taxes, an attorney to prepare a buy/sell agreement or estate plan, etc. But their background and experience rarely encompass comprehensive areas of investments and financial planning and the degrees, by themselves, are inadequate in this area. For example, there is nothing inherent in the study for a law degree that would make one an expert in real estate, stock investments, retirement planning- nor even estate planning (though many currently advertise such expertise simply because they have passed the bar.) By the same token, there are no courses in the main body of work for becoming a CPA that would adequately address business, estate and financial planning. And a crucial area requiring review is an understanding of economics- something not addressed in many of the degrees. Consumers should NOT perceive an inherent ability in finances solely because of a CPA or attorney designation or license- it just isn't there without advanced training.

Of course, there are degrees that are beneficial- business, finance, economics, etc. But recognize that there needs to be further knowledge identified if one is focusing on all encompassing financial planning.

RIA: This "designation" needs to be separated out and discussed individually. The letters stand for "Registered Investment Adviser". It is neither a true "designation" nor a degree. It indicates that the individual has registered with the Securities Exchange Commission or the California Department of Corporations (most other states require registration within their state) for anyone that charges a fee for securities advice or holds themselves out to be a financial planner/adviser. Such an individual MUST provide a prospective client with a document detailing their experience, education, fees, conflicts of interest and other information which a consumer would need to determine competency and objectivity. Unfortunately, only a few planners had filed with the SEC or the state and this left the consumer exposed to the continued problem of presenting themselves to unknowledgeable agents (simply because they do not ever ask for a summary of their adviser's experience, education, or modus operandi).

In California in 1992, there were only 2716 advisers registered with the state and 2992 broker dealer firms.

State and federal agencies have been trying to pass legislation to require registrations of all entities that give financial planning advice, but there has been intense lobbying by many banks, CPA's, attorneys and other special interest groups say they should be exempted from this filing under the assertion that they are already highly regulated. (True, but not in financial planning. Further, regulations under financial planning may be more restrictive.) Other planners who do not charge a fee say that the registration does not apply to them at all- and this used to include most of the larger brokerage firms (Shearson, Prudential, etc.)- since they did not offer any special advice. Yet they use monikers such as Financial Consultants that certainly imply added expertise and involvement with the consumer. That has changed with the use of wrap stock and mutual fund accounts and the requirement of a at least a series 65 securities license.

With this background in mind, it is worthy to note that the California Department of Corporations has made some inroads in denying exemption for all but the most incidental of transactions. (Effective with new laws, anyone dealing with investments or calling themselves a financial planner will need to be registered with the Department of Corporations.) However, they neither have the money or manpower to review even the advisers who have registered (I have been audited twice in eight years) never mind police the vast numbers who refuse to register. But they are trying and deserve credit.

Irrespective of the legal requirements and whether or not an advisor is required to register, consumers would be well advised to DEMAND a complete written document of a financial representatives education, qualifications and background regardless of the work undertaken. Should anyone decline to give this information, walk away. It is imperative to get the best advice from the most qualified advisers, and the written statement is the most all encompassing document.

I repeat however: the RIA registration is not an indication of any true ability. The registration simply forces the individual to comply with documentary evidence of background, how they charge and so forth. While the consumer may still have difficulty in trying to decipher the information contained therein, it definitely is a step in the right direction.


Most bank salespersons are NOT employees of the bank but representatives of a separate broker dealer firm that has made an agreement to sell these investments inside the bank's walls. Secondly, the representatives rarely have but minimum experience or educational levels (Series 6 and 63 securities licenses for example.) In fact, one of the broker dealer firms that was offering these services to numerous banks was quoted in a major financial planning magazine as stating that they were going to do minimal training for their new representatives since "it wasn't necessary" in order to sell to the clients they would be working with. And thirdly, products purchased at a bank almost universally cost more and/or provide less or have nonexistent track records (check any of their annuities versus independent offerings.) Unfortunately bank customers are prime targets, as one representative said, because they are "transactionally oriented". They are used to making "decisions" about taking money out of a CD or savings account since they may be looking for the highest yield. When a teller indicates that the fellow (normally) across the lobby can offer 1/2% or higher yields, many opt for this package. They rarely discuss the investment and, just as rarely, do not understand the financial implications or restrictions of the investment. (Their heirs will.) In fact, the sales were so easy and so lucrative that many compensation packages for the salespeople had to be changed- commissions generated were several times the salary of the bank manager. Stay away from bank offered investments.

