Most Americans could use the help of a financial professional at some stage in their life. The time when this occurs is different for everyone of us based upon our level of comfort and experience dealing with our finances and the level of complexity we are facing. For many, the burdens of managing a career, a family, and unforeseen life events (a sudden death, a divorce, a financial windfall, college expenses, taxes, etc.) tells us that it is time to seek out help. When I speak with clients I tell them the appropriate time to speak with a financial advisor is when they have questions that they cannot easily answer themselves. Don't wait until you have a problem, but seek out help when you first notice it or notice that you aren't comfortable making a decision. Most Americans could benefit from working with an advisor at some point in their life.
Here is a summary of the six key steps to include in your advisor selection process.
- A good advisor can help with investments and integrated financial planning, which is customized to your situation.
- Major life changes (births, deaths, divorce, inheritance, career change, etc.) are often a good time to seek out help, if not before.
- Seek an advisor who is a fiduciary and has the credentials/skills for the help you need.
- Interview 3-4 advisors before making a choice, and look for advisors who share your values.
- Understand how an advisor will be paid so you can understand potential conflict of interest and how much you will be paying. The advisor should be very transparent with regard to conflicts and fees. If not, run away.
- Never sign an agreement on the first date. Take your time to think about your options and make a choice based upon the criteria you have selected.
Good advisors can be found in all 50 states and in most cities large and small. But, finding them can be a challenge since there are many advisors to choose from and many individuals who hold themselves out as advisors when they are really salespeople. Here are some tips for determining if you could benefit form working with an advisor and how to go about selecting one. This list is not inclusive, but us a good place to start.
My do-it-yourself clients and friends usually ask why they shouldn't just buy a basket of index funds and let it go at that. First I tell them that investments, while an important aspect of planning, are only a small piece of the pie. Having proper risk mitigation strategies (read insurance) in place, proper estate planning documents, tax planning strategies and a view of how they all fit together with your investments in order to get you to retirement is key. That being said, index funds have been a godsend for the industry or rather for the individual investor and continue to save investors billions of dollars in fees and lost performance on an annual basis. But, they are a tool much like all financial instruments, and the key is knowing how to use them appropriately. No two investors have the same risk tolerance level, investment time horizon or tax situations. Thus, what works for one may not work for the other. Using index funds can be a great way to achieve performance goals, but they need to be aligned with the larger financial picture of the client. Investing in index funds may be great, but won't be of much help if you don't have proper insurance coverage or are sinking under a pile of debt. The financial advisor can help an individual think more broadly about his or her situation to arrive at comprehensive solutions.
Many DIY investors have a firm grasp over their financial affairs and can reasonably make good decisions about their finances and investments. But, there are a lot of people out there who are too busy raising a family and worrying about their jobs and who have neither the time nor inclination to manage all of their affairs effectively. That is when the advisor can be a very big help. When a pipe springs a leak, most people will call a plumber and get it fixed without batting an eye. But, when people have questions about their asset allocation in a 401(k) plan or about the level of insurance they need to protect their family, they are much more reticent to pick up the phone and have their questions answered by a qualified financial professional. My guess is that many people fear that by making that call they will be pitched a product they don't need rather than being offered genuine advice that is in their best interest. And, my guess is that their fear is legitimate, but they can do research to identify fee-only, fiduciary advisors who do not sell products and can offer them independent advice.
I am also frequently asked, does a typical small investor focused on retirement and college really need professional help? The answer is fairly simple. The small investor can ask herself, "Do I have a question about my finances and investments that I cannot readily answer myself and would I benefit from speaking with a professional?" In my experience, we all can benefit from expert advice from time to time because we cannot reasonably be expected to be experts in areas as diverse as taxation, investments, retirement plans and benefits and estate planning. If you wanted a hip replaced you wouldn't typically schedule an appointment with your dermatologist. If you have a question about investments, speak with an expert on investments.
