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Financial Planning 2010 Dr. Douglas Carlsen

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Where does the prudent dentist go for good financial education and advice?

There are a myriad of investment advisers with no state or national licensing. Bankers, insurance salesmen, mortgage brokers, real estate brokers, traditional brokers, certified financial planners, certified life underwriters, no-load brokers, and your know-it-all brother-in-law, all claim to be “financial advisers.” Let us triage the horde.

There are two main groups of financial professionals, those who mainly sell and those who advise. Let’s look at the salesmen first.

Insurance brokers, bankers, mortgage brokers and anyone else touting to be a financial advisor without the CFP (more on that later) designation usually have limited education and normally will try to sell you a pre-packaged investment vehicle that has onerous fees. They might or might not provide other advice. Buyer beware.

Beware, in particular, of any insurance company offering a retirement plan. Often they are deferred group annuities providing only a small choice of funds charging significantly more than a discount broker would charge for the same funds.

What about the traditional broker? “Broker-dealers” – known as stockbrokers – have been the usual adviser for many of us. Little did we know this crew has always been exempt from the Investment Advisors Act of 1940. The law exempts traditional brokers from “fully disclosing how they’re paid or revealing conflicts of interest that might bias their recommendations. Nor are they subject to the same stringent rules regarding fiduciary duty – that is, placing a client’s interests ahead of their own – as are other advisers.” In 2006, part of this exemption was stripped, yet brokers still may sell commissioned products without the fiduciary responsibility of protecting the client’s best interest. No other advisers have this exemption.

A seminal eight-year study presented to the American Finance Association 2006 meeting, concluded that traditional stock broker "load" (commission-based) funds, perform significantly worse than those from a no-load discount broker, before the additional fees and commissions are taken into account.¹ Repeat, load funds from traditional brokers do worse than similar no-load funds from discount brokers. Period. Sorry Morgan Stanley, Smith Barney and Merrill Lynch. Hello Fidelity, Vanguard and Scottrade.

The financial industry’s general practitioner for comprehensive financial planning is the Certified Financial Planner (CFP). They can provide a financial plan, insurance help, and plan your estate. For managing your money on an ongoing basis, use a Registered Investment Advisor (RIA). Both CFPs and RIAs act as fiduciaries. That is, they are required by law to act in your best interest. Conflict of interest selling “load,” or products with commissions, is not an issue. As mentioned above, traditional brokers do not have this legal requirement. Often CFPs are also Registered Investment Advisors. CFPs and RIAs are fee-only; no commission is involved. CFPs and RIAs almost always use the discount brokerages, such as Fidelity, Vanguard, Schwab, etc., as third party custodians for accounts.

There are other, less well-known designations that also are ethical and have continuing educational requirements. Please make sure that an adviser you are considering is fee-only and has no conflict of interest.

Where does the prudent dentist find these competent people? Traditional brokerages, banks, and insurance companies pitch a warm appeal for your financial goals, yet provide products that have high costs and under-perform. There are, though, many ethical, high quality sources that utilize the aforementioned planners. I’ll touch on those with which I am familiar and stress that this is an incomplete list:

First let’s look at dentist-oriented advisers. You will receive detailed and individual advice on all financial, insurance, small business retirement planning, and estate planning with these; be prepared to pay higher fees than with the other groups. Dentist-oriented advisers also offer practice transition service. They usually employ CFPs or CPAs.

Hufford Financial, Caine Watters and Mercer Advisers are examples.

Second, independent, fee-only planners, normally again CFPs, provide comprehensive advice, including small business retirement plans, estate planning, and insurance advice, at a lower fee than the dentist-oriented specialists. According to Consumer Reports, comprehensive financial plans obtained from independent advisers average $3,000 with management fees normally between 0.5 and 1.0 percent of assets. Additional fees apply to small business retirement plans.

Garret Financial Network lists experienced CFPs, and is recommended by Consumer Reports. Another highly rated company that also provides extensive educational resources and planning services is Merriman Advisors.

Discount brokers offer the lowest fees, yet plans might not be as comprehensive as the other advisors, with some including estate planning and insurance advice, some not. Small business retirement plan sophistication also varies. Charles Schwab, in particular, offers extensive retirement options, yet does not provide in-house insurance and estate planning. The discount brokers employ large numbers of CFPs, CPAs, tax attorneys and actuaries to handle your needs. All provide financial planning for fees of $1,500 or less, with management fees of between 0.5 to 1.0 percent for ongoing advice. Vanguard, Fidelity, Charles Schwab, T. Rowe Price, and others provide reasonable, easy-to-understand and balanced investment and retirement planning assistance.

