Q3 2013 Oxford Communiqué Investor Report: How to Select the Right Financial Advisor By The Oxford Club Research Team NOTE: The Oxford Club is not a broker, dealer or licensed investment advisor. No person listed here should be considered as permitted to engage in rendering personalized investment, legal or other professional advice as an agent of The Oxford Club. The Oxford Club does not receive any compensation for these services. Additionally, any individual services rendered to The Oxford Club members by those mentioned are considered completely separate from and outside the scope of services offered by The Oxford Club. Therefore if you choose to contact anyone listed here, such contact, as well as, any resulting relationship, is strictly between you and the Pillar One service. 105 West Monument Street Baltimore, Maryland 21201 410.864.1751
No matter what our respective levels of financial sophistication are, we cannot master every area of financial planning. The key is choosing the planner that s right for our individual circumstances. Remember that this person will be privy to a lot of information, from how much you paid in taxes last year to the outstanding balance on your mortgage. So while it s very important to select someone with the right experience and qualifications, it s equally important to find someone you can trust. This is not the time to just thumb through the yellow pages. Get referrals from people you know and trust in similar financial situations. And consider contacting one of The Oxford Club s Pillar One Advisors. These advisors have already passed our stringent endorsement standards, so they may be right for your individual needs. We recommend that you filter candidates through some basic screens. Your advisor should: Be more than 30 years old Have a minimum of five years experience as a financial advisor Have at least one of the professional designations listed in the table on page four, or be part of a team of financial professionals available to service your needs, some of which hold those designations (The financial team would normally be led by the financial planner and could include an estate planning attorney, a CPA and/or a registered investment advisor (RIA), or an investment advisory representative (IAR) for an RIA) Be licensed in the state where you reside Once you ve found someone or a financial team who meets these criteria, you will still need to answer one important question before you can decide who to interview: What do all those letters after the candidates names mean? The ABCs of Financial Planning Spelling out Success These days, you can t throw a rock without hitting someone who s calling himself a financial advisor (planner, counselor, consultant or investment specialist... the list goes on and on). Everyone from your broker to your barber is dispensing financial advice, and anyone can call himself a financial advisor because there is no law that controls the use of the term. That s right: there is no education, training or licensing required to use that title. There are many initials that can appear after the name of a financial professional, but we re only going to give you the ones that count. Based on interviews with the top experts in the field including esteemed members of our own Wealth Advisory Panel we narrowed down the array 2
of professional designations to the ones best for you. But before getting to those designations, here are two more general guidelines to follow when identifying the appropriate financial planner for your needs: 1. When you need an overall financial plan, go to an advisor who s a generalist (like a CFP) rather than a specialist (like a CFS or a CLU). Advisors who specialize in only one area tend to see that area as the solution to all financial problems. 2. No one is an expert in all aspects of financial planning, so beware of anyone who claims to be such. A truly good advisor works from his strengths and brings in other professionals to cover the rest. Expect to work with a planning team when you need a comprehensive strategy. That said, professional planners including those with certifications described on the following page will have the background, experience and expertise you will need to help you meet your financial goals. Registration and Your Right to Know The Investment Advisors Act of 1940 defines who must register with the SEC. If a portfolio manager has less than 15 clients, he can be exempt from registration. One client can be a company or limited partnership, i.e. a private placement limited partnership or limited liability company fund can be one client, and therefore not require registration if the manager does not hold himself out to the public as an investment advisor and the fund is not a registered investment company (mutual fund). A Registered Investment Advisor (RIA) will charge for investment advice, which could include an advisory newsletter and advisory subscription services, as well as managed portfolios or management of a registered investment company (mutual fund). Generally any RIA who manages at least $30 million must register with the SEC. And if assets under management drop below $25 million, the RIA must withdraw his SEC registration and register with his appropriate state agency. An RIA files Form ADV with the SEC. Form ADV is a two-part report. Part II gives detailed information on the advisor, his associates and directors, his education, work history, experience, method of management, investment strategies, professional designations and method of compensation. It also includes certified financials. Part I of the form contains a listing of any legal, regulatory or discipline issues in the advisor s past. By law, RIA s must show you Part II of the ADV upon your request. They are allowed to refuse to show you Part I. But if an RIA you are considering refuses to show you Part I, you should 3
