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On money

Keep your financial adviser honest

By HELEN HUNTLEY
Published July 24, 2005

I received a marketing piece recently from a financial adviser bragging about the fact that his clients paid no commission. He claimed all their money went right to work for them.

When I pointed out that the statement is misleading, the reply was, "It happens to be true. We do not charge fees to our clients, and our commissions are paid to us directly by the various companies that we represent."

That may make a great sales pitch for unsophisticated investors who don't understand how these things work, but it's snake oil as far as I'm concerned.

In the example I'm talking about, the financial adviser is selling annuities. The commissions are paid by the sponsoring company, but where does the company get the money to pay the commissions? From investors.

With variable annuities that fluctuate with the stock and bond markets, the fees are revealed as annual expense charges. With so-called fixed annuities, the fees are hidden. They are recovered by paying investors lower interest rates after the initial rate guarantee expires. Investors who drop their annuities within the specified time period (often five to 10 years or longer) pay a surrender charge.

It would be more honest if the financial adviser advertised, "We only sell products on which the sponsoring company pays us commissions" and "We recommend the same investment to all our clients regardless of their individual needs."

The next time a financial adviser tells you there are no commissions or fees, ask how the adviser is compensated. I don't expect advisers to work for free, and neither should you. I do expect them to be honest.

I am a single mother of two little girls and am tired of never having any money. I live paycheck to paycheck like most Americans. My daughters are away for the summer, and I have taken a part-time job to see if I can get myself out of a little bit of debt. I was also considering getting into stocks. What, if any, advice can you give me as far as what stocks to buy?

Congratulations on your decision to improve your financial position. But if you live paycheck to paycheck, you should not buy stocks. Your first priority should be to create a better financial foundation for your family. Here's my advice on what to do with the extra money you earn:

First, pay off all your credit card debt.

Then open a money market account and save the equivalent of three to six months of pay so you have money for emergencies. The lack of an emergency fund is a major reason people get into credit card debt.

The next step is to participate in any retirement savings plan your employer offers. Ideally, you should be saving at least 10 percent of your gross income toward retirement. Start with 5 percent if 10 percent seems impossible.

Of course, underlying all of this is the need to find ways to reduce your expenses so you no longer live paycheck to paycheck.

Recently you wrote about building a little "wiggle room" in your budget. Your essential category included taxes, groceries, housing and other obligations. Somehow you missed the blessing of tithing. Christians put God first and take one-tenth off the top of their gross earnings and take it to church.

My column suggested keeping essential expenses to less than 60 percent of your pretax income. The list of essential expenses was meant to be suggestive rather than all-inclusive. If you consider tithing essential, then by all means make it part of your 60 percent.

This allocation leaves 20 percent for discretionary expenses, at least 10 percent for retirement savings and 10 percent for other saving. If you are retired, you could allocate the retirement savings percentage to your tithe.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 19, 2005, 16:35:47]