By Gary Silverman, CFP®
For some reason, people regularly ask me how to choose a financial advisor. After my stock answer of “choose me,” I begin by asking them why they want one. Financial advice means different things to different people.
One such person told me that he had some stocks that he wanted to buy and wanted me to buy them for him. Well, that’s not giving financial advice. He did his own research and wasn’t interested in other aspects of planning. He didn’t want advice; he just needed someone to buy stocks through. For him, calling up (or logging into) a discount broker satisfied his needs.
A recently married woman discussed setting up a trust for her kids and making sure that the money she brought into the marriage made its way to her kids upon her death. She did need some advice, just not financial. She wasn’t interested in investments, retirement planning, or any other sort of financial services. I referred her to an estate attorney, the ones who specialize in things like drafting wills and trusts among a host of other estate-related issues.
If you are looking for someone to help with financial planning, investments, and insurance, keep reading. Deciding if you require a financial planner, stockbroker, insurance agent, or CPA for your needs requires some thought. There is no one answer. You may already have trusted professionals you are working with and just need to fill in some gaps. Maybe you’re handling the investing yourself, but need someone to help determine if you’re saving enough for retirement. You may want a comprehensive plan by a generalist who will act as the quarterback and call in specialists as necessary. Or you may want to choose specialists and act as your own quarterback.
As you can see, before you begin doing homework on the particular professional you’ll use, you must understand what your goals are. Do you, like in my examples, need a place to put the investments you have already researched? Do you need help with your estate? Are you struggling with cash-flow and debt issues? Wondering if you can afford to retire? Want to save some money so your kids can go to college and support you for a change? Did you get a large inheritance or win a jackpot and need guidance on how not to just blow the money? Are you worried about too high a tax bill? Is it life, health, disability, long-term care, and other insurance needs that keep you up at night? The answers to these questions will lead you to the professional(s) you will need.
Investment advisor, financial planner, financial advisor, stockbroker, registered investment advisor, insurance agent, retirement planning specialist, personal financial specialist…what the heck do all these mean and what do they all do? Heck if I know. You see, some of the designations above require specific licenses, some infer a certain level of expertise, and some don’t have any requirements to them at all.
Instead of going through a very long list, with dozens of possible titles and designations, I’m going to concentrate on those that may have a broader scope of expertise—what you might be looking for if you were asking for a financial planner.
In the world of financial planning there are many designations used, but there are three that I hold in highest regard. The first is the one I carry; I am a Certified Financial Planner™ professional or CFP® professional. The other two that earn my approval and respect: the Personal Financial Specialist (CPA-PFS), and the Chartered Financial Consultant® (ChFC®). Each require formal education, testing, experience in order to be licensed, as well as a commitment to continuing education to stay licensed.
You can find more information on all of these online. The CFP Board website includes the CFP® certification requirements as well as a way to find a Certified Financial Planner™ in your area (www.cfp.net/search/). The American Institute of CPAs (www.aicpa.org) has an overview of the steps CPAs can take to get the Personal Financial Specialist Credential and where to find one. Finally, for information about the Chartered Financial Consultant®, go to www.chfchigheststandard.com.
To me, each has their own “flavor”. I find that many Certified Financial Planner practitioners tend to come from a background in the investment field, or from the growing number of college programs specializing in financial planning. The Personal Financial Specialist is actually just part of the title: the full one is Certified Public Accountant-Personal Financial Specialist (CPA-PFS). And as you might suspect, CPA-PFS holders have a certain tax flavor to them. On the other hand, Chartered Financial Consultants® (ChFC®) often come out of the insurance world.
Those flavors don’t make one better than another, but do give you some indication of who you might want to shop for first. If you are mainly interested in investing or general financial planning, then maybe the CFP® professional matches you best. Have issues centering more on taxes? Then the CPA-PFS should be on your short-list. Have general needs, but specific problems in the area of insurance? I’d consider holders of the ChFC®.
That all said, any one of the three can handle most any of your issues, depending on the specific expertise of the advisor. So, just because they may lean toward a certain “flavor,” their tastes are influenced by their individual qualifications. Because of this, I wouldn’t limit myself to considering just one designation.
What to Discuss With Your Potential Financial Advisor
You’ve found an advisor or three who look like they might be a good fit for you…but how do you know? First, I’d schedule a meeting. Most financial planners and advisors will offer a free introductory meeting so that you can kick their tires and they can see if you’re the kind of client they want to work with. Some will charge a nominal fee, but will give advice during the session.
