MSN Money - 8 things your financial planner won't tell you

Literally anyone can claim to be a financial adviser. Even those with top credentials may not divulge everything you should know. Here’s how to dig up the facts on the person you're paying for financial advice.
By Liz Pulliam Weston

More people are flocking to financial planners these days, convinced they need professionals to help them navigate the market’s stormy seas.

Recent surveys by the Financial Planning Association show the average planner is adding clients, and 55% of Americans polled by the association say they believe financial planning is becoming more important.

Unfortunately, not all planners are created equal. Some are thinly disguised investment salespeople, and many don’t have the background or inclination to offer true, comprehensive financial advice.

So before you sign on with a planner, or implement the advice offered, make sure you know these secrets the planner may be keeping. Such as:

1. I have no qualifications for this job.
Anyone can claim to be a financial planner. There are no education, experience or ethical requirements and no government agency that regulates planners as planners.

Out of the estimated 250,000 people calling themselves financial planners, only about 40,000 have earned the Certified Financial Planner mark -- the best-known financial planning designation. Fewer still are Chartered Financial Consultants (ChFCs) or Personal Financial Specialists (PFS’s), the financial planning designations offered by the insurance and accounting industries, respectively.

Even if your planner has one of these designations, you’re not home free. It generally takes years of experience and ongoing education -- not to mention integrity and ethics -- to become a truly good planner.

Your best bet: Make sure that, at a minimum, your financial planner has one of the three leading designations. You can check on CFP status by consulting the Certified Financial Planner Board of Standards. For a PFS title, contact the American Institute of Certified Public Accountants’ Personal Financial Planning Division. And to look into a ChFC designation, visit the Society of Financial Services Professionals.

2. I have no obligation to put your interests ahead of my own.
Real financial planners take seriously their duties as fiduciaries -- professionals who are trusted to think of their clients’ needs first and foremost.

Most of those who call themselves planners, though, are really in the business of selling investments. As such, they may face scrutiny from various government agencies over their sales tactics. But instead of being obligated to create the best financial plan for you, they’re only required by law not to sell you something that’s utterly unsuitable.

Your best bet: Ask for, and read, a copy of any code of ethics with which your planner is required to comply (usually as part of his professional designation). It may be slow reading, but you’ll get an idea of the standard by which your planner operates. The word “fiduciary,” for example, does not appear in the Society of Financial Services Professionals’ code of professional responsibility, but members of the fee-only National Association of Personal Financial Advisors are required to take a fiduciary oath promising “to act in good faith and in the best interests of the client.”

3. I’m not being paid the way you think.
“Commissions” became a dirty word in the 1990s, when even the big brokerage houses like Merrill Lynch decided that people would rather pay fees than have advisers compensated by commissions for the investments they sold.

True fee-only financial planners are still a rare breed, however. The leading association for fee-only planners, NAPFA, has fewer than 800 members.

Most financial advisers still get some or most of their income from commissions, according to FPA. Many finesse the situation by calling themselves “fee-based” planners, or by simply avoiding the issue of how they get compensated.

Commissions aren’t bad, per se. But they do create a built-in conflict of interest. Your planner should volunteer information about how she gets paid. If you have to ask, you should at least get a straight answer.

Your best bet: Ask -- and then do more research. If your planner is a registered investment adviser (RIA), ask for a copy of his form ADV, Parts I and II. This document, which must be filed with the Securities and Exchange Commission, outlines whether the adviser accepts fees, commissions or both. If the adviser’s practice is too small to be regulated by the SEC, ask for the state equivalent of this form.

4. I’m looking at only one small portion of your overall finances.
A good financial planner looks at every aspect of their clients’ financial situations, from their budgets to their estate plans. That’s the only way to give truly customized, comprehensive planning advice.

Many of those calling themselves financial planners, however, focus on one narrow aspect of a client's monetary condition -- usually the area that corresponds with whatever financial training they've received.

One reader told me her adviser, who mostly prepares tax returns for a living, insisted she get a home-equity line of credit to pay off her credit card bills. His reasoning was that she would be better off paying a tax-deductible interest rate on a home loan rather than paying nondeductible credit card interest.

The problem was that this reader was so deeply in debt that she couldn’t qualify for a reasonable rate. An adviser with a broader background in financial planning would have recognized that a home-equity line would do nothing to curb her real problem, which was overspending. Meanwhile, she had cash sitting in low-interest accounts that could have been used to pay off her debt.

