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Fixing the problems of financial do-it-yourselfers

New Jersey financial adviser Michael Kay wrote in yesterday’s Wall Street Journal “Do-it-yourselfers often approach advisers as a last resort when they have an especially complex or urgent financial issue, and advisers should proceed carefully with this type of client.” Since the launch of my own practice six months ago, I notice that a high percentage of my clients fall into this category of do-it-yourselfers who ran into trouble. The two most common types of trouble I’ve run into so far are tax penalties and suspected fraud. Dealing with relationships in a family business, handling problems with other advisers, and stalled divorce negotiations would probably round out the top five types of do-it-yourself problems. I find that, in fact, I like working with do-it-yourselfers who run into problems.

Problems handling financial issues are no reflection on the skills or ethics of the individual. The financial world today is unfathomably complex. Our tax laws are a mess and the procedures used by enforcement agencies are out-of-control. I say to my clients that I can;t fix the system but I can deal with the problem logically, one step at a time, and help relieve the enormous emotional stress that accompanies these issues.


Mr. Kay suggests caution in working with these cases and I agree. I add an extra disclaimer to my engagement letter to adjust for the added risk of these cases. The fact is that when a problem exists there is an inherent risk that your efforts to help will only make matters worse or may lead to a second previously unrecognized problem. These engagements need to be on a best efforts basis with relaxed accountability for the problems.


Do-it-yourselfers understand and appreciate the difficulties of managing finances. They tend to recognize the difference between amateur and professional service. They also notice the difference between the service I provide (confirming items in writing, doing what I promised, returning calls, being available). I find that they frequently express their appreciation about the improved level of service and that this helps our working relationship. (I’ve not found that these satisfied clients are any more likely to refer me to others, perhaps because they are sensitive of exposing their problem situation to others).


The main problem I have with  do-it-yourselfers is that I need to learn to price services appropriately. Undoing a problem typically takes 3 or 4 times longer than starting a project from scratch. You need to gain an understanding of the problem, research the consequences (often requiring outside expert advice and legal help), convincing other parties that it wasn’t your fault and they should let me “start clean” and then finally . WHere there are penalties or consequences from the prior work, that requires even more time. It is not unreasonable to price “fix-up” services at five times higher that the service would have cost if I started the project myself.

How do you know who to trust for financial advice?

Tonight I finished a 13 hour continuing professional education course on the topic of ethics in the financial services industry for baby boomer and senior clients. The scope of scams perpetrated on seniors covered in the course leaves me dumbfounded. In each of these many cases, the victim made a critical mistake in trusting the wrong person. 

Looking back, I think that I did a pretty good job addressing the question “How do you know who to trust for financial advice?” in a 2012 editorial that breaks a complicated topic down into 4 simple and workable concepts. I still think that from a consumer’s perspective, simple and straightforward is the best approach to advice on this topic even if that means making overly harsh general assessments.

Lack of modesty aside, I think that the editorial is useful enough to warrant republishing it today below. The only cange is that I labeled the points #1  through #4 for emphasis.

(reposted from, 8/9/2012)

There have been several reports in the news this summer indicating that people have difficulty knowing who to trust for help with financial advice. One television news show reported on working people who had fallen behind on key financial planning benchmarks (like having a cash reserve for emergencies) this year even as the overall economy continues to improve. A report issued jointly by the Consumer Federation of America and the Certified Financial Planner Board of Standards on July 23, 2012 reached the same conclusion. Many people failed to address even the more basic financial planning issues. The excuse given most often by people who have the resources but were dragging their feet is that they do not know who to trust with these basic transactions. In its July 25 coverage of the report, CBS News reported “More than half of those surveyed said investing just seems too complicated, or that it’s difficult to know who to trust for financial advice” (emphasis added).

