Even Small Nest Eggs Need AdviceBy RON LIEBERPublished: August 8, 2008
Here’s the sad truth of the financial advice industry: The clients most in need of unbiased help often get the least access to competent assistance.
The problem comes down to a basic pricing issue. Financial advisers seeking to avoid conflicts of interest prefer to earn money solely from fees customers pay them, and not from mutual fund or insurance commissions.
The neediest customers, however, don’t have a lot of money to pay for help. People with no savings, lots of debt and many questions may not be able to pay a financial planner $150 an hour.
Even if you have a small portfolio, advisers may not want to take you on, since they can’t make a living charging a 1 percent annual fee on a $25,000 balance. Citigroup politely refers to this crowd as the “emerging affluent,” glossing over the fact that they have always been the great unwashed of the financial services industry.
Now, however, Citi’s global wealth management unit has come up with a new way to try to serve this vast untapped market. It’s called myFi, which is short for My Financial Life. The idea is to use the Web, along with call center teams that will be led by certified financial planners, to help people make sense of and then improve their entire financial lives, not just their investments.
The catch? You may have to be willing to pay a monthly subscription fee. MyFi uses a “wellness” theme in its pitch. Plenty of people pay $50 or $100 a month for gym memberships or personal trainers. Shouldn’t it be worth that much to keep your finances in shape, too?
Last month, I checked in with a myFi adviser, incognito, to see.
MyFi currently has about 20 advisers in Citibank branches on Long Island in New York, though it hopes to place some in more branches eventually. It’s also using direct mail to pitch certain Citi credit card customers, who then contact myFi through its two call centers. Eventually, Citi may also market to the employees of companies whose stock plans it administers.
Clients of Citigroup’s Smith Barney brokerage unit with less than $250,000 in assets at the company may also be hearing about myFi as well. The company is encouraging (but not forcing, it says) its brokers to move those clients to myFi, since it wants advisers focusing on high net worth customers. Thus, there’s a real danger that myFi could end up feeling like a dumping ground for second-class clients (and employees).
With that chip on my shoulder, I met with Michael Rachwalski, who works in one of Citi’s bank branches in Great Neck, N.Y. I was taken aback when Mr. Rachwalski told me that he hadn’t graduated from college; he had taken time off to get experience in investments and is now going to school at night. Still, he’s acquired three of the basic securities industry licenses and completed training as a retirement specialist.
He won me over when he made fun of the mutual fund salesmen crowding the offices of Smith Barney brokers, likening them to pill pushers from pharmaceutical companies. His view is that clients are better off in lower cost investments, like exchange traded funds that track market indexes, than they are trying to beat the market.
The day after our meeting, Mr. Rachwalski Googled me and blew my cover. But the next steps in the myFi process would have gone something like this: You set up an account at myFi.com, where a dashboard of sorts pulls in information from your credit and debit cards, plus investment and other accounts. That gives you — and myFi — a better sense of where you stand and how to improve that standing. This part of the site won’t be working for at least four months.
Then, someone from the myFi team helps create a blueprint for action, say, consolidating credit card debt and creating an emergency fund. Eventually, myFi specialists, in areas like life insurance, will be able to help with specific tasks. MyFi will e-mail customers educational materials periodically, and clients can call in as often as they want.
All of this amounts to a lot more than peddling investments, which is Smith Barney’s specialty. “This is not a product-centric offering,” said Andy Sieg, the managing director in charge of myFi. “It’s about how I get well and stay well financially.”
Helping clients achieve this sort of financial enlightenment isn’t going to be easy when the conversations take place primarily over the phone. MyFi will live or die based on the quality of its staff, who need to behave like coaches or personal trainers in the company’s view. Mr. Sieg said that the average team member has seven years of experience, all of them have securities licenses of various sorts and each team will be led by a certified financial planner (though not every one is now).
MyFi’s director of financial guidance is Jonathan Clements, my former colleague at The Wall Street Journal, who regularly beat up on brokers like those at Smith Barney over the years. His presence gives the entity a conscience it might not otherwise have had.
One question that you should always ask when looking for a financial adviser is this: How do you pay for their service? MyFi advisers earn a salary plus a bonus based in part on customer satisfaction and client acquisition. They make no extra money, however, for pushing Citi mortgages or credit cards or directing client money to particular mutual funds.
This is a crucial point, given the history of other call center operations. In 2006, Merrill Lynch paid a $5 million fine after the National Association of Securities Dealers accused it of, among other things, holding sales contests that rewarded employees for putting client money in Merrill’s own mutual funds.
Mr. Sieg oversaw the Merrill call center from 2000 to 2002 before joining Citi in 2005. He chalked up the problems to growing pains and said that Merrill had solved them long before being hit with the fine. He added that Citi has no proprietary mutual funds anymore, so the temptation to put customers in them doesn’t exist for the myFi staff.
So how will myFi make money? Right now, myFi’s fees look like those of a standard brokerage firm. Soon, however, it will test various monthly charges for myFi services. My guess is that the monthly fee will include all handholding, investment advice and trading costs.
Will people pay $75 a month for financial advice? Vernon Hill, who built Commerce Bank before he was ousted last year, was critical of myFi in a recent bankstocks.com post. “Customers don’t want it,” he said in an interview. “My experience at Commerce was that customers want clear, simple products to get banking done. There is no record of success of banks giving financial advice.”
If he’s right, myFi’s future may depend on whether potential customers perceive it as a bank offering or an advisory service that is its own unique entity. MyFi’s brokerage competitors may help people with their investments. But any other one-on-one financial advice, if it’s offered at all, is generally available only to high net worth individuals.
Whether those who try out myFi will stick with the service will then depend on the quality of that advice. Mr. Sieg says the company is still working out the extent to which it can act as a fiduciary, the standard for someone who always acts solely in the client’s best interest.
MyFi intends to be a fiduciary as far as client investments are concerned. What isn’t yet clear, however, is how far it has to go to be a fiduciary when, for example, advising someone who needs a new mortgage. Can myFi advisers fulfill their duty by simply reminding clients that competitors like Chase offer mortgages, too? Or must it direct them to a mortgage broker who will scour rates from a dozen lenders? The myFi staff is huddled with lawyers trying to figure this out.
MyFi could make a lot more money for Citigroup by pushing customers toward Citibank accounts, mortgages and credit cards. If it can resist this temptation, however, it has the potential to help plenty of people who are just starting out, just starting over or simply not wealthy enough to attract attention from anybody else.
Originally found at the NYTimes