Your best bet: If your adviser has a narrow focus, get a second opinion -- or, better yet, look for a real financial planner who can evaluate your entire financial picture.

5. The only products I understand are the ones I’m selling.
The old saw goes like this: When all you have is a hammer, everything looks like a nail.

Advisers who lack training in comprehensive financial planning often know only what their companies tell them about the various investments they’re told to sell. An insurance agent, for example, might sing the praises of variable annuities -- not realizing that annuities should only be considered after tax-favored retirement options, such as 401(k)s and IRAs, have been exhausted and less expensive alternatives, such as index funds or tax-efficient mutual funds, have been considered.

I still remember a conversation a few years ago in which an insurance agent launched into a passionate defense of variable annuities, only to confess -- after much probing -- that he had never heard of alternatives like tax-efficient mutual funds and didn’t know how much could be invested in a 401(k) or Roth IRA.

Likewise, a stockbroker might push individual stocks or mutual funds, when the best use for your money might be increasing your emergency fund or paying down your mortgage.

Your best bet: Same as above. Your planner should be able to converse intelligently about alternatives to his recommendations. If he can’t, or insists his approach is the only way, look elsewhere for advice.

6. I can’t beat the market.
Many people believe a financial planner can help them supercharge their investment returns. Many of the best financial planners, however, believe they’re doing well if their clients’ portfolios simply match the market averages. They don’t even try for more, convinced that such efforts are a waste of their time and effort -- and of their clients’ money.

Those that do try often fall woefully short. The more they trade, the more money they spend in commissions and fees, and the farther they fall behind the market benchmarks.

Good financial planners concentrate on making sure their clients are well-diversified and that other aspects of their finances -- their budgets, credit ratings, insurance coverage, tax situations, estate plans and retirement accounts -- are in the best shape possible. In contrast to the adviser who’s trying to keep secrets, however, these good planners are upfront about the fact that they’re not trying to beat the market.

Your best bet: Understand that good, comprehensive financial planning doesn’t ensure outsized returns. A plan should, however, allow you to improve your credit, minimize your taxes, protect your assets, take care of your heirs and grow your wealth over time.

7. I won’t save you from yourself.
The best financial planners didn’t let their clients overdose on technology stocks during the 1990s and insisted they stay invested during the roller-coaster ride of the past three years. The worst encouraged their clients to chase every hot trend, whether it was dot-coms, last year’s hot mutual fund or this year’s fad of excessive investments in real estate.

Many planners fall somewhere in between -- trying to make the case for diversification and common sense, but lacking the confidence and experience to insist their clients not make suicidal moves.

Your best bet: Avoid planners who don’t have a consistent philosophy or who are constantly talking about the next hot trend. And take some responsibility for your actions: Don’t be a trend-chaser or insist on wild swings in course, especially if your credentialed, experienced planner advises otherwise.

8. I have a checkered past.
Sooner or later, most financial planners will have a run-in with an unhappy client. If those disputes regularly escalate to lawsuits, however, or your adviser has been disciplined by a regulatory board, that’s a red flag. The worst offenders skip from job to job or industry to industry, hoping their past never catches up with them.

Your best bet: Do your homework. Read the ADV form, which includes disciplinary histories. Stop in at your local courthouse to see what lawsuits may have been filed against your adviser. Contact your state’s insurance department and securities regulator to see if your adviser has any disciplinary history there. If your adviser has a financial planning designation, check with the groups listed earlier for any disciplinary history. Then check with the National Association of Securities Dealers and the SEC.

10 Things Your Accountant Won't Tell You

By Eleanor Laise

1. "I don't need some silly old certificate to set up shop."
As you search for an accountant to sort through your capital gains or make the most of your itemized deductions, you'll find no shortage of candidates. The Bureau of Labor Statistics reports that there are over 900,000 accountants, auditors and tax preparers in the U.S. But according to the American Institute of Certified Public Accountants (AICPA), only 450,000 are CPAs, who must pass state exams and, in some states, meet continuing-education requirements.