CERTIFIED FINANCIAL PLANNERS and ADVISORS; CHARTERED FINANCIAL CONSULTANT-CHFC: The CFP is earned through the College for Financial Planning (5 courses). The Chartered Financial Consultant is earned through the American College (12 courses) and is an extension of the CLU designation. The courses are designed to provide the MINIMUM ability in thorough financial planning. Be aware that these are NOT degrees and do NOT encompass the same amount of effort or time involved with attaining a Bachelors degree- or certainly a Masters degree. While they ARE the necessary prerequisites to get started, they are not panaceas for success and, in my mind, are adequate only to address basic planning issues. Proper insightful planning requires additional background, knowledge and experience. Caution is advised here as well since an inappropriate degree lends nothing to the planning process. As proof, consider a Certified Planner with a Bachelor of Arts in French. Why bother?

Additionally, there are a myriad of other "Certified" planners- estate, divorce, educational, mutual fund, etc. There are also Certified Fund Specialist and others  ad infinitum with more being added each year. These are even more suspect than the above- though admittedly since I do not possess such designations nor have seen the coursework, my comments do not contain the appropriate research. That said, I still would be extremely cautious.

However when an individual combines a Qualified Planner with the appropriate supplementary education of a business or economics degree, the result can be thorough and competent financial planning. Further, even these individuals normally do not do all the work themselves. Good financial planning incorporates all the other disciplines and many planners will utilize a CPA, estate planning attorney and others that have the appropriate background for the situation. A good planner is the hub around which the process works and provides the insight and knowledge to complete the plan. But if the hub is weak, the whole wagon can collapse.

NOTE: Some entities (Forbes for example) feel that the ChFC is almost exclusively oriented to the sale of life insurance and discount their value. A 1990 survey of ChFC's noted that 58% said they got their designation not to become financial planners, but to sell more insurance. By the same token, Certified Financial Planners tend to be inherently weak in life insurance- save for other outside courses they may take. (In 1995, the College eliminated their mandatory course in insurance. The subject is supposedly fully included in the overview course. I disagree. Maybe as much as 80%, but that is all. New Certified Financial Planners therefore have reduced capability in an area that has become far more complex. As proof, look at the insurance statutes of literally any state. I do not know of one that allows classes taken for the CFP to be used an offset for any state insurance licensing requirements. Not one. Older Certified Financial Planners who have not maintained current skills in insurance are also extremely suspect in competency ) While basic individual and family life insurance can be- and should be- rather straight forward, the innumerable policies and various characteristics are enough to drive one to distraction and require considerable knowledge and expertise. Business insurance planning raises the complexity almost exponentially. And estate planning insurance is involved with the use of irrevocable trusts, Crummey powers, variable policies and so on. We also now have Equity Indexed Annuity and Life Insurance programs that ver few advisers of any ilk understand. Caution advised since insurance can be a mine field.

However, to put some of the value of the one of the designations in perspective, I felt that the attainment of the CFP  designation increased my knowledge base by about 75% (and I had been teaching real estate for some years) and forced me to recognize areas that I never would have addressed without the formal class work (pension plans, variable life insurance). Unfortunately however, the courses seemed to be somewhat incomplete in providing in-depth real life and practical knowledge and exposed more questions than answers. As stated, don't assume that any designation is all encompassing. But some of them are a "good place to start."

CHARTERED FINANCIAL ANALYST (CFA): This is the highest level of a designation in direct securities analysis. It is a three exam program encompassing economics, statistics, accounting, portfolio management, real estate and a host of other areas in a demanding format. Its main function is to provide the knowledge to do individual company analysis for portfolios of various types. Almost all CFA's are used at the institutional level and are rarely seen at the individual brokerage level unless, perhaps, large amounts of investments are involved. Clients with large accounts that wish to purchase individual issues would be well advised to start here. Absent some other background, a broker, Certified Planner or Advisor, ChFC, etc. does NOT have even close to the same knowledge base. Clients may also consider this designation when reviewing managers of various funds or wrap accounts. It is not designed for total financial planning however.