I am also frequently asked about which type of adviser one should consult if they are looking for the best advice, what skills or certifications one should look for and which compensation model is best -- commissions, asset-based or true fee-only. There is no one answer to this question, but there are some steps you can take to help screen advisors. First of all, I would start by working with someone who is a Certified Financial Planner(r). While this doesn't guarantee you will immediately find the perfect advisor, you will be guaranteed to find someone with a basic understanding of the major areas involved in financial planning and investments. CFPs come in all different stripes, commission-based, fee-only, a blend, etc., so the CFP certificate is a first level screen but is not generally definitive. If you are looking for someone to perform estate planning, you should seek out an Estate Planning attorney as they are the only ones who can draft legal documents for you. Next, if you are focusing on investments, I would look for someone who is a Chartered Financial Analyst Charterholder (CFA(r)). This is the gold standard designation for investment analysts and should give you comfort that the individual has a very solid grounding in investments and investment theory. If you have particular concerns related to taxes and estate planning you can speak with a CPA, an EA or a tax or estate planning attorney. Again, look for the person who has the expertise that you are seeking. The CFP Board, The CFA Institute and the Financial Planning Association all have websites where you can search for advisors in your area and allow you to screen based upon credentials and expertise.
In terms of fees, I am a firm believer in fee-only advisors as they can help to minimize the conflicts-of-interest that come with selling products on a commission basis. Also, a fee-only advisor will generally have many different payment plans available including hourly and package rates, and thus can likely accommodate any projects you might have on a relatively cost-effective basis. Commissioned salespeople tend to sell products under the guise of advice, but are much more focused on selling the product and getting a commission as compared to providing comprehensive advice for a fee. Employees of large banks, broker-dealers, wire-houses and many large financial planning chains are technically salespeople, regardless of their title, and are not held to a fiduciary standard. They are subject to a lower standard of suitability, which may or may not serve you. I am biased as I am an independent RIA and a fiduciary. I have heard many friends and potential clients tell me that their advisor doesn't charge them a fee to manage their portfolio, mainly because they don't see it. But, in reality, no firm would stay in business if they didn't charge a fee. The fee is likely hidden within an insurance product or they are compensated through commissions or other fees coming from mutual funds. If it seems too good to be true, it probably is.
Finally, and potentially the most important aspect of the advisor search is to find someone with whom you feel there is a good fit from a philosophical and practical perspective. Obviously the advisor needs to be honest and ethical, but they also need to understand your unique situation and tailor their advice to you. This also needs to be someone who you can trust. As you interview your 3 to 5 potential advisors, ask yourself if you can see yourself working well with this person for 20 years. And, always try to make an independent decision by filtering out the noise you might be receiving from your brother-in-law or a neighbor whose advisor is apparently the best thing since sliced bread. Your brother-in-law may love his advisor because he takes him to play golf and buys him dinner twice a year and not because he is good at helping him achieve his financial goals. Caveat Emptor.
Finally, I am frequently asked should you look for someone to manage your money or just to make suggestions or design a master plan you could then follow yourself? Asking someone to manage your money is a personal decision and may or may not be right for everyone. Money management is a great choice for people who feel overwhelmed by the prospect of managing their own funds. For people who have a basic understanding of investments and only need periodic help considering new ideas or rebalancing their portfolio, having a different type of relationship might make more sense. But, in any case, everyone should do their due diligence on anyone or any firm they are considering for this job. Make sure they have the right credentials, take your time, and don't be swayed by the fact that a manager may already have a lot of money under management. Also, don't feel pressured to sign a contract on the first date. Make sure you understand all of the fees involved in the process including commissions, advisor management fees, trailing commissions, up-front loads on mutual funds, and the underlying operating expenses on any mutual funds being recommended. Once you aggregate the advisors fees with those of the underlying funds, total management fees can easily reach 1.5% to 2% or more of you portfolio on an annual basis. This is where index funds and ETFs can help as they tend to have greatly reduced operating expenses. Clients working with Ebersole Financial can usually save anywhere from 25% to 50% on the overall level of fees they are paying on their portfolios, with a similar return and risk profile.
Working with a good advisor should result in a lower level of stress, a feeling of relief and a sense of well being knowing that a professional is helping you reach your goals. If your advisor doesn't listen to you or take note of what you are saying, is paying lip-service to your feelings and needs or you leave your meetings feeling you are not being taken care of and with even greater stress, it may be time for a change.