Designation Test Required? Prerequisites Designation Granted By Cont. Education Required? CFP YES Three years experience CFP Board of Standards 30 hours every two years Certified Financial Previous designation as CPA, in at least two different Planner JD, ChFC, CLU, DBA, CFA or PhD areas of planning i n economics or business Two hours on ethics Completion of CFP course ChFC YES Three year s experience The American College 60 hours every two years Chartered Financial Completion of CFP course Consultant CFC YES** Bachelor s Degree The Institute of Financial None Certified Financial 30-hour self-study program Consultants Consultant 4 CFS YES 60-hour self-study program Institute of Business & 15 hours per calendar Certified Fund Finance year Specialist CLU* YES Three year s experience The American College 60 hours every two years Chartered Life Completion of 10 self-study courses Underwriter A CLU designation is acceptable as long as the advisor has at least one of the other listed designations. ** Alternately, a candidate with a master s degree and/or professional qualification plus three years experience can earn the designation without taking the exam
consider looking elsewhere for your investment advice. You can get copies of the ADV from the SEC or the state agency where the advisor is registered. Some states require that the advisors pass a proficiency exam or meet other requirements, but the SEC has no such requirements. To learn about your state s licensing requirements, you can call the North American Securities Administrators Association (NASAA) at 202.737.0900 or go to its website: www.nasaa.org to get the phone number for your area. What s This Going to Cost You? Before you find out how much it will cost you, you have to know how your advisor/planning team is going to charge you. You need to understand explicitly how payment works you don t want to find out later that there are hidden costs. If you choose a Registered Investment Advisor, you ll find this information spelled out in Schedule F of his ADV. There are generally three types of cost structures used by these professionals: Fee only Commission only Fee plus commission Fee-only planners only charge you for the advice they provide and do not actually sell any products such as insurance or mutual funds. They may charge you a percentage of the value of the assets they are managing for you, by the hour or with a flat fee. Typical hourly rates range from $100 to $250 the minimum time spent creating your plan should be about 15 hours depending on the complexity of your situation. Flat fees can run you anywhere from $500 to $15,000 depending on the complexity of your finances. High-end advisors can charge up to $10,000 for just the discovery phase (determining what the client has, needs and wants) and several thousand more to come up with strategies and implement them. If the charges are based on your assets, the percentage will generally be about 1% and shouldn t exceed 1.5%. A commission-only planner does not charge you for his advice. They only earn their keep when you purchase the financial products they re selling. In many cases, they will draw up a plan on a complimentary basis in return for having you invest through their company. While this seems like an obvious conflict of interest, if you re working with an ethical professional, he won t try to sell you products or advise you to buy things you don t need. In many cases, working with someone on a commission basis can save you money. But there are unscrupulous individuals in every industry, and if you re working with a 5
commission-only planner, there are some things to look out for: An advisor who changes (not just reviews) your plan more frequently than twice a year An advisor who tries to sell you products that you don t want or need A professional who has pre-made cookie-cutter plans that work around the products he has to sell instead of around your goals An advisor who charges a fee plus commission will charge you for his advice and also earn commission on any products he sells to you. Generally, fees will be lower than the fee-only advisors since the advisor will also be earning commissions. One fee structure is not better or safer than the others. While there is a potential for conflictof-interest with advisors on commission, good advisors will never sell you products that are inappropriate for your situation. Most financial advisors (around 85%) include commission as part of their compensation. And if you do use a fee-only advisor who suggests you purchase various financial products, you still have to buy them from someone and then that person will charge the commission. As long as you know exactly how, when and for what you will be charged, it doesn t really matter which method your advisor uses. But as always let the buyer beware. Know what you re purchasing before you get it. The uneducated client is a huckster s dream it s up to you to make sure that isn t you. Asking the Right Questions Your Best Strategy for Finding the Right Planner Once you ve decided which kind of professional you need and have narrowed down your search to three or four advisors/teams, the interview process begins. Head into these interviews armed with a comprehensive list of questions. Asking the right questions can mean the difference between a bright financial future or losing your life savings to an unscrupulous con man. You should ask all candidates the same list of questions (a sample is provided below) to make it easier to compare their answers. Bring your spouse with you for the initial consultation good advisors should work equally well with both partners. Questions to Ask: 1. What financial planning designations do you possess? 2. How long have you been offering financial planning services? 3. How long have you been practicing in this community? 6