This is frustrating because knowing who to trust should be the easy part. Actually hiring that person and then sticking to solid financial strategies later are likely to be more difficult in many cases. But the key point is that if you say “I do not know how to find someone to trust for financial advice”, then the chances of finding an appropriate person are slim. These survey results tell me that the combination of challenges ahead means that many people will not make financial progress and are financially doomed. Those who commit to improving their finances must reach some clarity on this issue and take some actions to improve their situation.

Four keys that open the door to trust

Knowing whom to trust is not a simple subject. It requires an understanding of four separate intellectual concepts that must be reduced to simple and clear personal resolutions. Those concepts are:

  1. Avoid potential conflicts of interest
  2. Use an adviser who has fiduciary responsibility
  3. Keep custodianship of money separate from the adviser
  4. Understand credentials, competency and experience

#1 – Avoid potential conflict of interest

It is necessary to first understand and be able to recognize “potential conflict of interest” in order to avoid it. Most important, it is crucial to understand that your resolution to avoid potential conflict of interest here is not an implied accusation of conflict of interest of any other person. For example, your decision to avoid using your brother-in-law, although he may be an excellent financial adviser, is based on the principle of avoidance of potential conflict of interest and in no way is an accusation against the brother-in-law for having any ill intent.

To apply this concept from a practical perspective, simply eliminate consideration of anyone with whom you have a meaningful relationship other than providing advice. The typical objection is that these are the people who care most about you. It is true that they care, but this also leaves a conflict of interest risk since their feeling of “care” can complicate financial decisions. For example, you should stay away from family members or close associates, elders of your church or other similarly influential people in your life. They certainly mean well but their judgment is potentially influenced by their role and relationship. Use a “plenty of fish in the sea” approach to seek out a clean fresh financial advisory relationship that cannot be unduly affected by other relations.

It also means eliminating from consideration anyone who is paid based on the completion of a transaction. Commitment to the transaction itself creates a potential conflict of interest. Sales people, by definition, have a potential conflict of interest in providing financial advice. This doesn’t mean they don’t give good advice or should not be used to handle necessary transactions, but rather it means that they should not be on your list of candidates for a trusted financial adviser.

It is a simple matter to ask a potential financial adviser “How do you get paid?” yet surprisingly few people understand this important detail. If the only way for the adviser to get paid is to complete a transaction, this is a sales person and not an independent adviser. There is nothing wrong with this method of compensation, just be clear on the difference in the two roles. There will be no problem when part of an adviser’s compensation to come from a commission so long as that commission compensation is fully disclosed, it does not increase your overall cost or lower your overall return, the adviser is adequately paid for not completing the transaction and the commission does not increase the adviser’s overall pay for time invested. For example, an adviser who makes $1,000 when not completing a transaction and $5,000 for completing a transaction does not have a potential conflict of interest if it takes three hours to complete the work without the transaction and another 12 hours to complete the transaction.

Finally, pay attention for signs of not-so-obvious potential conflicts of interest. Some advisers are overly influenced by a specific approach, company, belief or philosophy that their work deviates from the bulk of the evidence on the subject. While it may not be possible to entirely eliminate all potential conflicts of interest, by paying attention and discussing these issues in advance will reduce the risk to an acceptable level.

#2 Use an adviser who has fiduciary responsibility

Fiduciary responsibility simply refers to the legal obligation to act on your best interest when providing financial advice. Because this concept is for too often misunderstood when it comes to financial advisers, it should be listed separately. It is important to know, at an absolute minimum, that a broker or agent does not have a fiduciary responsibility and they will not be held legally accountable for acting in your best interest under the legal system regardless of what title they put on their business card.

Certain professional roles do carry a fiduciary responsibility. These include Certified Public Accountants (CPA) and independent Registered Investment Advisers (RIA) and Certified Financial Planners (CFP). Changes to organizational oversight of RIAs are now being discussed by Congress as part of the proposed Investment Advisor Oversight Act of 2012.  Similarly, changes are being negotiated within the professional industry organizations and the financial planning community that may affect CFPs. This is not meant as a negative comment on these professional designations but the public might simply not be clear on the details of how the RIA and CFP designations and the pending proposals apply to fiduciary responsibility. In contrast, people are generally aware that the CPAs are committed to independence and accountability to the public as the core central principles of their profession.

