054 Certified Stupid

(Complete Show Notes Below)


In the 54th episode of the Financial Procast:

 The Survey Says…

People actually care about what professional designations are held by their financial advisers…or at least a recent survey would have us believe they care.  According to the research firm ORC international, an overwhelming majority of those people survey indicated that they would much rather work with an adviser who was distinguished by his/her professional certifications.

Now I'm not saying certifications don't matter.

In fact, I believe that some designations are quite valuable as they relate to the rigorous academic requirements one must endure to obtain the designation.  However, I've been in the financial services industry for a bit over 13 years now and I've yet to see any real evidence that proves an adviser is more or less qualified to practice based on these designations.

Again…it's not that professional certifications and designations don't matter.

I just argue that most normal people have no idea as to what any of it means.  In the financial planning/advisory world there are a handful of organizations that have designations that are 100% legitimate, require rigorous study and examination to complete etc.  But even those handful of organizations can't agree on what the benchmarks should be?

There's no consensus in the financial planning world.  Other than people who sell products and earn a commission for doing so are inherently evil (rolling my eyes).

Also, let's not discount the fact that this type of survey is terribly flawed.  People will generally answer the questions the way they think they're supposed to.

It also seems that people think “knowledge of financial planning” is important when selecting a financial adviser.  That sounds good and we'd agree that it is important.

How does the average person define that?  Sounds good right?  But it's a totally subjective measure.

The survey also indicates that people would prefer to have one relationship or a “one stop shop” to handle everything in their financial lives.  I agree that this sounds so good…so very convenient.  But the problem is that it just doesn't work very well.

We talk intelligently with our clients about all aspects of their finances, however, we're way too busy doing what we're really good at to advise them on every detail.  We can't watch investment accounts, make buy/sell decisions, decide the timing of transactions etc.  If we're doing that then we're not going to excel at our life insurance analysis which is our true specialty.  The one-stop shop results in  mediocre results across the board.

Lincoln Enters the Fray

Lincoln National (LFG) has decided to enter the deferred immediate annuity or deferred income annuity market.  What is a deferred income annuity (DIA) you ask?

It's a bit like a single premium immediate annuity (SPIA) in that it will give provide you a guaranteed income stream in exchange for a lump sum premium/deposit.  This new product, the DIA is a bit different in that you can provide a lump sum in exchange for an income stream at some point in the future–deferred.  The upside is that it gives you a bit better result than using a SPIA.

New York Life pioneered this category a few years ago.  In our analysis, the two dominant players in terms of offering the best payouts combined with financial stability are New York Life and American General.  So, it will be interesting to see how Lincoln competes.

It's a $930 million market, but it's a small part of the $34 billion fixed annuity market.  But this class of product is to likely gain steam in years to come.  More and more companies will probably enter the market as the need for guaranteed income has become very evident to consumers, particularly as great numbers of baby boomers retire with large qualified plan balances (401k, 403b and 457) that they need help distributing.

Also, don't dismiss income annuities because those in the financial press talk disparagingly about giving up control and that your beneficiaries will get nothing if you die.  Annuity payout options are numerous and there's only one payout option that will totally cutout your beneficiaries from receiving any money when you die.  Also, no competent financial planner, agent, adviser (including us) would ever suggest that you plow every available dollar you have into an income annuity…that's crazy talk, of course this is a bad idea!

Fee-Only Advisers are Always Better?

If you want your adviser to be uninfluenced by evil commissions then you must only work with fee-only advisers (can you detect my sarcasm?).  The financial planning association, the CFP board and NAPFA are having a pow-wow this week to discuss what fee-only really means.

Is this really so hard?  It would seem to us that if you say you're “fee only” that means you get paid a fee to help clients.  This could be a flat fee for service, an hourly fee or a fee managing client assets.

However, this hasn't been completely agreed upon.

Some people believe that you can call yourself fee only or fee based if you get paid to write a financial plan and then earn a commission on the products used to execute the plan.

The CFP board has decided that this is not okay and in fact if an adviser is affiliated with a company that derives revenue from commissions, he/she cannot call themselves fee only.

NAPFA says you can own a small portion of an insurance brokerage and still call yourself fee-only.

What will this new definition really mean? Well, we think it basically means if you want to be fee only and represent yourself as such you must have a series 65 license and not have any affiliation with a broker-dealer. Because if you're affiliated with a b-d you can't call yourself fee only.

Do these three organizations really have to get together to hash this out?  I'm pretty sure this could all be solved on a conference call but I guess somebody wanted to take a trip to Chicago?

Yet Another Reason to Hate 401ks

T. Rowe Price has banned 1300 American Airlines employees from trading their 401k accounts because of their frequent trading activity.  These employees were following the advice of EZtracker, an investment newsletter for airline employees.  Additionally another 800 employees were warned that they were treading on thin ice and better cut it out.

Evidently the fund managers at T. Rowe Price didn't like  people hopping in and out of the funds.

Why?  It messes with their money and that's not fair.  Somebody call the Waambulance please!

401k plans are setup to enrich the retirement plan industry and the federal government. The two entities are very much in cahoots because they have a mutually beneficial relationship.  How so?

Well, the feds basically have an annuity due by you accumulating tax deferred money in your 401k, so they have every incentive to protect the retirement plan industry and allow legislation that heavily favors the industry.

So guess who wins in employee vs. 401k plan provider?  No contest.

The investment industry obfuscates this issue by claiming to have a fiduciary responsibility to protect other investors.  Gag me with a spoon…T. Rowe Price is protecting its own interest and fund manager bonuses.

They just want to use your money to make themselves look good.  You should never underestimate the lengths to which they will use their lobbying muscle to force their will on plan participants.

Listen to the entire episode to hear how we really feel about this issue.


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