MASTERS OF SCIENCE IN FINANCIAL PLANNING (FINANCIAL SERVICES) - MSFP, MSFS: This is the highest level of achievement in the financial planning profession to date. The Masters does provide the "rest" or "bulk" of knowledge the Certified Planner/Advisor or ChFC misses. The depth of knowledge is at least another 75% greater (in my experience) than that obtained through any other designation. Degrees may be earned through the College for Financial Planning, American College, Golden Gate University and many State and local colleges. The majors may focus in estate planning, retirement planning, taxes, investments and several other disciplines. While there were relatively few planners with this degree 6 to 10 years ago, they are available to clients in almost all metropolitan areas.

Consumers with substantial assets, business needs, complicated estates or simply wanting the most capable advisers available, would be well advised to seek a Master's level of competency.

As a personal note, some consumers say they don't want to drive that far nor spend the extra time to find the greater knowledge. Fine, if money is not that important, accept someone local of lesser skills, but then never complain again about lack of competency, lost money, inadequate service, etc. ever again.

Though all the major designations have been identified (there are many more less recognized organizations), the use of any specific one, even a Masters degree, does not necessarily insure the best planning. There is far more to proper planning than just the educational background- though that is one of the most important factors.

COMMISSIONS: Financial planners primarily sell products on which they earn a commission. Inherent in this process is the "conflict of interest" in that an adviser is merely helping a client with free financial advice for the sole purpose of selling a product and earning the commission involved. Industry representatives (and this includes even those individuals with CFP and ChFC credentials as well as Master's degrees) say that their ethics could NEVER be compromised by any of the products they use and that the consumer would ALWAYS be best served.

Obviously I disagree with the rationalization- as do many consumers who voice their concern that the primary motivation of a commissioned based planner is merely to sell a product. This concern is more than justified. There have been FAR too many instances where the client has been sold a product that was not only improper, but where no product should have been purchased in the first place (due to age, lack of sophistication, etc.) The issue is even further compounded by the fact that the numerous products have considerably varying commission structures. Many of the higher paying products are pushed by securities and insurance firms and are obviously most beneficial to the agent and the company- not to the consumer.

That said however, one must recognize that there are individuals who do make the highest effort to put their clients first regardless of the commissions received. That is further identified by the fact that some products do not pay enough commission to justify the time spent in "selling" the product. For example, a long term health care policy might cost $1,500 and provide a $400 commission. However, if the client is properly counseled, it may take an advisor from 3 to 6 hours to properly compile and analyze personal data about the client in order to make a valid presentation of a product. If the advisor charged a fee, the cost could easily be more than the commission earned. And when one looks at the cost for a 20 year level term policy for a 30 year old at $250.00, the advisor could not ethically (my opinion) charge a fee higher than the commission generated without getting a client's release. If one further addresses business insurance, I doubt most small business owners would ever pay for the number of hours necessary up front in order to get the proper key person insurance, draft the appropriate buy sell agreements, etc. as suggested by a highly competent agent. Notice that I said "highly competent"- not a friend or relative. If you wish to pay a commission (or fee for that matter) solely based on the personal attributes of the agent, don't complain how big it was or the fact that they went on a free trip at your expense.

Admittedly, however, the commissions on many insurance products are ludicrous. I might be able to accept that were it not also for the fact that the companies offer unbelievably expensive free trips and incentives that almost totally negate any objectivity to the sale. The insurance business needs to clean house. It unilaterally won't, but in the next five to ten years, you will find extensive state regulations radically changing the entire life business and that of an agent. It's already happening now through suggestions by the NAIC.

CAPTIVE AGENTS: This is a continuation of the problem addressed above but goes further since it comments on the use of only one company (normally the larger insurance companies with major advertising budgets- Prudential, TransAmerica, IDS, John Hancock, etc.) to provide products. In such a situation, the agent is almost universally required to sell the products of that ONE company ONLY. Policies in these companies are almost always higher in cost and/or provide less coverage than those offered by an independent agent able to select from virtually all the national companies available. Additionally, one company cannot provide products to fit every need for individuals or businesses. The captive agent may therefore have to "force fit" their products for many situations. A particular instance makes the point. A client with bad health was seeking life insurance. Most of theses cases should be directed to companies that deal in "rated" or difficult placements. The odds of coverage with a major firm indicated above was very remote- if for no other reason than the underwriters did not have the background or skill to properly analyze such an individual. But the "system" required that the application be filed. Unfortunately, everyone played the game and went through the motions. The end result was preordained. The individual was denied coverage- and it took over two months. (What was the liability of the company and agent if the potential insured's health declined- or the individual died- in the interim?) This issue is also of considerable importance to senior citizens who are being sold other company products (long term health care policies as a prime example) that are far from being the best in the business. Extreme caution is recommended to those who wish to use these agents/companies.

