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This is a transcription of the October 24, 2012 Mullooly Asset Management podcast.

 

Brendan: Hello and welcome to the Mullooly Asset Management podcast for October 24, 2012. This is Brendan and today we’re going to talk with Tom about just what financial advisors do. So Tom, before we started recording this, we were talking about an article issued by Cerulli Associates recently.

Tom: Right.

Brendan: The article discusses how most households in the US who have between $100,000 and $500,000 in assets have not developed a formal retirement plan or even consulted with a financial advisor. What are your thoughts on that?

Tom: Well, Brendan, I think there’s going to be some folks at no matter what asset level are going to be able to handle things on their own. They just have enough time on their hands and enough education in the investment world to kind of have a handle on where things are going. And you got to find people at both ends of the spectrum that are just going to be able to handle things on their own and they’re just never going to need an advisor, that’s just the way things are.

I think that there’s also a portion of folks out there who just don’t trust the market. In fact, we saw this report this morning from Wells Fargo that 70% of the people that they surveyed are not confident in the stock market. And there’s a lot of folks out there, when it comes to planning for retirement, well, they just, well, they’re guessing, on what kind of money they’re going to need in the future. You know, a good example of it, you know, we’re right smack in the middle of this presidential race in 2012, so we’re hearing these kinds of statistics a lot. But, you know, if you were planning to retire 4 years ago, a gallon of gas was $1.86, today it’s around $4, it’s doubled in price. That’s just one little bit of your monthly budget, or might be a growing part of your monthly budget, but everything goes up in price over time, and it just seems like all things in your food basket cost more.

But the problem is, we can’t really project five years from now how much things are going to cost. How much is it going to cost ten years from now? How much is that doctor visit going to cost in five years? No one really knows and so I think a lot of people just, still ball-parking their numbers, guessing, you know, what they’re going to need for retirement.

Brendan: Right. So why won’t people talk to somebody like an advisor who might be able to help them or at least make things a little clearer?Financial Advisor

Tom: That’s a great question. I think that you’re going to find that there’s still a lot of fear out there. People who have not worked with an investment advisor or financial planner before approaching retirement are now going to wonder, “Hey, am I going to be sold a product?” Or, “Is this product or service going to cost me so much that it wipes out the benefit that I get from talking with an advisor?” There’s a lot of fear out there because people just don’t know how the process works.

The other issue is the investment advisory world still has a big trust issue that they’ve got to, a trust hurdle that they’ve got to get past. No matter where you are in life, it’s really awkward to walk up to someone at your neighborhood, you know, barbeque and ask them, “Hey, Fred, what’s your net worth?” Or, “What are you doing in the market these days?” It’s just an awkward topic, it’s really hard for people to open up and talk about money.

The other side of the trust discussion is, you know, since Bernie Madoff unraveled his whole scam a few years ago, the number one question I get asked every week is, “How do I know you’re not Bernie Madoff?” Which is actually a great question and people really ought to be asking that. But it comes down to that whole trust thing, people have to feel comfortable who they’re working with and they have to ask a lot of questions.

The last thing is, you know, people just don’t want to appear that they don’t know what they’re doing. It’s okay. I think a financial planner or an investment advisor who’s really doing a good job for his clients should be spending more time on education and less time selling products—but that’s just me.

Brendan: Some people in the industry might actually be trying to sell these people a product, right? There’s some truth in that?

Tom: You’re absolutely right and I think that comes from so many people who are outside the industry not really knowing what all the different roles are in our industry, you know, what do advisors actually do for a living and how they get paid? So, let’s break that down.

We’ve got wealth managers, financial planners, we’ve got investment planners, and then we’ve got money managers. And a lot of this comes from that report that Cerulli Associates put out recently, you know, when you hear the term “wealth manager,” people hear wealth and they say, “Oh, you know, I don’t have that kind of money.” What they’re doing, though, is they’re managing a lot of money, usually for a small circle of clients. And they’re going to do some pretty unique things, like they’re going to help them plan out the execution of their stock options at work. They’re going to work on executive compensation, if they’re, you know, a senior official with a publicly traded company with stock. They’re going to work on estate planning. They’re going to work on structuring gifts to charity. So a wealth manager really gets involved in a whole lot more than just managing money.

