How you invest your life savings is one of the most important decisions you will make in your entire life. I’ve worked with thousands of families spanning over two decades in the financial services industry. I’ve witnessed portfolios go through the dot com bust, the 2008 stock market crash, 9/11 and most recently the extreme volatility of the corona crisis. What I know to be true is that not all financial advisors are created equal and not all financial advisors are created ethical. In this blog, let’s walk through the some questions to ask a financial advisor, so that you know you are working with the right financial services firm and advisor for you.
WHO ARE YOU SELLING FOR?
I entered the financial services industry right out of school in the 90’s. I was young, eager and ready to make a difference in peoples investment portfolios so they could retire well and happy. My first job was at a big brokerage house. I worked hard, I cold-called, networked with as many people at as many events as I could. I was promoted quickly but what I learned in those promotions is that sometimes ethics isn’t always at the forefront of business practices.
Once I was promoted to an office, my boss came in and told me, this week your team needs to sell X amount of this product. The next week same thing. The following week, if it wasn’t that product it was another product that had to be pushed. I quickly realized that making something suitable for a financial client was a lot different than offering them the best financial investment option for them. I spent a great deal of time the next six months researching the Fiduciary vs Suitability standard. What I learned was I had to leave that brokerage house.
In 2002, I learned that being a Fiduciary Financial Advisor was the only standard of financial advisor I wanted to be ever again. So I left the brokerage house and established Strategic Wealth Designers. A fiduciary advisor does what is in the best interest of the client first and foremost always as governed by the SEC. I wanted my clients to always know that I was working in their best interest and I was not offering them a certain product because I was told to or because I was paid more. Which brings me back to the phrase of “we do better when you do better.”
WHAT QUESTIONS TO ASK A FINANCIAL ADVISOR?
Some financial services firms like to tout or imply they are simply doing well when you are doing well but that isn’t a transparent statement. If a portfolio is crafted without safety and full exposure, I would argue that is not in the best interest of the client. I would also point out that if the market goes down like we’ve seen in this wild 2020 that they still charge a fee and make money and the client just loses. Many times the client pays the fee and has no safety nets in place to properly protect their retirement accounts. So don’t fall for the we only do well when you do well trap.
The first question to ask when working with a financial advisor: Are you a fiduciary?
The Department of Labor has worked to make the standard the fiduciary standard and advisors could risk losing their license if they aren’t following those guidelines. Even if they are following those guidelines the second key will give you the client the most freedom while tying the hands of most big box brokerage houses.
INDEPENDENT ADVICE IS CRUCIAL
The second question to ask a financial advisor is: Are you an independent advisor?
You want to work with a firm that is independent to suggest or recommend the best financial service offerings to you. Many are tied to one financial group with those certain offerings. For example, say you walk into a big box shop and you say you want to own mutual funds. Okay, so they put you into 10 mutual funds and when your statement comes in the next month or quarter you look how you did. What you will notice is that almost every single time, those funds that you are in, are the firms mutual funds. Now they might have a really good mutual fund but their are 10,000 mutual funds in the world, they don’t have all the best mutual funds but they only put you in theirs and that’s not independence and that likely isn’t best for you.
At Strategic Wealth Designers, we don’t typically recommend mutual funds but if we did, we have the complete landscape of those funds to choose from. Working with a wealth management company or financial advisor who isn’t independent will limit the playbook from which you can operate in. Unfortunately, most consumers don’t understand this happens. Many will spend years working inside limited options for their investment portfolios. This isn’t just with retirement plans are brokerage houses though, this happens at your employer sponsored 401K too.
There are exceptions but most 401K or 403B retirement plans have very limited options inside of them. The bigger the company you work for, the more likely they have established a relationship with a certain firm to oversee that retirement plan. It is their role to operate in a fiduciary manner for that employer but once again there won’t be the independence to work with the multiple of resources outside of that one 401K plan. In summary, ask if the advisor is a an independent fiduciary financial advisor. Finally, and equally important, you’re going to need to know what they charge.
AVOID HIDDEN FEES
I believe for 99% of Americans working with an independent fiduciary financial advisor is critical to getting your retirement planning correct. Working with a professional in wealth management, when done properly can be the difference of sailing through retirement or running out of money to cover the bills before you die. We know many in the United States have a saving problem. For those that get that part right, the big concern we see too often is the cost families are paying for financial advice.
The third question to ask a financial advisor is: What’s the cost?
Make sure you understand how much your fee is going to be for the financial service. Make sure it’s clear what all the fees are. Many firms will only disclose the management fee and the 12-B1 fee to you. That doesn’t mean that is the only fees they are charging, rather it is the only fees they are outwardly disclosing to you. Trading costs, hidden fees inside variable annuities or mutual funds, marketing costs etc. All these fees show up in that prospectus once a year but most if not all of you don’t read it but it’s costing you!
The average investor in or near retirement should have an all-in cost of at or near 1% on the entire portfolio. There are some exceptions but if you nest egg has grown to $500,000 or $1,000,000 you should not be paying more. Just .5% difference every year can be a massive burden on that portfolio to overcome, especially if you are dealing with the other potential problems mentioned above. The average couple sees one spouse live to 90 these days and it’s important that you get there without overpaying a financial advisory firm in fees. Here’s a final recap of the 3 financial advisor keys to look out for.
In summary:
Make sure you are working with a firm that isn’t pushing product but building a financial plan in your best interest — a Fiduciary Financial Services Firm
Seek out an independent wealth management firm to get their take on financial investment offerings available to you. Second opinions don’t cost and might save your retirement plan.
Watch the fees. There are so many great questions to ask a financial advisor beyond the basic “what does it cost?” Ask the financial advisor about other costs that might only show up in the prospectus or some other fine print they hadn’t discussed prior.