FEE ONLY PLANNERS (no implementation): These individuals perform financial planning for a fee usually based on an hourly rate, flat fee or on a percentage of client's net worth. One should get very objective and comprehensive analysis of a financial position- but that is not guaranteed. Further, these plans may be overly expensive and not very good at all. Some of the reasons are identified below.

Many fee planners use a purchased computer program to define the allocation of assets, determine life insurance, do estate planning and many other functions for a client. But what is the background of the program writer, what formulas are actually used, what assumptions are being made, etc???? and what is the actual input of the planner, if any? An example further defines the problem. Many years ago I was requested to write an investment course for a CPA group and asked to develop a planning "matrix" that would incorporate any type of client. Simply stated, a CPA planner would then use the basic personal information gathered about a client- say 45 years old, two children, $50,000 of income- merely to look in a box (matrix) where it showed that the client should have 20% real estate holdings, 15% bonds, 32% equities, and so forth. This is not individualized planning. In fact, I don't know what to call it except a waste of time. Whether one uses a fee or commissioned based planner, make sure the planner has the ability to use his/her brains in developing a truly personalized plan. No computer program has yet been developed that can do thorough comprehensive financial planning (many attempted and all failed). The programs are great for crunching numbers, but that is usually the extent of "expertise". Consumers need a report personally developed by the planner and not some paragraphs from a book or program written by someone else with limited expertise.

Cost: Recognize that the costs may actually be far GREATER with some fee planners than with selecting a commissionable planner initially. And it all relates to product implementation. Should a fee only/non implementation planner present a very good plan, but without indicating the various products to use, the client is still mired in the confusion of which products are any good and where to go to find them. If such a planner sends the client to a "friend" at a local brokerage firm to get the 46% of mutual funds the plan suggested or to an insurance agent to purchase the $500,000 of insurance, then the client will undoubtedly pay a commission as well as the fee. The cost is far more expensive than just commissions alone. Further, the client may not get the best products but simply what the broker, firm or insurance agent is pushing that particular month. This type of planning is TOO Expensive and Not Very Good. Spend planning money elsewhere.

WHO IS LEGAL: A significant number of planners in California do "comprehensive" fee only planning. They, however, are illegal in that such reviews also incorporate- or must incorporate- a review of the client's life insurance- certainly one of the most difficult areas of planning. But they are violating the law. (Anyone in the state of California offering insurance advice for a fee must be licensed as an insurance analyst. This requires five years licensing in insurance, the completion of approximately 115 hours of continuing education and the passing of an extensive exam. More than that- there are about 22 states nationally that have similar requirements/licenses. Check out Texas, New york, Pennsylvania, Massachusetts to name a few.) A June 1998 review of the 57 NAPFA fee only members in California that I have researched shows that NOT ONE of the licensees possesses the Life Analyst license as required by the state. I have also checked most of the CPA PFS (their financial planning designation) and while some have an insurance license that allows them to do commission work, not a one had the Analyst license to charge a fee for service. Therefore the bulk- effectively all-  of the fee only planners are acting illegally and unethically in analyzing life insurance or recommending product. They are illegal not only in the implementation of the work but even to allow the perception of licensing. This does not mean that using an agent gets you the best product. But at least they are properly licensed and are required to take the mandatory continuing education in the field. (Ask yourself this. You could pay for advice for a fee for someone that has refused to take any licensing courses and continuing education in the area addressed, or you can work with someone who gets a commission who has taken over 150 hours of course work. True, the commission is an element of concern, but at least they know something to have earned it and are acting legally and ethically.) As a further note, recognize that retirement planning MUST incorporate insurance- at least what you currently own. Long term care planning MUST incorporate insurance- possible utilizing a 1035 exchange of a current policy or considering new insurance. Estate planning MUST incorporate insurance since it WILL be taxed in your estate (over $675,000). And irrevocable life insurance trusts are mandatory considerations for some high net worth individuals. Anyone presenting themselves as a financial planner is, ipso facto, presenting themselves as having the competency to perform financial planning- with the accompanying insurance elements-  and is licensed as mandated by the State. If anyone tries to rationalize why they don't have to be licensed, recognize that they are lying. And if you use a liar for your financial planning, it probably won't be long before the lies directly affect your pocketbook.

