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WHETHER TO CONSULT AFINANCIAL ADVISOR ORDO IT YOURSELFby Cynthia Sharp, Esq.Article, ABA GP Solo eReport, July 2014THE SHARPER LAWYER 875 N. 24TH STREET PHILADELPHIA, PA 19130609.923.1017 [email protected] WWW.THESHARPERLAWYER.COM

WHETHER TO CONSULT A FINANCIAL ADVISOR OR DO IT YOURSELFWHETHER TO CONSULT A FINANCIAL ADVISOR OR DO ITYOURSELFWhether to Consult a Financial Advisor or Do It YourselfVol. 3, No. 12Cynthia SharpCynthia Sharp (J.D., LL.M. (taxation)) dedicated close to 30 years building a successful law practice serving thousands ofclients. At the pinnacle of her career, she sold her interest in the practice and established The Sharper Lawyer. She is also acontributor to the American Bar Association’s Publications Board of Solo, Small Firm and General Practice Division’supcoming publication The Lawyer’s Guide to Buying, Selling, Merging, and Closing a Law Practice. Cynthia’s socialmedia column appears on a regular basis in the GPSolo eReport. Take a look at the website and blog of The SharperLawyer for up to date information and commentary on relevant topics: www.thesharperlawyer.com.From The Lawyer's Guide to Financial Planning, Section ThreeManaging One’s Own Investment PortfolioAccording to a 2012 Investopedia article,1 the market share of online brokers increased by three percentagepoints while the market share of other retail brokerages lost four percentage points. This apparent uptickin the number of do-it-yourself (DIY) investors can be attributed in part to the relatively easy access thatthe public now has to the same or similar information relied on by financial professionals. Plummetingvalues of professionally managed portfolios over the past few years have also led some investors down thepath of self-management, apparently with the attitude that they couldn’t do any worse than theirbrokers.Many decide to go with a discount broker in order to save fees. The trade-off for lower fees is that nopersonalized investment advice is offered, since the role of the firm is to execute trades. While riskassessment tools, a myriad of calculators, and research findings are offered by most of the rated discountbrokers, individual investors are responsible for weighing options on their own regarding issues such asasset allocation, choice of funds, and post-retirement draw-down amounts. Investors must also rigorouslymonitor their own progress and make strategic adjustments where appropriate. Those determined toinvest on their own must first conduct a thorough study of the discipline of financial planning in order togain a complete understanding of relevant concepts. Knowledge of what drives financial markets andthe ability to interpret trends and analyze financial statements are among the preliminary prerequisitesto beginning a successful DIY investment strategy.SmartMoney annually ranks discount brokers. The 2012 Broker Rankings can be found at . Factors taken into account include the firm’s range of2