A financial planner, there’s a couple different types. There’s a fee-only financial planner, there’s an hourly financial planner, and then there’s financial planners who are going to charge a fee and they’re also going to collect, you know, some type of compensation commission for products that you wind up employing with the plan. So they’re going to be working with you on getting a handle on all the assets and all the liabilities as well.

Then you come to an investment planner where this is someone who is doing a few things, they’re managing money for people but they’re also spending time talking to clients about planning for retirement and what kind of path they can take there. What kind of options they have when they’re planning for college.

Then you also get to money manager, which is someone who’s actually just managing the portfolio. There’s very little advice given when outside of investments when it comes to a money manager. They’re strictly interested in how’s that portfolio doing.

And so there are so many different roles that people in our investment advice community take. I think it also depends on where an advisor works. If you’re working with an advisor who is employed by a Wall Street firm, remember, this is someone who is a salesperson for Morgan Stanley or Merrill Lynch or one of the big firms that are out there. They are paid to generate revenue for their firm. They also, many of them, most of them do a great job helping their clients reach their goals. But remember, ultimately they’re compensated based on the revenue they generate for their employee.

An independent advisor is going to be someone who’s not working for a broker, actually works for the client and many of those independent folks you’re going to find doing financial planning, investment advisory, or some kind of blend of the both. And those are people who work on fees and commissions generated by their clients.

There’s a third class, if you want to call it that, people who are dual-registered. They’re registered as investment advisors, but they’re also a licensed broker and they are affiliated with a brokerage firm. So this is someone who can charge a fee for advice, but also generate commissions for any product sales that they make as well.

So, you know, the other thing, I think, that’s also important, and there seems to be a cloud of mystery around it, is how does your advisor get paid? There are basically a couple of ways that they can do it. An advisor can be paid by fee only. There’s advisors that can be paid on commissions, which used to be the model up until the late 1980s, and then you have some folks who get paid on fees plus commissions. Let me walk you through some examples.

An investment advisor like Mullooly Asset Management, we’re paid fee only. So we don’t even get paid trailing commissions on mutual funds that our clients hold. We’re only compensated based on the value of assets. So we want the value of the assets to increase, that’s how our business grows. So we want to make sure that we’re doing a good job for our clients, but we negotiate up front what that fee is going to be and we’ll usually give the clients a fee schedule.

There’s others that work on commission and there’s a certain place for that, I did it for 16 years before starting Mullooly Asset Management. The big rage for the last 15 or so years with Wall Street firms is this wrap-fee program. And what a wrap-fee program is, is you’ll pay a fee instead of paying commissions per trade. Let me take another extra second and talk about that.

These wrap-fee programs, they are, if you read the fine print, it says “fees in lieu of commissions.” So the basic gist of the approach is, “Hey, Mr. Jones, you would’ve paid 2% in commissions last year instead of paying per trade, what we’re going to do is we’ll attach a fee of 2% and we’ll divide it into a quarterly fee and just deduct that from the account.” But read the fine print, it’s very important, it’s fees in lieu of commissions, it’s not fees for investment advice.

So there are a lot of different directions that an investment advisor can take. I certainly understand why folks who have between $100,000 and $500,000 may not be talking to an investment advisor. There’s lots of reasons why.

But if you are looking for an investment advisor, we need to remind you that if you’re relying on a podcast for investment advice, you’re likely making a huge mistake. See, none of the securities that we mention in any of our podcasts or videos represent past specific recommendations of Mullooly Asset Management. And of course, this video’s not a recommendation to buy or sell any of the securities that are mentioned here.

We always, always, always recommend to our listeners that they consult with an investment advisor before they make any decisions to buy or sell. Now, if you don’t have an investment advisor, you can feel free to contact us, you can find us on the web at Mullooly.net, that’s M-u-l-l-o-o-l-y.net, or you can call us at 732-223-9000.

So Brendan, some great topics to cover from one report that we got from Cerulli, and keep those questions coming, they’re good topics for us to discuss on the podcasts, and we’ll talk to everybody next week.

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