Regardless, the reality exists that fee only planners may do an incidental- though still illegal- review of insurance needs FOR A FEE and then either refer the clients to a properly licensed agent who will complete the plan by selling the insurance for a commission or refer them to a no/low load company where the client will need to do the work of purchase. I submit that since a commission was still charged to the client, irrespective of their planner's receipt of any of it, that true fee only PLANNING was not done. Further, that the client has been treated improperly and unethically since there has been double dipping- a charge of a fee PLUS a commission. The issue was expressed to the CFP Board years ago by me- no reply. Others note that they can refer clients to no load or low load insurance products (still illegal). Unfortunately, many of these products cost more than a commissioned product (do NOT assume that the low load products you read about cost LESS than fully commissioned products. Normally they do, but there are other commissionable life insurance policies that cost much less than low load products. It all happens because many people are sold the wrong type of policy in the first place). Further, there (to my knowledge) are no no-load Medigap or Long Term Care policies and very few no or low load disability policies. Recognize further, that one prerequisite for selecting a company is its longevity/stability in underwriting policies- which may not be true with many no/low load companies. Lastly, simply referring a client to a no load company- when they could have gone there anyway to begin with- is not reflective of personal competency or integrity in helping a client sort through this most difficult of planning areas.

WHO IS ETHICAL: This is a contentious issue with literally all the national planning organizations. They all talk about the high standards and ethical conduct but, pursuant to a reply from a CFP Board attorney years ago and most recently from the president of the Board of Standards, they will not enforce an ethical violation unless preceded by a legal one. NAPFA also talks about the highest fiduciary obligation yet has, at least in California, violated any basic duty required of any properly ethical advisor.

Here's another dandy- many of the national B/D firms also offer financial planning services for a fee. Unless it is specifically identified as investment advice only, such service- at least in the 30+ states- is both illegal and unethical. Taken to a proper conclusion however: you can't be illegal and unethical in 30+ states and be legal and ethical in the other 20. The lack of ethics and personal (or corporate) integrity stays intact no matter where you move. Period.

In essence, the talk about ethics, fiduciary responsibility, integrity, etc. is primarily a marketing gimmick designed to lull the unsuspecting client into the perception of trust.

Ethics must come from the individual you select- it is not a mandatory element of all the organizations since they try to either avoid the issue altogether or are suspect in the unethical activity directly. You really need to do a lot more homework and be extremely careful if you apply too much reliance on the marketing prose.

FEE AND COMMISSION: (Also known as fee based planning) Here the planner provides the plan AND does the implementation as well. While the fee for the "plan" would/should be less than that of a fee ONLY planner and the implementation possibly better than that addressed directly above, the overall cost is probably still too high due to the commissions the planner will get on TOP of any fee. And we still must consider the difficult "conflict of interest".

The final determination of who to use will (must) encompass the issues and concerns listed above. If possible then, the combination of that listed below might yield a knowledgeable and competent individual that could produce acceptable results.

FEE ONLY (with implementation): Find a Qualified Planner, ChFC or MSFP (preferred) with 1) a life and disability license and the skills to use it, (Insurance Analyst license or similar is preferable in California and about 30+ states ) 2) a series 7 license- does not have to be current since no load mutual funds may be the investment of choice, but some type background in the industry is almost compulsory. Admittedly the Series 7 training is not adequate in itself, but it beats not having anything at all. One may substitute MBA in Business, Economics, CFA, and other recognized designations/degrees 3) Registration with the State and/or SEC as a Registered Investment Adviser 4) an appropriate additional background /degree such as an economics degree, CPA, etc. who 5) does fee planning, 6) and implementation. Lastly, if commissions are generated on life insurance, they may be rebated back to the consumer. (Some states have laws on rebating. Florida and California are the only states currently allowing insurance rebating. Actually, in the alternative, instead of rebating on a large policy, the planner could negotiate the premiums directly with the insurer. Saves a lot of the hassles and paperwork later.)