#3 Keep custodianship of money separate from the adviser

To keep it simple, your money should not be accessible to your financial adviser. In other words, you should not write your check to “Madoff Investment Company” when hiring Mr. Madoff as your financial adviser. Make sure your money is directly conveyed and held by a reputable organization and that your adviser does not have legal access to that money. The custodian organization should usually be legally and functionally separate from the financial adviser and the custodian is normally a well-known and insured bank, investment firm or insurance company. Following this simple step would eliminate the large majority of all financial scams. Yet it is amazing how many times people are duped into granting an adviser custodian rights to access client funds.

#4 Understand credentials, competency and experience

These first two items – credentials and competency – can usually be considered together because they both address the underlying skills necessary to provide good financial advice. Much has been written about the pros and cons of various professional designations and there is little use to repeat that information here. The fact is that anyone can put the title “financial adviser” or any other similar term on their letterhead. It is left to the consumer to do the research and understand the distinctions of professional credentials.

Finally, consider the adviser’s experience.  The value of experience is most often under-valued by those who do not have it and over-valued by those who do. There is a line from an Indian proverb about a warrior speaking against the tribal elder who advocated for peace: “The value of experience is over-rated, especially by elders who nod wisely but speak foolishly”. Many young over-achievers in the technology field today would echo similar sentiments. Yet there is plenty of fact-based evidence that the financial planning instincts of younger affluent individuals are just plainly wrong and misguided. The point is that experience should be considered in the context of the assignment. When selecting a financial adviser, the value of experience would be weighed against the ability to accurately evaluate your situation and apply research-based principles with other personal skills that combine to build a long term relationship based on trust. Shakespeare wrote “Experience is by industry achieved, and perfected by the swift course of time”.  Who could argue with that? In the end, we’re all experienced.

Keep these four principles in mind when considering the suitability of a potential financial adviser. You want someone who is independent of potential conflicts of interest, holds fiduciary responsibility, works independently from the custodian of your money and has the credentials, competency and experience to deserve your trust.

Comment on “A Tale of Two Recoveries: Hurricanes Katrina and Sandy”

Researchers Susan L. Cutter and Christopher T. Emrich at the Hazards and Vulnerability Research Institute at the University of South Carolina published information about recovery from super storm Sandy as compared to Katrina. I think that I participated in submitting responses to their survey.

I noticed that one area not mentioned in the article in Emergency Management “A Tale of Two Recoveries: Hurricanes Katrina and Sandy” was the long term financial impact of the storm on affected residents. In this regard, I can best speak for myself but I know that I am not alone in this type of scenario.

On the day before the storm I was an average small business owner with little debt, good credit, and conservative finances.

Today, now two and a half years later after Sandy, I am financially insolvent, deeply in debt, under severe lifestyle stress that affects marital stability and family relationships and adversely impacts personal health. Here in our corner of rural southwest New Jersey all types of financial assistance for recovery were denied: homeowners insurance, flood insurance, FEMA, SBA, NJ Stronger, and so on, were all denied in Downe Township NJ. I am resolved to the possibility that I may never be able to move back into my home or reopen my business. It feels like the world just abandoned us to die a slow painful death in the wake of the storm. Now we are facing foreclosure by the township and prosecution and eviction by the county health department, we don’t know what to expect for our future. It’s a tough way to live. The mantra adopted by citizens and government officials alike here is “Disaster assistance was a disaster”. Although I’m not an expert on Katrina, it seems that more long term resources and options were available to dedicated hard working residents and business owners who wanted to rebuild. So I wish more attention could be focused on the long term financial impact of the storm on ordinary residents and business people.