While some of the rest hold IRS certification or trade association membership, many are merrily filing Form 1040s free of any oversight whatsoever. In California, where tax preparers are required to register with a state agency, unregistered preparer Winston Halal filed returns for 27 clients over five years before the IRS caught up with him in 2000. The agency claimed Halal had bilked the government of more than $100,000 in unpaid taxes, and he was sentenced to 15 months in prison, leaving his clients to fend for themselves. If there's a problem with a return, says Greg Newington, chief of enforcement at the California Board of Accountancy, the taxpayer "has some culpability. They sign it under penalty of perjury."

You don't necessarily need a CPA to file a simple tax return, but some level of credentials — whether it's an Enrolled Agent certification or at least registration with a state agency — is a must.

2. "So I'm a convicted felon. Why should that hurt my career?"
Think a criminal conviction might end your career? Not if you're a CPA in Ohio. Timothy Bourke's CPA certificate was revoked by the Accountancy Board of Ohio in August 1996 after he was convicted of theft. But by April of 1997, his certification was reinstated. California CPA Jeannie Johnson received only a slap on the wrist when she was convicted of defrauding her former employer, the Los Angeles Metropolitan Transit Authority, of more than $80,000. Johnson was sentenced to two years in a federal prison, but her CPA license was suspended for only four months.

Luckily, even CPAs in good standing can't completely hide a shady past. To check out any blemishes in your CPA's disciplinary history, go to www.aicpa.org1, which provides links to individual states' accountancy boards.

3. "That 'rapid refund' will cost you."
In the first few months of each year, tax-preparation services inundate consumers with ads for speedy refunds, promising cash in as little as 24 hours. But such transactions aren't exactly "refunds." They're refund anticipation loans (RALs), which, like any loan, carry interest and substantial fees: one for a loan application, one for preparation and another for electronic filing.

The total interest and fees can result in an annual percentage rate topping 200%. H&R Block has faced legal action in several states relating to its RAL program. Last year New York City's Department of Consumer Affairs found that company representatives provided misleading information on "rapid refunds" during 86% of phone calls from investigators. But as long as fees are disclosed somewhere in the fine print, firms aren't breaking the law.

4. "I play fast and loose with the tax code..."
Most people who hire an accountant to do their taxes are motivated in part by a mortal fear of coming face-to-face with an IRS auditor. But they might be better off on their own. Ironically, some accountants are just glorified tax protesters whose methods all but guarantee the unwanted attention of the IRS. Atlanta accountant Harold Hearn filed returns for clients in 11 states based on the "Section 861 argument," a point in the tax code that, by one interpretation, exempts all domestic income from taxation. IRS examiners have heard this one before, and they don't think it's funny. The Justice Department filed a suit against Hearn last November, claiming he "preyed on uninformed taxpayers." Hearn insists that the IRS has issued "dozens of refunds" based on the 861 argument.

Others are less creative. Overland Park, Kan., tax preparer Alfred Reece managed to claim almost $3 million in refunds for clients in the 1990s simply by inflating deductions such as medical expenses and charitable contributions. He was sentenced to five years in prison. To help ensure your accountant isn't a criminal prosecution waiting to happen, avoid preparers who guarantee refunds or base fees on a piece of the refund.

5. "...or just make the same goofs that you would yourself."
A missing Social Security number. An incorrect credit claim. A little bad subtraction in determining a refund. The IRS says these are the most common errors made by regular folks doing their own taxes. Turns out those are the same mistakes made by the pros, too.

Granted, a missing Social Security number isn't a huge deal, but some basic errors are more costly. When California CPA Christopher Thomas prepared 1996 estate-tax returns for one client, he included as income more than $10,000 of nontaxable bond interest, failed to file the proper state tax return and didn't bother to claim a $59,000 state tax credit. The state accountancy board found Thomas "grossly negligent" and put him on three years' probation. Thomas did not return calls seeking comment.

And some accountants simply don't specialize in tax services. A good safeguard: Hire an Enrolled Agent (EA). These preparers specialize in taxation and achieve their certification by either working at the IRS or passing a thorough exam. (A CPA may or may not specialize in taxation, and will probably charge more than an Enrolled Agent.) See www.naea.org2 to locate an EA in your area.

6. "I don't have time for you."
More than 69 million people hired paid preparers to file their federal returns in 1999, according to the IRS — that's 77 returns for each accountant in the U.S. Since not all accountants offer tax services, the workload for the average preparer is likely even higher.