Which is best for the prudent dentist? The discount brokers provide the lowest rates, yet might not provide all services one desires. Independent, fee-only planners provide extensive service with moderate pricing. Dentist-oriented planners provide the extensive services of the independent planner with the added benefit of transition assistance, yet one will pay much higher fees.

Please note that any business mentioned above does not have my endorsement and that many competent financial firms not mentioned are available.

What about going it alone? To set up one’s own financial and retirement accounts with a discount broker, find one’s own insurance and to coordinate with one’s estate planning attorney has merit and has been done by many, including yours truly. Fees are kept to a minimum, yet the time necessary to reallocate funds periodically, update insurance correctly, and keep all components organized might be more than the busy practitioner can handle.

In interviewing many dentists over a wide age and income spectrum over the last three years, my strong feeling is that those who employ a professional to handle all financial affairs come out in better financial shape and have much less stress.

But, for heaven’s sake, please keep away from the insurance “retirement specialist” salesmen and their sneaky annuities!

On that note, dentists often report hearing, “Doctor, what if I told you about a product that invests in the stock market, pays a minimum of five percent per year, and guarantees you will never lose money?”

It seems that in every course I give there is someone in the audience that has either purchased one of these products or is considering them. What are they?

They are equity index annuities. Numerous alerts have been posted regarding the sales tactics of insurance agents selling these products over the last several years. As recently as June 25, 2008, the Securities and Exchange Commission issued statements warning of fraudulent claims made regarding these products.²

What is an annuity? In the simplest form, you give an insurance company a sum of money and the insurance company pays you a guaranteed sum for the rest of your life. This is a fixed annuity. Many variations have come about over the years to attempt to spice up the basic premise and usually increase the commission for the seller. An annuity invested in mutual funds, with a hope of an eventual higher return than one formed from a one-time lump sum, is called a variable annuity.

Let’s look at this latest annuity, the equity index annuity, often investing in a common stock market index:

The guaranteed minimum return, in this case five percent, might only apply to a portion of your total investment, and the contract might require you to hold the investment for up to 15 years to get credit for any increase!

Further, that gain of the index you participate in, say the S&P 500, will normally be reduced by the following:
  1. Participation rate: It allows you to recover a certain percentage of the index’s gain, often 80 percent.
  2. Index Rate Cap: You might have a limit of say seven percent on any gain on your funds. If the S&P 500 gained 25 percent in a year, you would only be eligible for seven percent times 80 percent!
  3. Margin or Spread: The index gain for many annuities is determined by subtracting a margin or spread. This is often three percent.
Thus, in the preceding example, an S&P 500 return of 25 percent would be capped at seven percent, reduced to 5.6 percent by the participation rate, then decreased down to 2.6 percent by the margin or spread. As you can see, in good years for the stock market you would be severely hampered.³

Can you actually lose money in one of these funds? According to the U.S. Securities and Exchange Commission, yes! If you need to cancel your contract early, in some cases before 15 years, you will pay a significant surrender charge and suffer tax penalties.

The bottom line here is that you’d have a better return with far more liquidity by investing in U.S. Treasuries. Further information is available at the Securities and Exchange Commission at the listed site.

References
  1. Bergstresser, Daniel B., Chalmers, John M.R. and Tufano, Peter, ”Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry”(October 1, 2007). AFA 2006 Boston Meetings; HBS Finance Working Paper No. 616981. Available at SSRN: http://ssrn.com/abstract=616981.
  2. See press release at www.sec.gov/news/press/2008/2008-123.htm.
  3. Collins, Patrick, Lam, Huy, Stemp, Josh, “Equity Indexed Annuities: Downside Protection, But at What Cost?,” Journal of Financial Planning, 22:5, 48-57.
Author’s Bios
Douglas Carlsen, DDS, owner of Golich Carlsen, retired at age 53 from private practice and clinical lecturing at UCLA School of Dentistry. He writes and lectures nationally on financial topics from the point of view of one that was able to retire early on his own terms. Dr. Carlsen consults with dentists, CPAs, and planners on business systems, personal finance and retirement scenarios. Visit his Web site: www.golichcarlsen.com; call 760-535-1621 or e-mail at drcarlsen@gmail.com.
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