WHETHER TO CONSULT A FINANCIAL ADVISOR OR DO IT YOURSELFinvestment products and research tools, speed and reliability of websites, customer service, and fees. Topranking Fidelity is described as “[o]ffer[ing] the biggest selection of funds and the most comprehensivewebsite” while tenth-ranking Wells Trade was criticized because “[o]nline trades were slow to execute.Got low marks for its website, trading tools and research offerings.”2 The survey found the average priceof a stock trade through a discount broker to be 7.96 in 2012, compared with 8.27 the previous year.3The Role of the Financial ProfessionalIn contrast to do-it-yourselfers, another category of investors (such as busy lawyers) defers responsibilityfor financial planning to their advisors. The “do-nothing-at-all” crowd (so dubbed by Bill Harris writingfor Forbes) may end up with “expensive products, such as excessively high-priced mutual funds and othermore expensive investment vehicles that provide large commissions for advisors but little overall value tothe investor himself.”4 Perhaps some people turn over all decision making to their advisors because theyare already overwhelmed and are too busy with their own business or career or because they lackadequate financial knowledge to make informed decisions. This section will equip the investor withfundamentals to take into account when choosing a financial professional and defining his or her role.Keep in mind that a key role played by an advisor is to remain dispassionate, as it is often very difficult tobe objective with respect to your own money. Whether to hire a stockbroker, investment advisor, financialplanner, accountant, insurance agent, broker, or other type of professional to help plan financial affairscan be a confusing proposition. As a group, they offer a wide range of investments and products, hold avariety of designations, and have a number of different compensation methods. To further complicatematters, the definitions of the terms are fluid, depending upon the services offered or products sold bythe individual or firm. Those interested in delving further into the definitional aspect are directed to thewebsite of the U.S. Securities and Exchange Commission (SEC)5 and to the website of the U.S. FinancialIndustry Regulatory Authority (FINRA).6No matter the label, the professional chosen should be the person who can best serve the investor’sneeds, and the initial step is to specifically define those needs. The personal assessment process willidentify whether assistance is needed in development of a detailed strategy or financial plan for meetingall financial goals or whether the engagement will be limited to services such as advising with respect toinvestments, business, insurance products, income tax reduction, retirement, or estate planning. Themost important objective is to choose someone with whom there is chemistry and a sense of trust.Seeking referrals from other attorneys, professionals, or friends is a wise move.Many people adopt the team approach, under which their professionals work together. (Note that insome jurisdictions, attorneys are permitted to act as financial planners for their clients.) Others retainseveral different financial firms, choosing not to put all of their eggs in one basket. Diversification ofadvisors may have its advantages. Investors whose sole advisor was Bernard Madoff would have felt alesser financial sting if a portion of assets had been handled by three or even four other advisors. TheSEC’s Office of Investor Education and Advocacy lists the following as questions that a potential client“should always ask when hiring any financial professional.”7 What experience do you have, especially with people in my circumstances?Where did you go to school? What is your recent employment history?What licenses do you hold? Are you registered with the SEC, a state, or FINRA?What products and services do you offer?3

WHETHER TO CONSULT A FINANCIAL ADVISOR OR DO IT YOURSELF Can you recommend only a limited number of products or services to me? If so, why?How are you paid for your services? What is your usual hourly rate, flat fee, or commission?Have you ever been disciplined by any government regulator for unethical or improper conductor been sued by a client who was not happy with the work you did?For registered investment advisors, will you send me a copy of both parts of your Form ADV?The Initialisms: A ClarificationThe FINRA website lists close to 100 different designations that may be held by financial advisors, andThe Wall Street Journal has identified an additional 115.8 The credentials are not issued by governmentagencies.9 For example, the well-regarded CFP designation is issued by The Certified Financial Board ofStandards, Inc., which is in turn accredited by the National Commission for Certifying Agencies.A financial advisor’s credentials show a commitment to increasing the knowledge base, at some level, in aparticular financial realm. However, an investor should keep in mind that an advisor without a list ofdesignations may produce excellent results, having learned through self-study and experience. Sincecertain designations in the financial world are relatively easy to obtain, independent research into therequirements may prove worthwhile. The designations can be easily confused since they are oftenreferred to in common parlance by initialisms. FINRA’s website offers consumers the ability to “decodethe letters that sometimes follow a financial professional’s name,” determine the continuing educationrequirements (if any) of the issuing organization, ascertain whether a mechanism is in place forregistering complaints against credential holders, and “confirm who holds the credential.”10CompensationProfessionals deserve to be compensated. When a lawyer is working on or completes a matter (dependingon the arrangement), the client (hopefully) receives an invoice specifically outlining the amount that isbeing paid out of retainer or that is owed. Although often convoluted and difficult to interpret, billslisting treatment rendered and the exact amounts due are (or at least should be) sent by medicalproviders to the patient and/or the insurance company. Many investors do not receive invoices detailingspecific services provided by their financial planners. A 2011 study conducted by Cerulli Associates andPhoenix Marketing International revealed that 33 percent of investors believed their advisor’s serviceswere free, while another 31 percent were unclear as to how their advisor was paid.11 Of course, peoplemay not understand bank statements, medical and legal bills, or even estimates provided by plumbers.All compensation arrangements should be presented to the consumer in a clear manner.Any prospective client should feel free at the initial interview to ask for a written fee schedule from theadvisor. Full disclosure allows the individual to properly analyze whether a particular compensationarrangement is appropriate for his or her individual circumstance. Awareness of advantages anddisadvantages allows the investor to choose which type of service is most suitable for his or her individualneeds, which of course dictates the compensation level.The first issue to address is the level of service needed. Although cost should be the least importantaspect of the decision, it is usually the subject of the first question asked. Investors must realize that some4

