07 Oct Secrets will hurt your money life

Q. I have an IRA with a CFP, and I’m not sure if I’m happy with the CFP. Is there anything to stop me from hiring another CFP and transferring my 401(k) to this new CFP at age 59 1/2, and then not telling the new CFP about the existing CFP who has the IRA?

A. Of course you can work with two different advisors, but if you’re not careful, you could sabotage your own financial plan.

If you’re not honest with the advisor about your entire situation, the advice you get will be incomplete, no matter how talented the advisor.

“The basis of any good advisor/client relationship – be it doctor/patient; CPA/taxpayer; or CFP professional/investor – is open communication,” said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

He said there’s nothing preventing you from hiring another CFP, however, the new pro should be informed of all your assets, no matter who is managing the assets.

“Without disclosing your entire financial situation you will not get good advice,” he said. “Would you go to a new doctor and not disclose that you have an existing heart condition?”

Ideally, it would be great if you were comfortable enough to tell both advisors the truth and that each advisor would understand, but given human nature, it may not be possible, said certified financial planner Laura Mattia.

“The downside is that since you are not fully open with either one, the advice that you receive may be skewed,” Mattia said. “It’s a little like going to a doctor and not disclosing all of your symptoms.”

Mattia said depending upon the complexity of your life and your need for good advice, you could get bad advice – at no fault of the advisor.

“Still I think trust trumps all and you need to make sure you find someone you trust,” she said. “If you have your doubts about the first one, you probably should leave. Take your time to find someone you can trust.”

Mattia said once you select an advisor, you should talk to the person face-to-face. Ask about education, experience, licenses and certifications, how they are paid and if they’ve ever been disciplined by the government.

She said in addition to the actual answers, you want to assess if this individual is operating transparently and if they are willing to answer your every question.

“You are going to be asking this person many questions throughout your relationship and you want to observe if they welcome questions or if they appear to consider them a nuisance,” she said.

Then, conduct your own due diligence.

Mattia said most advisors need to register as investment advisers, investment adviser representatives or brokers (registered representatives). Others may only be licensed to sell insurance.

FINRA’s BrokerCheck and the ADV filed with the SEC can help you find registration and other background information on the advisor, Mattia said. Then review the advisor’s web-site thoroughly and Google the advisor’s name. You may find out some very interesting things about the advisor.

Mattia said one of the best ways to judge if the financial advisor will work as a fiduciary — someone who will put your interests about their own — is to find out how he or she is compensated.

“The fee-only model minimizes conflicts of interest,” Mattia said. “A fee-only financial advisor charges clients directly for his or her advice and/or ongoing investment management. No other financial compensation is provided, directly or indirectly, by any other institution. Fee-only financial advisors sell only one thing: their knowledge.”

She said the fee-based model is the most popular model and it is very different than the fee-only model.

“Fee-based advisors will earn some of their compensation from fees paid by their client just as the fee-only advisor, but they will also receive compensation in the form of commissions or discounts from financial products they are licensed to sell,” Mattia said.

She said the biggest problem with this is that the advisor is not required to tell you how and when they are being compensated, and you never really know if the advice you are getting is in your best interest or if it is creating a large commission for the advisor.

She said when an advisor gets paid under a commission model, you know automatically that the advisor faces potential conflicts of interest.

“In this situation the advisor only gets paid if you buy or sell a financial product,” she said. “Certainly there are good people that operate under this model and attempt to do the right thing for their clients, but the large incentives that they receive can possibly influence them.”

No matter who you work with, Mattia said, make certain that you remain involved and that your advisor listens to your investment ideas.

“If they think you are taking on too much risk or if there is a reason why they think you should not invest a certain way, it is their job to educate you on their approach and philosophy,” Mattia said. “Continue to ask questions and observe.”

She said there many options in terms of selecting an advisor and in terms of selecting an overall investment strategy and the actual investment vehicles, but you need to be comfortable with the decisions that are being made on your behalf. After all, it is your money!

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This story was first posted in October 2015.