First case of fraud in small business accounting

I’m dealing with my first case of likely fraud in a small business client’s bookkeeping. It apparently stems from the actions of an incompetent or inattentive bookkeeper and an overly trusting business owner. I should not be surprised knowing that $2 out of every $100 passing through the US economy is based on fraud of one type of another. I also know that every small business has similar financial vulnerabilities that usually won’t be discovered until it is too late. Yet the thing that strikes me most in this case is that “fraud” doesn’t look like what I expect. The problem does not fit any of the stereotypes that we tend to have about fraud. The offender doesn’t fit any stereotypical risk profile. The motivations for the actions are not clearly defined. In this case, the fraud mostly strikes me as just sad more so than malicious, criminal or greedy.

The fraud in this case likely involves kiting of payroll taxes. The IRS actually gets credit for discovering the problem even if their involvement meant a hefty fine imposed on the business for the late payment of wage taxes. It is unfortunate that most small business payroll tax fines can be avoided simply by using one of the better automated payroll processing services available today. That’s what we will be doing moving forward.

This case reinforces that the overall cost of fraud to the small business is huge even if the amount of money unaccounted for is small. In this case there are substantial penalties for late payment of taxes to IRS (presumably the bookkeeper delayed the payments to cover up) and the cost to investigate the problem is certainly more than a business would normally spend on its accounting operations. The cost to invesitgate, reconcile and secure accounts is still adding up.

A big part of my work in this case will be adding automated protections in the payroll processing system to keep this type of problem from happening again. Fortunately for me it is easy to adopt a payroll system that is reportedly 17 times less likely to incur these types of problems (according to payroll industry sources) than their current system. This will ultimately make me look like a hero to my small business client.

CPE lectures must viewable offline

RESOLVED: From now on I will only purchase CPE courses with recorded lectures that can be downloaded and viewed/listened to on a portable device without an active Internet connection . I am frustrated and will not deal with those that will not let me use my idle commuting hours for this purpose. @SurgentCPE

NJ state workers need to revise their financial plans

(This post follows yesterday’s announcement that the state Supreme Court ruled that the state is not required to make negotiated pension plan contribution. More at

“The future isn’t what it used to be.”

New Jersey state workers and other participants in the state pension system (like teachers) who were promised solid pensions will receive less retirement income than they expected and it it time to adjust personal financial plans to reflect that reality.

Regardless of what you think about Governor Christe, it is time to recognize that the State of New Jersey made promises to its workers that it will not keep. It is time to deal with that simple fact. This is a one-sided issue. It is not a matter of what is fair to state workers or what workers deserve to receive but only a matter of what the state will pay. The sooner that we recognize this simple fact the state workers will be able to adjust to the reality of their financial future.

But all is not lost for workers who combat this bad news with a stepped-up financial planning respoonse. Millions of Americans have faced significant financial setbacks and still enjoyed a comfortable retirement.

Tax planning at the time of layoff

An accountant shared a sad story that reminds me of the need for tax planning by ordinary folks.

A 40 year old middle income single guy was laid off from his corporate job last year but apparently did not seek professional financial help until now. He took money out his 401(k) for living expenses without doing a rollover first. He purchased a health insurance policy on the exchange and the agent erred on the calculation of the premium tax credit. He is now late filing and paying about $4,000 in taxes and penalties that could have been avoided if he had met with a financial adviser earlier.

Part of the problem, I suppose, is that there are few systematic reminders to prompt a person leaving their employment to huddle with a tax adviser in order to save money and minimize the impact on the following tax return. Solid financial planning can typically result in the saving of several thousand dollars for a person in this situation. In an ideal world, this would be an “automatic” part of the severance process.

An article that I wrote a few years ago at the peak of the recession titled “Surviving a Layoff” dealt with this topics. The article received several hundred thousand web page views back then but is not as popular today.  The concepts in the article are still valid and so maybe I should revise and republish it.


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