Still, that doesn't mean your accountant has chained himself to his desk to get your return done. A 1999 survey sponsored by the Texas Society of Certified Public Accountants found that only 60% of hours worked at accounting firms were "billed" hours, or time spent working for clients. The rest, says Raymond Zimmermann, an associate accounting professor at the University of Texas at El Paso and co-author of the study, are "administrative hours," which often means "drumming up new business." So how do you secure your accountant's attention? Newington suggests "you get a clearly articulated engagement letter" spelling out all services, fees and deadlines.

7. "I'll hold your records hostage."
In 1994 california engineer Natalie daCosta hired an accountant to oversee her financial affairs because she expected to be out of the country for several years. She gave San Diego CPA James Haynes limited access to her bank account and authorization to take care of certain expenses. But when daCosta asked to see her bank statements six months later, Haynes refused. When daCosta was able to obtain the records directly from her bank, she found that Haynes had withdrawn thousands of dollars without permission. Haynes repaid the money, but the state board revoked his license.

DaCosta's story isn't unique. Several states list retention of records as a top consumer complaint about accountants. And if your accountant kidnaps a year's worth of business receipts, you'll be hard pressed to document your deductions for the IRS. While accountants "have the ability to withhold [work] for payment," says Johanna Bravo, executive director of Nevada's accountancy board, "their ethics rules [say] they can't retain original documentation." Again, a clear engagement letter will help avoid a tug of war over financial documents, but Newington adds this: "Always keep a copy of everything you give to a CPA."

8. "Good luck pursuing a complaint against me."
If you suspect your accountant of fuzzy math, you might settle the matter with a quick call to your state accountancy board. But don't hold your breath.

The Missouri accountancy board gets an average of 140 complaints a year, many relating to improper filing or sloppy audits, says the board's executive director. But in a typical year, only eight complaints result in formal discipline, such as license revocation or an order to attend an ethics class. Meanwhile, in 1999 the Arizona Auditor General's office found that half the complaints received by the state's accountancy board in 1998 took more than six months to resolve, and some took more than a year.

If your state accountancy board can't or won't handle your complaint, file a grievance with the Better Business Bureau and hire a lawyer, advises Bravo. If your conflict involves a tax preparer, contact your local IRS office. The IRS investigates and prosecutes abusive tax preparers.

9. "I hustle software on the side."
The AICPA is a nonprofit organization, but that hasn't stopped the group from trying to make a little money. In 2000 the group launched CPA2Biz, a Web venture that sells accountants business-related products and services. A group of outside investors ponied up about $70 million for an equity interest, and AICPA doled out equity stakes — to the tune of nearly 5,000 shares of common stock — to its senior management.

Those shares don't sit well with some members. "It makes you wonder if they're pulling an Enron," says Kentucky CPA M. Dean Owen. "Our profession is supposed to have a higher degree of ethics than that. At a minimum, there's an appearance of impropriety." (AICPA spokesman Joel Allegretti says the share allocations are valid because the executives paid for them.)

That's not the only problem with CPA2Biz. Thanks to agreements with the AICPA and its investors, the portal sells CPAs many products, including books, technical publications and e-mail systems, some of which accountants can mark up for clients.

Of course, your CPA should offer sound advice, not push products. If he suddenly decides that a state-of-the-art e-mail system is a must for your small business, ask how he discovered the product and why he thinks it's right for you. Then do some comparison shopping to be sure you're getting a fair deal.

10. "Welcome to financial planning amateur hour."
Hoping to provide one-stop shopping for financial services, the AICPA has created a "personal financial specialist" (PFS) designation for CPAs who want to enter the lucrative planning field. To qualify, AICPA members must pass an exam and meet continuing-education requirements. The idea is catching on fast: The AICPA reports that about a third of the group's members offer financial-planning services.

But Sunrise, Fla., certified financial planner Barry Katz says that "all too often accountants give out investment advice without training or...[knowing] whether the investments are appropriate." Plus, according to a 2001 study co-sponsored by Tiburon Strategic Advisors, accountants who offer financial-planning services receive 61% of their planning revenue from product commissions, offering them a strong incentive to sell you certain investment products.

In short, walk away. The best way to sidestep possible conflicts of interest is to hire a true financial planner, and one who isn't commission-driven. Check out the National Association of Personal Financial Advisors' directory of fee-only planners at www.napfa.org3.