WHETHER TO CONSULT A FINANCIAL ADVISOR OR DO IT YOURSELFfirms may provide recommendations, investment advice, and research support, while others may not.The method of compensation will depend upon the services to be provided by the firm.Advantages and disadvantages exist with each type of compensation structure. The most significantcriticism leveled is that each has an inherent conflict of interest, as an advisor may have an incentive tomake recommendations profitable to the advisor that are not in the client’s best interest. However, thesame criticism is often raised in regard to legal fees. Attorneys who operate under a contingencystructure may encourage early settlement to avoid spending potentially unprofitable hours in trial. Anhourly rate agreement may inspire numerous motions and other questionably necessary legal work inorder to drive up the bottom-line fee in the matter. However, honest lawyers do not engage in suchpractices and neither do honest financial advisors. Full and complete trust of any advisor, on all levels, iscrucial. Thorough research at the outset and careful decision making with respect to the choice of anyprofessional is critical. The pros and cons of compensation models for financial advisors are discussed ingreat detail by Daisy Maxey in an excellent article titled “How to Pay Your Financial Adviser.”12Common Fee StructuresFee-Only CompensationThe three main fee-only structures are percentage of assets under management, flat fee, and hourly rate.Clients opting for the percentage of assets under management system, the most common in the industry, pay theadvisor a percentage of assets managed by the firm. Standard fees range from 1 percent to 2 percentannually. An account balance minimum is normally required, often in the 500,000 to 1 million range.Because the advisor’s compensation is directly tied to the client’s success, he or she has an incentive togrow the account and to minimize losses, which places the interests of the advisor and the client in paripassu.A scant number of firms base the fee on a percentage of the client’s entire net worth plus a percentageof the client’s gross income. This gives clients with little liquidity access to the services of a financialadvisor. For example, a young attorney earning a healthy income but with little to invest currently due toheavy student loans may be attracted to this type of structure. A flat fee may be attractive to investorsseeking specific advice or services. This type of person may be of the DIY ilk, simply seeking aprofessional’s opinion or expert direction. Both the flat and hourly fee methods leave implementation ofthe plan to the client. The following example illustrates this type of arrangement.Jude Boudreaux, an advisor with Upperline Financial, a fee-only financial-planning firm in NewOrleans, offers an introductory financial-planning service for 1,000 a year or 100 a month. Clients getfour meetings of an hour to an hour and a half in which they discuss their net worth, budget, andchanges that are needed. They meet again later to discuss their progress and any new issues that havearisen. The investors aren't charged extra for telephone calls or e-mails.While the hourly rate option is not widely available, those seeking one-time or ongoing intermittent advicewith respect to their portfolio could choose this alternative. The common fear expressed is that theadvisor has an incentive to “keep the meter running.” A solid agreement and ongoing involvement in theplanning process should obviate this concern.5