Going into the meeting, the first thing I’d do is to shut up and see what questions the advisor has for you.
“But Gary, if I’m looking for a financial advisor, shouldn’t I be the one asking the questions?” Oh, don’t worry, you will, but first get a feel for where the advisor is coming from by seeing what they’re interested in knowing about you.
You see, some advisors are like the guy whose only tool is a hammer…everything looks like a nail. So if they start explaining how you need a living trust, more life insurance, a particular stock, or that you need to go through some training classes even before they even know anything about you, leave. That’s not an advisor, that’s a salesman. A pretty poor one, at that.
Now for your questions. Assuming you’ve done your homework and know what kind of help you are looking for, ask the potential advisor what experience they have in that area of personal finance. They may sound qualified, but if they have never worked on a case like yours, you don’t want to be their guinea pig.
Ask them their qualifications, what it took them to earn those qualifications, and how they maintain their level of expertise. There are many titles and designations that have no requirements other than working long enough at a particular company, or sending in application and a filing fee, sitting through a few hours of a workshop, or passing a very simple test.
Do you want to work with the type of person sitting in front of you? There is no truly wrong answer to this one. Some offices will have a single advisor as your specific point of contact. Others employ a team of people. And some will hand you off to whoever has the specific expertise you need at a particular time. All of these setups work—you just need to be aware of it before you hire them.
Ask, “Have you ever been disciplined?” No, we’re not worried about the spanking they got when they wrote on the upholstery with crayons, but rather whether any of the professional organizations or regulatory agencies they are licensed under have ever found them less lawful or ethical than you’d like. And don’t take their word for it, check it out yourself. The SEC has information and links to direct you to important information about brokers and investment advisors at www.sec.gov/investor/brokers.htm.
Oh, before you leave you probably want to find out what they’re going to cost you.
How Financial Advisors Get Paid
You’ve come to the point where you think you’ve found a financial advisor who can help you with your problems. Now comes the time you’ll want to find out the cost. A simple way to do this? Ask, “What will this cost me?”
There are three typical ways your financial advisor might get paid.
Commission: Depending on what you buy from the advisor or the company, they are paid a percentage of the value of the product sold.
Fee-Only: These advisors are paid either on an hourly basis or they charge a percentage of the investments they’re managing for you or a percentage of your net worth. They do not receive commission from any product sales. I’m one of these.
Fee-Based: The advisor charges in the same manner as Fee-Only, but may also make a commission on investment or insurance products you buy. The fee may or may not be reduced based on the commissions received.
So, are commission-compensated advisors biased against their clients’ best interests, and the fee-only advisors not? That’s a common belief, but as a fee-only advisor, let me assure you that this is not true. While there are a few more issues in the commissioned world, trust me, there are biases in both situations. I’m familiar with many advisors paid on commission who put their customers’ interests ahead of profit, and I’ve seen former fee-only advisors who didn’t; they’re now sitting in prison for theft and fraud.
In Washington, there’s a lot of discussion about something called a fiduciary standard. Some of this has become law but political battles are still being fought over it as I write this so I’m not sure how it will all shake out.
A fiduciary is required to act in the best interest of clients, something the proponents of the standard say should be more important than bigger advisor paychecks. Only a subset of financial advisors were required to act as a fiduciary. The rest were held to a lower suitability standard, where advisors ensure their recommendations are suitable to your situation even if they feel another course of action is better for you. Even under the new law some of the fiduciary protections can be watered down via disclosures given to a client. You might want to read those if that comes up.
Arguments abound in the industry as to whether all financial professionals should adhere to the stricter fiduciary standard. Some believe it would cause the middle class to be effectively ignored by the industry. That’s not true. I work under the fiduciary standard and serve dozens of middle-class clients. But let’s not argue that now.
Whether an advisor must follow a fiduciary or a suitability standard, you can ask this question: “Regardless of a requirement to act as a fiduciary in regard to me, will you always put my interests above your own?” You see, there are financial professionals who are held only to a suitability standard that nevertheless puts their clients first. Their company may not allow them to put this into writing, but that doesn’t stop them from acting in a fiduciary manner.
Personally, I think you should request that they, in action, act as a fiduciary. But that’s up to you.
Either way, one last question you need to ask your prospective advisor: “How do you make money from me?”
Be especially observant on how they answer this question. If the advisor gets fidgety, defensive, or side-steps your question, keep asking. If you hear, “I don’t cost a thing,” keep prying until you can trace how money makes it from your hands to theirs. Trust me. None of us works for free and the money we earn somehow someway comes from you.
One more thing to remember about investment professionals…
I’m going to let you into a little secret. Investment advisors are human. This is true regardless of whether they work for a big-name broker, an insurance agency, or are independent. Each and every one of them is human. And that’s a problem.
I’ve talked about a strange phenomenon among individual (meaning non-professional) investors. They seem to have a bias to get out of the market after it’s gone down and a penchant for getting into the market after it’s gone up. While they still, on average, make money, they don’t make near the money they would have if they had just left their investments in place.
Enter the professionals. You might call them financial planners, financial advisors, investment advisors, or some other such title (I’ll answer to just about anything). They do this for a living. You’d think they must be immune to the emotions brought on by a volatile—these days very volatile—market.
You’d think that, but you’d be wrong. You see, it’s that human thing. Humans are emotional creatures. It’s wired into our brains.
In a Wall Street Journal article, Jason Zweig talked about a study done by TD Ameritrade. They looked at what percentage of cash and bonds was being used by advisors. In October of 2007, which was the high point of the stock market before the financial crisis, advisors had 26% of client assets in bonds or cash. But on March 9, 2009, which was the market low during the credit crisis, those cash and bond holdings had risen to 51%.
Now, there may be some extenuating circumstances. Advisors have to follow their clients’ orders, and some clients told their advisors to sell all of the stocks in their portfolios. Also, if they did nothing, the percentage of stocks would have dropped, since the value of stocks plummeted to less than half of their high values during that time period.
But even taking that into consideration, and given my own observations of what many investment professionals did, there was a tendency toward amateurish behavior on their part; many advisors moved to a safer configuration after the markets had gone down.
They got scared.
This isn’t to imply that all investment advisors do a poor job of investing; and it doesn’t mean that all, or even a majority, of them are not doing a professional job. But it does show that they are human after all, subject to the foibles that plague us all.
If, after all of that, you’re in the market for an advisor I’d be remiss if we didn’t share some thoughts on using Personal Money Planning for your financial advice needs.
One question people ask us: What does Personal Money Planning have that others don’t? It’s difficult to pinpoint. After all, there are hundreds if not thousands of financial advisory firms in the country that serve their clients well, are honest, build a great investment portfolio, follow the tenets of financial planning, and put their clients first. We are among those.
However I can say when it comes to investing, while we are not the exclusive holders of such, there are three traits that serve us and therefore our clients well:
Emotional Neutrality: I can be opinionated. I can be emotional. I get excited about many topics (ask me about the sport of curling or the game EVE Online sometime). But when it comes to investing I get rather robotic. Maybe it’s because I’m an introvert, but the crowds stampeding around affect me little. If my spreadsheet says sell, I sell. If it says buy, I buy. A company that has done great does not impress me. One that does poorly does not disappoint. I may be wrong a lot in the short-term. But that’s better than being wrong in the long-term.
Discipline: Even when I get a good “gut” feeling on a client’s tolerance for risk, we still run a risk analysis on them. While I may get an idea that an asset class will continue descending into the abyss, if it exceeds our tolerance bands, we begin to build the position back up. While I may want to invest more in an area of the market, if cash flow needs dictate we leave the cash alone, we leave the cash alone. It’s our discipline that enforces our emotional neutrality.
Flexibility: Being able to change is critical for long term survival. Success can breed complacency. We continue learning, challenging our notions, asking what could go wrong from here and what could go right. Our target bands have changed over the years. The asset classes we use in our portfolios and their target weights have also changed. Discipline keeps us from doing this in response to current conditions, but rather due to long-term trends. Flexibility can be a great investment virtue, while stubbornness can drastically shorten an investment career.
Still, there are hundreds of firms across the country and thousands of advisors that do the same. So what’s different? We love what we do, we’re rarely bored, and we have a great sense of humor. But what makes us and everyone else different is how we connect to you. Come in, sit a spell, ask your questions, and see if you like what we say and how we say it. Can you be free and open with us when it comes to your finances? Does it seem like we can be open with you as well? Do we connect? That’s the difference. That’s what makes us a good fit or a bad one.
We’re certainly not for everyone. But we might be a good match for you.
Contact us today if you want to find out.