Originally published on March 12, 2002.

Lessons from life learned at Hurricane Katrina

Everyone can experience a serious incident that results in continuing normal life. This can happen any day at any time. The potential causes are many and varied: floods, explosions, earthquakes, brush fires, floods, and mudslides, hurricanes, ... the list is endless.

The information below is designed to help you and your clients plan for these scenarios. They will help you reduce both the risk and impact should the worst occur. In the event of a disaster, a recovery plan is critical for getting your life running as quickly as effectively as possible. This list below can help advisors by helping them plan for clients’ disasters ahead of time.

For those without means or vehicles:

Insurance: Make sure you have copy of your homeowner’s or renter’s insurance policy or at least your insurance card with your representative’s phone number. Insurance will help you as quickly as possible. Most lending institutions require homeowner’s insurance so most of us have it.

Evacuation Plans: If you have no vehicle, you must contact government officials now and ask what evaluation plans they have in place. Where would you need to be evacuated? Are there buses or transportation? Is there a shelter? What will you be permitted to bring to the shelter? Do they have a place for your pets? Do you have at least TWO friends with vehicles that you can count on in any emergency situation? Would they take your pets? Could you cut down on the number of pets you plan to acquire, if you could not realistically evacuate them all?

Cash: It may be hard to put back emergency funds, if you have limited income, but you really must start stocking cash away. Even if it’s only ten or twenty dollars a month. Start NOW… Save a bare minimum of $100.. much more if possible. Try to have enough to buy yourself a greyhound bus ticket out, or keep yourself in the very minimum of water and food supplies for at least a week’s time. Many places will not take an out-of-state check and ATM machines do not function without working phone lines or power. Buy a fanny pack that you can wear and keep safe, and put your cash in there when you must take it with you. Cash is going to give you the widest range of choices if you must evacuate your home, so give up one little luxury a month if you can and start saving now.

Communications: You have to know what is going on and how to contact people. If you already have a cell phone, keep that on you. You must have at least an inexpensive battery-operated transistor radio and spare batteries. Two-way radios are also good. (those who have a vehicle, keep the cell phone charger in you car for when the power goes out.) Have list of emergency phone number on you, laminate them if possible.

Contact List: What if a disaster hits your entire region? Do you know folks in other cities, other states, or even other countries that you could count on for temporary shelter? Swap addresses. Rely on each other for that possibility. Ask them how long they would be able to take you in, in the worst case scenario. Insurance sometimes takes a couple of weeks to get moving, so could they house you for at least that long? How about your pets?

Documents: These also go in the fanny pack... you need I.D. VERY Important. It is very difficult and takes time to replace Social Security cards, driver’s license and birth certificates. If it is a true emergency, you had better take the real things along with you, and keep them on your person. That means your driver’s license, your passport, your checkbook, your pet’s vaccination record, your bank card, and that insurance card.

Medications: You’ll need your prescriptions, spare glasses, etc….

Clothing Items: You can’t take a lot, so make it count. Take a ball-cap, because you are going to have some real bad hair days. Wear your unglamorous rubber boots or hiking boots/shoes and take practical jeans and loose T-shirts and sweatshirts, a light jacket, clean undergarments and socks. If you have lightweight items that dry quickly, all the better.

Basic Hygiene and Sanitation: Pack some personal items, like baby wipes, hand sanitizer, deodorant, tampons, lip balm, toothbrush, toothpaste, disposable razors, bar soap… you get the picture. Take along some large trash bags for clean-up or your dirty clothes. You’ll feel a lot better if you are able to feel at least a little clean.

Small, lightweight cooler or lunchbag: If you aren’t able to take jugs of water with you, at least take what bottled water you can carry. Pack some peanut butter sandwiches and high-energy snacks.

Favorite Photos and Personal Protection: We have learned we must arm ourselves against thugs…

Throughout all of these life events, I have accumulated a number of ideas. I know they work. I've read many times that original ideas are rare indeed. This is particularly true when it comes to the ideas listed above. My contribution is that I've assembled these ideas. Stay dry and stay cool.

Source: Phyllis Bernstein, CPA, Phyllis Bernstein Consulting, Inc. co-contributor of Regaining Financial Balance: AICPA Information and Resource Guide for American Impacted by September 11.

Regaining Financial Balance