WHETHER TO CONSULT A FINANCIAL ADVISOR OR DO IT YOURSELFCommission-Only CompensationSome advisors receive a percentage of the value of each product sold or transaction entered into on aclient’s behalf. The advantage to the client is that no fees are incurred except for specific individualtransactions. A concern often expressed is that a commission-only advisor could put his or her own profitopportunities above the client’s best interest. Churning, excessive trading, or abuse of other salespractices is regulated by SEC Rule 15c1-7. It is fair to ask whether the advisor receives a largercommission upon the sale of the firm’s products.Fee-Based CompensationSome advisors may charge a fee (hourly, flat, or retainer) for development of a financial plan and maysubsequently receive commissions at the time of the sale of the insurance and investment productsrecommended in the plan. The same criticisms cited with respect to commission-only advisors may beapplicable here. Investors may opt for this structure in light of the one-stop shopping feature.Salary-Plus-Bonus CompensationFinancial advisors working for a discount broker typically offer no investment advice and often receive asalary and a bonus. Discount brokers are generally not valued for the advice. Rather, the so-called valueis the discount itself.The SEC’s Office of Investor Education and Advocacy suggests that a potential client inquire as towhether the financial advisor’s fee is negotiable.13 This author is not personally inclined to negotiate feeswith a professional in any field. That being said, certain situations may warrant a request for a morefavorable financial arrangement. A large investor such as Donald Trump may exercise more clout than aneophyte with a modest portfolio with respect to negotiating fees or commissions.Endnotes1. 1. Tim Parker, 5 Reasons The Do-It-Yourself Investor Is Gaining Popularity, Investopedia (May 4, g-popularity.aspx#ixzz2NH4R7VkB.2. 2. Financial Planners, U.S. Securities and Exchange Commission on the Internet at http://www.sec.gov/answers/finplan.htm.3. 3. Id.4. 4. Bill Harris, DIY Investors: Don’t Go It Alone, Forbes (Sept. 4, 2012), diy-investors-dont-go-it-alone/.5. 5. Financial Planners, U.S. Securities and Exchange Commission on the Internet at http://www.sec.gov/answers/finplan.htm.6

WHETHER TO CONSULT A FINANCIAL ADVISOR OR DO IT YOURSELF6. 6. Selecting Investment Professionals, FINRA (2013), .7. 7. Investment Advisers: What You Need to Know Before Choosing One, U.S. SEC (modified Aug. 7, .htm.8. 8. Understanding Professional Designations, FINRA (2013), ofessionalDesignations/DesignationsLookup/.9. 9. Zweig, Jason and Mary Pilon. Is Your Adviser Pumping Up His Credentials? The Wall Street Journal.Updated October 16, 2010 on the Internet at 48703927504575540582361440848.10. 10. Understanding Professional Designations, FINRA, supra note 7.11. 11. Jennifer Johnson, What Americans Don’t Know About Financial Fees, Fiscal Times (Dec. 4, -jX8UL8Ld7EI32m6u.99.12. 12. Daisy Maxey, How to Pay Your Financial Adviser, Wall St. J. (Dec. 12, 2011), 54204577024152103830414.html.13. 13. Tim Parker, 5 Reasons The Do-It-Yourself Investor Is Gaining Popularity, Investopedia (May 4,2012), larity.aspx#ixzz2NH4R7VkB.!Order The Lawyer's Guide to Financial PlanningDid you find this article helpful? Do you think more information like this would help you? Moreinformation is available. This material is excerpted from The Lawyer's Guide to Financial Planning, 2014, by7

WHETHER TO CONSULT A FINANCIAL ADVISOR OR DO IT YOURSELFCynthia Sharp, published by the ABA Solo, Small Firm and General Practice Division. Copyright 2014 by the American Bar Association. Reprinted with permission of the author. All rights reserved.This information or any or portion thereof may not be copied or disseminated in any form or by anymeans or stored in an electronic database or retrieval system without the express written consent of theAmerican Bar Association. Click here to purchase the book.8

website” while tenth-ranking Wells Trade was criticized because “[o]nline trades were slow to execute. Got low marks for its website, trading tools and research offerings.”2 The survey found the average price of a stock trade through a discount broker to