Key Takeaways
Everyone’s calling themselves a “financial planner” these days. Most are not.
Here’s what to look for in a true fiduciary advisor who puts their clients’ best interests above their own.
Know how your advisor is being compensated for the services they provide. Never apologize for asking. If he or she won’t tell you clearly – move on.
Now and again I get irritated when I see ads from large banks and brokerage firms touting their financial planning services. With so much uncertainty on people’s minds, everyone’s using the term “financial planner” these days. Everyone promises to get you on a straight line to retirement and is anxious to help you meet your goals. In reality, there are many different shades of financial planners. It’s important to understand the distinction so you can find the right financial partner for your family’s situation. Large banks and brokerage houses have access to deep research and a wide variety of products. That’s great, but they tend to use templates for all but their very wealthiest clients. When you first sit down with them, they ask you a standard list of questions. Based on your responses, they run through the model and tell you: “This is how much you’ll need to retire.” It’s a cookie-cutter approach.
There’s no tweaking or customization for your specific needs like you get with a comprehensive fee-only fiduciary advisor, such as a Certified Financial Planner (CFP)® who is a member of the National Association of Professional Financial Advisors (NAPFA) or the Certified Financial Planner Board.
In many ways, the large banks and brokerage services are like the discount gym chains. Imagine walking into a huge gym and being told there is only one type of men’s fitness class. Everyone from recent college athletes to lifelong couch potatoes are put into the same group, lifting the same amount of weight and doing the same number of reps and cardio. How long will most people stay in that class if they don’t feel their needs are being met and they’re not seeing the results they hoped for?
Compare that to comprehensive wellness centers that provide one-on-one consultations and try to get to know your medical history, unique goals, dietary needs, and time available to commit to your fitness regimen. That way they can put a customized plan together that addresses your needs and works on your timetable. The same goes for financial planning. Like good trainers, good financial planners help you think about your future in ways you may have never considered before. Then they apply that knowledge honed from years of experience and other client situations into a structure that is customized to your situation. It’s a partnership more than a series of transactions or pay-by-the-hour meetings.
Picking a Planner
Selecting the right firm to entrust with your money is not a decision to be taken lightly. I know it can seem like you’re wading through an alphabet soup of credentials. For a variety of reasons, you’ll want to look for fee-only planners who have a CFP credential because they’re held to a higher “fiduciary standard.”
That means they must always act in the “best interests” of their clients and put their clients' interests above their own. Many people helping you at large banks and brokerages aren’t held to the same fiduciary standard. Legally and ethically they only have to make recommendations to you that are “suitable,” i.e. not necessarily in their best interests.
As you start interviewing various types of advisors to help you, there are several important considerations to keep in mind:
1. How the advisor is compensated? Fee-based advisors – which you find at many large institutions -- are paid a commission for any trades they make on your behalf and for any products or services they recommend to you. Because of their compensation plan, they’re incented to make sure you have a lot of activity in your account. They can sell annuities and insurance in addition to investment products—but they’re often required to recommend only their own company’s products or services. Again, they’re not required to be fiduciaries, so their recommendations only need to be “suitable” for your situation, i.e. not ideal. If you decide to work with fee-based advisors, make sure they are clearly explaining all the commissions and fees you are paying for. If they won’t tell you, move on!
Other advisors charge by the hour, just like attorneys do. An hourly advisor can make sense if you’re a do-it-yourselfer who just needs occasional advice or a second opinion about a financial challenge or opportunity you’re considering. However, hourly advisors will charge each time you pick up the phone or come in to see them. There’s not much room for getting to know you better.
With a fee-only advisor, you pay a flat percentage of the assets you have under management at the advisor’s firm and they’re free to recommend the best product or service on the market for your particular situation. One percent of assets under management is a typical annual fee amount. If the value of your assets goes up, you pay a little more in fees. If the value of your assets goes down, you pay less. Unlike hourly advisors, you can call or meet with fee-only advisors as often as you wish. It’s all part of the flat annual fee.
Further, fee-only advisors are proactive. Instead of waiting for you to contact them, they do regular reviews of your situation with their colleagues to make sure you are on track. They will reach out to you if they suspect an adjustment needs to be made based on a changing life circumstance. Hourly and fee-based advisors aren’t incented to provide that level of service.
2. Breadth of services offered: Investment management or comprehensive wealth management?
These two criteria are very important to consider when evaluating a trusted partner to help you manage your family’s wealth. Investments are a very important part of the wealth-building and retirement puzzle, but they’re not the only part. We find the comprehensive approach provides the best outcomes over the long run. Comprehensive planners will make sure every area of your financial life is in good order, not just the investments. In addition to investments, they provide expert advice on estate planning and coordination, insurance planning for property and casualty as well as life, long term care, and disability planning, business succession planning, tax planning, and more.
3. Client Load
At larger financial institutions, it’s not uncommon for each “planner” to have a roster of 500-plus clients. How can you possibly have in-depth relationships with that many people and know what’s important to them? At fee-only firms, by contrast, each advisor has only a few dozen clients to manage. This allows them to get to know everything important to each client including what their kids and grandkids are up to and how that influences their money issues, goals, and financial plan.
4. Staff Training and Turnover
It’s really important to compensate the staff well, and create career tracks so they can expand their knowledge and expertise, and stay at the firm. It’s an integrated relationship. Compare that to the high turnover of a large financial institution in which you are explaining your situation from scratch to a new advisor every year or two.
Conclusion
I get frustrated when successful people assume the only advice they can get from a financial advisor is cookie-cutter. They don’t realize they can (and should) avail themselves of a true, comprehensive financial plan from advisors who take the time to know their family and their unique financial and life situation. Ironically, the customized, comprehensive plan from a full-service advisor often ends up being less expensive than the cookie-cutter approach.
If you or someone close to you has concerns about your portfolio balance, retirement readiness, or advisory fees you are paying, contact us any time to discuss in more detail. We’re happy to help.
ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth