If you’ve made the commitment to invest in yourself by assembling a professional team around you, it’s worth taking the time to ask: are you getting the full value for the price you’re paying? And are there competencies your advisor might be missing?
Here are some questions that can make sure your financial advisor is not only someone you can fully trust but also someone who’s doing the most for you.
Listen now and learn:
- 6 questions to ask your advisor
- The importance of getting a fiduciary commitment in writing
- How an advisors compensation impacts their advice
Listen Now
Show Notes
Before today’s episode, I wanted to alert you to an upcoming opportunity being exclusively offered to my email subscribers.
While you can always schedule a time with me to learn more about working with Plancorp at thelongterminvestor.com or peterlazaroff.com, my availability is somewhat limited.
But once a year I clear my entire calendar to give my email subscribers priority access to schedule a 30-minute discovery call in which we can explore whether or not hiring Plancorp is a good fit.
Basically, this 30-minute call is a low-commitment way to assess whether Plancorp might be a good fit for you.
If we both agree it makes sense to explore a relationship more deeply, the next step is to build a first draft of your financial plan to present in a 90-minute follow-up meeting. This allows you to better understand what it’s like to work with Plancorp and allows us to showcase how our financial planning expertise can help you.
If we decide to move on to that stage, I will build you a custom wealth management team based on your specific situation and introduce you to them over email. They will assist you in collecting the necessary information to prepare a draft of your financial plan. Depending on how quickly you provide us with information, this step takes one to three weeks.
When we present your financial plan in the meeting itself, we leave plenty of time for you to ask additional questions. Whether you decide to hire us or not, our goal is to provide you with valuable insights into your finances. At the conclusion of your 90-minute meeting, you should have a good sense of what problems we can help you solve, how we can make your life simpler, and how we can help you make the most out of your wealth.
The fall is one of the best times to hire an advisor because a lot of important tax opportunities need to be assessed before the end of the calendar year. Plus, a down market makes for some investment optimization opportunities as well.
Again, this priority access is only offered to my email subscribers, so visit thelongterminvestor.com to get on the list.
Now on to the show.
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Working with a financial advisor is a great decision. I’m obviously biased, but think about it…
Would you argue a serious case about a legal document in a court of law without an attorney? Would you opt to have surgery from someone who wasn’t trained as a medical professional with expertise in your specific area of concern?
Of course not.
And if you follow the same logic, working with a good financial advisor can improve your chances of financial success. Not only will a good financial advisor optimize your finances, he or she can save you boatloads of time and stress.
We know financial advice isn’t cheap – and that’s for good reason. If you’ve made the commitment to invest in yourself by assembling a professional team around you, it’s worth taking the time to ask: are you getting the full value for the price you’re paying? And are there competencies your advisor might be missing?
That’s the topic of today’s episode….
Here are some questions that can make sure your financial advisor is not only someone you can fully trust but also someone who’s doing the most for you.
1. Will you put your fiduciary commitment in writing?
I’m starting with the most important question first.
Different financial professionals are held to different standards of care. Some work under the fiduciary standard while others operate under a weaker standard of care.
The fiduciary standard requires that an advisor put a client’s interest first. A new regulation called Regulation Best Interest has muddied the waters in a way that I think is really harmful to the end investor.
I recently wrote a blog post about it that I can link to in the show notes to better understand the differences, but the bottom line is that you should want your advisor to act as a fiduciary at all times.
The critical part of that sentence is “at all times”. There are some people that act as a fiduciary when developing a financial plan or investment allocation, but then act under a different, lesser standard when implementing the recommendations.
Attorneys and accountants are required to put the interests of their clients first. Medical professionals put their patients’ interests before their own. Why should financial advice be any different?
It’s unfair to expect the average person to know when an advisor is or isn’t acting as a fiduciary, and most people using a financial professional struggle to understand that their advisor might not act (or even be obligated to act) in their best interest.
But the fact remains that, at this time, there are different standards of care for financial professionals.
Therefore, act accordingly: ask your advisor to put their fiduciary commitment in writing. If your advisor isn’t willing to put their fiduciary commitment in writing, then they can’t be held accountable for working in your best interest.
2. Will you run a tax projection?
While an accountant can obviously run a tax projection on your behalf, why pay additional fees to another professional when such services should be included with a high-quality financial advisor?
At a very basic level, tax projections eliminate surprises, which can help you feel more informed and have a better understanding of your situation before needing to file your return come April. All your advisor needs is your most recent tax return (sometimes two years of returns is useful) and your most recent pay stubs.
But a projection can do much more than simply minimize surprise. With the increased standard deduction in the 2017 Jobs & Tax Cut Act, tax projections allow you to make better decisions on when and how much to contribute to charity.
Bunching deductions (including charitable deductions) in a high income year maximizes the income tax benefit, for example – and a detailed tax projection can help you decide whether it makes sense to bunch several years of charitable contributions into one year.
Another good use of a tax projection is better understanding the implications of doing partial Roth conversions in the years leading up to your age 72 (when you will be required to take Required Minimum Contributions).
Tax projections also help you control the timing of income and deductions, which is especially beneficial for people with equity compensation or business owners who can impact the bottom line by accelerating or delaying income and expenses to stay below certain thresholds (including 3.8% net investment income tax).
3. Will you review my estate planning documents?
Estate tax law changes periodically, which may necessitate changes in your estate planning documents. Much like having your advisor run a tax projection can save you money with your accountant, having your advisor read through your documents and make recommendations can save substantial amounts of money in legal fees.
When you have an advisor do this work, you will want to make sure they aren’t simply outsourcing to an attorney so that they may refer the business. An attorney in this scenario will often want to redraft your documents and charge you for a completely new estate plan.
On the other hand, a firm offering comprehensive financial planning has the expertise to identify gaps and opportunities in your estate planning documents without outside counsel (and cost).
When you ask for an estate plan review, you should receive an outline of the key people or entities (executors, trustees, guardians, etc), a flow chart explaining how your estate passes through different entities to your heirs, and recommendations for improvements based on your goals.
This puts your estate plan in plain English, which often makes it easier to identify the types of changes you’d like to make.
4. How do you get paid?
You should have asked this question when interviewing your advisor, but better late than never.
(For your own reference, here is a list of interview questions for hiring advisors as well as a scorecard and instructions for conducting an unbiased interview.)
But to be clear, this question is aimed at the individual acting as your advisor, not the firm as a whole. At the firm level, you want a fee-only firm (not fee-based or commission-based) to remove the possibility of your advisor receiving commissions or kickbacks for the products they recommend.
Even for advisors working at a fee-only firm, how the people you work with are compensated can reveal their incentives. I’d argue that advisors who are salaried employees, for example, have fewer conflicts of interest than someone who gets paid a percentage of the revenue their clients generate.
You definitely wouldn’t want them to be getting paid based on the products you are using or the activity in your account because this is a hefty conflict of interest that may lead to advice that isn’t in your best interest. Same goes for advisors that participate in sales contests or aware programs, which create incentives that favor particular products and vendors over others. You also don’t want your advisor being paid for making referrals to specialists like estate planning or insurance agents.
5. If something happens to you, who will take over my account?
Even the best advisors will retire at some point in time. Unfortunately, not all advisors plan for the inevitable.
According to the Financial Planning Association, only 27 percent of advisors have a formal succession plan in place. And even those with a formal plan haven’t necessarily started the succession process.
Only 27% of advisors have a formal succession plan in place.
But retirement isn’t the only thing to consider. It’s also common for an advisor’s career to shift such that they will no longer be your advisor, whether that’s through internal promotion or leaving for another opportunity.
It’s important to know who would take over your account. What are their credentials and experience? How involved are they with your account today, and is there a process in place to get them up to speed if they don’t normally work with you? Do they work with other clients who are like you, and therefore are familiar with your needs and goals at this stage of life?
5. How do you make investment decisions?
Your advisor undoubtedly will have a practiced response to this question, but there are three things you should be looking for.
First, you want to know that their investment philosophy is rooted in evidence. Most investment success comes down to minimizing mistakes, so it’s important to understand how an advisor’s strategy could go wrong and what that would mean for you.
Second, you want them to have an open investment platform, meaning that the advisor and advisory firm can use any fund company they choose. An advisor shouldn’t be restricted from using any particular fund family, especially if those funds offer lower costs or are a better fit for your needs.
Finally, you want to ensure that your advisor isn’t the person responsible for scouring the tens of thousands of available investment funds to determine what’s best for you. No single advisor or advisor team has the capacity to manage clients (which comes with a litany of financial planning research on its own), perform proper ongoing due diligence on investment options, and perform underlying investment research.
What you want instead is a firm with a dedicated team of experienced researchers who perform ongoing due diligence as part of their primary job function. You also want to know that this team has access to research from all of the world’s largest asset managers and doesn’t rely solely on recommendations from an internal home office team.
Next Steps
Using a good advisor can make a significant, positive impact on your net worth. But how can you know that your advisor is one of the good ones?
Asking these questions of your advisor helps ensure you’re taking full advantage of all the value a financial professional might offer.
It also may shed some light on whether you are working with someone that truly offers comprehensive financial planning. After all, why pay for financial advice if you aren’t getting comprehensive advice?
If you don’t use an advisor today, then I’ve developed a resource to help you interview prospective advisors and identify the right one for you: How to Interview a Financial Advisor Worksheet
And again, be sure to get on my mailing list if you want access to the exclusive week of 30-minute calls to learn more about working with Plancorp.
Resources
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About the Podcast
Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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