4. What professional associations do you belong to? 5. Have you ever been cited by a regulatory body for disciplinary reasons? 6. Will you or an associate be working for me? 7. Will other professionals (such as CPAs or attorneys) help prepare or implement my plan? If so, who are they? 8. Do your services include recommendations for specific investments or products? 9. Will you take possession of or have access to my assets? 10. How are you compensated (fee/commission/combination)? How much, regardless? 11. May I have a copy of your resume or ADV? 12. What s your area(s) of expertise? Who will handle my needs in other areas? 13. What is a profile of your typical client? 14. May I see a few sample plans? 15. May I have a list of references? While the right questions can go a long way in helping you determine if a particular advisor will work well with you, don t ignore personality. This person will be with you for a long time and must be someone you and your spouse are comfortable with. Once you ve met with your possible financial planners, you ll have to make a choice. The bottom line is this: take the time to choose an ethical, experienced advisor/advisory team that you feel personally comfortable with; someone who really listens to your needs instead of boxing you into a pre-made plan. Pay attention to your gut feelings. You need to work with people you can be completely open and honest with. If you re not comfortable disclosing all the necessary personal information, then they are not the right planner(s) for you. Make Sure Everyone s on the Same Page With an Engagement Letter After you ve finally selected your financial advisor(s), you ll need a written engagement letter that sets out the scope and nature of your relationship. The letter should cover your specific goals, the financial advisor s understanding of your goals, and the amount and form of compensation. Most advisors will require this document. If yours doesn t mention it at the first meeting, you should. To help square away the parameters of the engagement letter, you and your advisor will need to have a very thorough, joint understanding of your current financial status as well as your financial goals. The more current information you can bring to your planner, the more thorough the 7
engagement letter will be and the greater your shared understanding of your financial plan. Below is a list of items you ll need for your advisor to develop a plan. Always leave copies; keep all original documentation for yourself. Bank statements Tax returns Mutual fund statements Brokerage statements Listing of all assets and liabilities Financial statements for your business Insurance policies Estate-planning documents (including wills and trust documents) You and your advisor will also need to determine how often your plan will be revisited. In general, the plan should not need to be altered more than once a year unless you go through a major life change (like having a child or retiring). The two of you should sit down and review the plan at least semi-annually. But you should feel free to contact your advisor as often as needed. Some relationships will require much more frequent contact. If your advisor is actively managing your investments, you ll be in contact with them on a much more regular basis. The Best Return for Your Effort: A Planner You Can Trust If you put in the effort to find a financial advisor/advisory team that is the right fit for your needs and goals, you have taken a giant stride toward securing your financial future and ensuring your legacy passes on to your family intact. Unfortunately, given the nature of sound financial planning, you won t be able to see the success overnight this plan will be for the long haul. That s why selecting the right financial planner is so important. 8
From time to time, The Oxford Club will discuss investment ideas that will not be included in the Club s various portfolios. There are certain situations where we feel a company may be an extraordinary value but may not necessarily fit within the selection guidelines of these existing portfolios. In these cases, the recommendations are to be considered speculative and should not be considered part of any of the Club s portfolios. Also, by the time you receive this report, there is a chance that we may have exited a recommendation previously included in one of our portfolios. Occasionally, this happens because we use a disciplined trailing stop philosophy with our investments, meaning that any time a company s share price falls 25% from its high, we sell the stock. If you have any questions about your Oxford Club membership, subscription status, or, would like to change your email settings, please contact us at 800.992.0205 Monday Friday between 9 a.m. and 5 p.m. Eastern Time. Or if calling internationally please call 443.353.4056. 2013-present The Oxford Club, LLC All Rights Reserved The ww 105 West Monument Street Baltimore, MD 21201 North America: 800.992.0205; Fax: 1 410.246.2297 International: 443.353.4056; Fax: 1 410.246.2297 Email: customerservice@oxfordclubinfo.com The Oxford Club is a financial publisher that does not act as a personal investment advisor for any specific individual. Nor do we advocate the purchase or sale of any security or investment for any specific individual. Club Members should be aware that although our track record is highly rated by an independent analysis, and has been legally reviewed, investment markets have inherent risks and there can be no guarantee of future profits. Likewise, our past performance does not assure the same future results. All of the recommendations communicated to members during the life of this service may not be reflected here. The stated returns may also include option trades. We will send all our members regular communications with specific, timely strategies and updated recommendations; however, you should not consider any of the communications by our company and employees to you as personalized investment advice. Note that the proprietary recommendations and analysis we present to members is for the exclusive use of our membership. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the worldwide web), in whole or in part, is strictly prohibited without the express written permission of The Oxford Club, LLC. 105 W. Monument Street, Baltimore MD 21201. COMMIR0613-19 The Oxford Club 105 West Monument Street Baltimore, Maryland 21201 443.353.4056 300R010818web0913