The Case Against Financial Planners

All hot and bothered I was last week to write about James Putman. He is a past president of the National Association of Personal Financial Advisors (NAPFA), a white-shoe trade organization whose members pledge not to take commissions on any financial products (mutual funds, annuities and insurance, for example) and to adhere to a code of ethics.

Alas, Putman apparently forgot about that ethics thingy because on May 20, the SEC got a judge to freeze his assets and those of Wealth Management Associates, the firm he founded, alleging that he and a colleague took about $2.5 million in kickbacks from investments made by six unregistered investment pools they ran for clients. Worse, the pools, according to the SEC, weren't suitable for some of the clients. On a further degree of worse, the pools "have limited remaining assets" which are themselves overvalued. In other words, whatever's left ain't worth much, and the investors are outta luck. As if all that weren't bad enough, Putman continued to receive management fees based on the bloated assets. One press report said that he posted an apology of some kind on the company's website, but I couldn't find it. Instead, there was a little red note saying that a receiver had been appointed by the court.

But on the way to writing about this all-too-familiar situation, I got waylaid by a trip to my home town to help my mom through cataract surgery. That alone shouldn't keep me from writing, but something happened to my mind in the interim. (You can read about it in my forthcoming confessional "Even at This Age, Your Mother Can Drive You Crazy.")
Anyway, while I was working to overcome my "mom issue," Ron Lieber of the New York Times stole my thunder by writing a column about the case. "Curses!" I thought to myself along with lots of unprintable stuff. And, sure enough, Ron, who is a very smart guy, underscored, as I was planning to do, that for years financial journalists have considered NAPFA membership a gold standard of planner ethicality and recommended that readers use only fee-only advisers. Now it turns out that you can't even trust those guys -- not even their bleeping past president! So how can you find a financial planner who will give you good advice without skipping to Argentina with your thousands?

Well, as your consumer protector, dear readers, I am here to give you some news: Odds are, you do not need a financial planner at all. Probably more people need reflexologists than they do financial planners. (Those are the folks, in case you don't know, who squish and rub your feet to improve your health.) At the very least, reflexologists won't leave you a pauper.

Now why do I say this? First, planners cost a lot of money, especially those fee-only ones -- at least a few thousand a year plus a percentage of your investments. Even if your planner is a genius, you're going to have less money after you pay him unless he somehow finds the next Microsoft. Second, no matter how fabulous his or her credentials and degrees, you can't tell whether a planner will resist stealing your money. Even those who start out honest can go bad, and sometimes they skim off money in such subtle ways that you and the SEC won't find out until it's way too late. Three, forgetting about fraud, how do you know that your planner is competent? Sure, you can ask about his SAT scores or GPA, but they don't prove anything about his financial chops.

With all those dangers, I have to think that most people would do just as well or even better to choose a few plain-vanilla mutual funds from Vanguard and T. Rowe Price, stuff money in regularly, and stay the course. You can bet that those once high-flying clients of Bernard Madoff (or James Putman, for that matter) wish they had done just that. When all is said and done, how much magic can any financial adviser perform? You think you need a planner to lower your tax bill? Forget about it. There's very little that's secret or exotic; you can find decent advice in any tax filing software program. And if the planner recommends something exotic, it's probably illegal, and the government will make you pay up eventually.

I am not saying that all planners are bad or stupid. But, here's the problem: you'll have a hard time figuring out which ones aren't.