In reference to the implementation, the planner is preferably someone who has had extensive experience in both securities and insurance, perhaps as a previously commissioned agent, KNOWS the marketplace and has the appropriate licenses. He/she then finds the best product, charges a fee for the work and negotiate the best fees on other products as applicable. While, as stated, that negotiation normally refers to insurance, you can also negotiate fees on stock purchases (rather moot now due to on line trading) and, more importantly, wrap accounts (clients may still pay 3%- absurd.). Clients are therefore paying for the best of service AND implementation. The overall cost will invariably be cheaper that any other combination- in some cases costing "nothing".

For example, if a client had $100,000 to supposedly invest, a commissioned based planner might suggest the use of a mid-load mutual fund. At a 4.5% commission, that represents a cost of $4,500 for advice- though that might not be deducted on the front end . An annuity might charge a minimum commission of 4% (up to 8%) or $4,000- again not charged on the front end. That said, remember, there is (normally) no such thing as a free lunch. The costs come out of lower returns, higher expenses, as surrender charges and a host of other combinations of fees.

On the other hand, a true fee planner might charge $2,000 for all his/her work (which, for that fee, should be very encompassing and include many other different levels of planning). Assuming the fee planner also decided on the same 4% commissionable annuity (though highly unlikely), the client would have paid $2,000 for competent professional service and received the full commission of $4,000 in return.

Alternatively, the planner might have selected a no-load product- an almost given statement with mutual funds. (I must note however that one should not totally focus on no loads. There are good loaded products that, at least over time, outproduce no loads and should be considered. However, the cost of the commission must be addressed to the client irrespective of whether or not the planner receives any of it.)

Or perhaps the planner would have stated that NO investment should be made- a bank CD or money market fund would be appropriate. Admittedly the client paid a fee to find out they should do nothing, but that might have been determined in the initial review and cost just a couple hour's work- not the $2,000 or so as indicated above. That certainly was a worthwhile expenditure to have avoided purchasing an illiquid, unsuitable investment (i.e. limited partnership) from another adviser. There are not too many planners working this way primarily because commissioned based planning makes far more money. However those that work in this manner are probably the true professionals in the business.

IMPORTANT NOTE: As identified above, the use of some insurance products pays less in commission than the amount of hourly fees that could be charged. The advisor must address this issue and, in my opinion, opt for the lower charge whenever possible.

MONITORING: Of equal- and perhaps even greater- importance to the consumer, for those with sufficient assets, is the continued monitoring of investments and planning opportunities. The consumer is put on a annual retainer based on the value of the underlying assets- though a hourly fee for work may be utilized as well. While this aspect may not seem necessarily new- almost all brokerage firms are offering managers to suggest, implement and monitor investments- the different element in the statement above is the continuation of financial planning. Most financial planners who continue to work with clients do so under the guise of money managers. But it would seem that the true extra benefit in using them is their continued monitoring- and reporting- of the other financial aspects of the clients life. Such involvement would include a new budget for retirement purposes, Social Security, Medicare and Medicaid planning, estate revisions, long term care issues, business changes, charitable gifting, dying, review of pension plans and other retirement vehicles and a host of other issues far beyond the relatively narrow scope of "money management". These issues can be elicited by the planner due to, or hopefully because of, the total involvement of the planner in the client's ongoing everyday life. Unfortunately, this planning involvement has not been utilized extensively to date probably because 1. the clients do not understand the value of the service, and 2. because few planners are that knowledgeable and competent to provide this broad scope of activity. But as more professional planners (MSFP, MSFS) come into being, their worth in this capacity should be invaluable.

RESEARCH: Regardless of who you use or what method is employed, there is one element assuring greater competency by the planner. And that is where the client does an extensive amount of reading and research BEFORE engaging any professional. Publications such as Money Magazine, the Wall Street Journal, Financial World, Kiplinger's Personal Financial Magazine etc. are sources as is the local library. The more knowledge a client possesses and the more intelligently they can discuss critical issues with the adviser, the more beneficial the meeting and process will be. Everything else being equal, there is less risk in any venture the more one tries to understand the fundamentals of what the adviser is doing.

There are no guarantees of success even when using an adviser with the highest qualifications, but if consumers read and do objective research, they should do immeasurably better than the guesswork and emotional investing normally used by most consumers today.

"Success is 20% skills and 80% strategy. You might know how  to read, but more importantly, what's your plan to read?"

Jim Rohn