There are do-it-yourselfers among us who love the challenge of figuring things out for themselves. Whether it’s car repair, home renovations or home-schooling kids, many people prefer to bypass the experts.
Some things like medical care, wealth management, and complex legal matters are generally better suited for professionals, who focus all of their time and expertise on these matters. Even if you have the technical knowledge and time—which most of us don’t—an impartial trusted advisor can take the emotion out of critical decisions. With tax laws constantly changing and the array of financial products and services becoming more complex, we strongly recommend working with a team of competent, knowledgeable financial advisors. This can and should be a partnership with you involved as much as you want. The key is selecting the right partners.
Below are seven mistakes we see people make when hiring a financial advisor and three that we see people commit when working with a team or individual they have selected. By avoiding these mistakes, you can reduce your stress and have the best chance of optimizing the return on your hard-earned wealth.
Seven Mistakes People Make When Choosing a Financial Advisor
Here are seven mistakes to avoid when hiring a financial advisor.
1. Consulting with a “captive” advisor instead of an independent advisor
Financial advisors who work for a single or branded firm—sometimes called “captive” advisors—are required to sell the products those companies offer. Certainly companies with good reputations can sell you good financial products. But because their advisors are compensated for leading with those products—or selling those products exclusively—you are missing out on the ability to consider myriad options. This is like the difference between phoning a specific airline, who will offer you their flights, versus a travel agent who can find you the best flight at the best cost for you. You will get more options if you work with an independent advisor who is free to sell products from many different companies. This can allow the advisor to find the best products for your unique situation.
2. Hiring an individual instead of a team
It is extremely important to work with an advisor you trust and feel comfortable with. After all, he or she is going to know everything about your financial situation. But if that advisor works alone, what happens when he or she retires? What happens if he or she passes away unexpectedly or leaves the business? All that work you’ve done together to build a financial plan based on your goals and dreams will evaporate. You’ll have to find someone else you trust and like, and you will both basically have to start over.
That’s why we recommend choosing an advisor who works as part of a team. In a team environment, advisors have backup. Plus, on a team, the advisors are likely to have varied expertise, knowledge and experience, making them a stronger and more valuable resource for you overall.
3. Choosing an advisor who focuses on just one area of planning
It makes sense that investment planners will be focused on getting the highest possible return on the investments in your portfolio. The key to true wealth management, however, is holistic planning. This involves looking at everything from your tax and legal planning to your insurance (risk management) and cash management. Planning will look at debt, long-term goals, short-term needs and a myriad of other factors. Your trusted advisor should act as a quarterback coordinating all of the professionals you work with.
Referring back to mistake #2, this is another reason it’s ideal to work with a team of advisors. Today, it’s simply not possible for one person to be an expert in insurance, college planning for your kids and grandkids, investments, annuities, retirement planning and all the other components of a sound financial plan.
4. Not understanding how an advisor is paid
Financial advisors are compensated in a number of ways. These can include commissions for selling a product, fee’s or a combination. The compensation is independent of investment expense. It’s important for you to understand both. The least expensive option is not always the best however, you should understand what your cost is and what you are getting for that.
While you are interviewing advisors, ask each one, “Do you earn a commission from the products I buy or investments I make?” If the advisor says yes, that means he or she could have a conflict of interest on what they offer. This doesn’t mean that commission based advisors will necessarily work against your best interests. It just means they might be more inclined to recommend products and services they will get a commission on that may or may not be the best option for your financial-planning needs.
In contrast, fee-only financial advisors must follow the fiduciary standard. When an advisor follows the fiduciary standard, it means he or she is required to make recommendations that are in your best interest, and they are compensated through fees rather than commissions. Those fees can be an hourly fee, flat retainer fees or asset under management (AUM) fees. In deciding to pay a fee rather than commissions, it is important to understand that the fee may be higher than a commission alternative during periods of lower trading. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs.
5. Failing to get referrals
There are a lot of financial advisors out there, so getting started with your search can seem overwhelming. It pays to ask people you know who their advisors are. Ask people whose opinions matter to you who they work with, but keep the other recommendations we’ve made in mind when considering those advisors.
For example, if your brother-in-law refers a firm that only sells annuities that may not make sense for you if you need a financial-planning team whose advisors cover every aspect of financial planning. Ultimately this is will be your advisor, so you must be comfortable with them and what they offer.
Also, consider more seriously those referrals who work with people in situations like yours. If you are only 10 years away from retirement, but someone recommends to you an advisor team who specializes in working with people who are just getting started in their careers, that probably isn’t a good match for you.
6. Choosing the first advisor you meet
Yes, it takes time and effort to interview more than one advisor or advisor team. But it’s worth it. Your future financial security is critical, and you don’t want to entrust it to just anyone! Make appointments with at least three advisors or firms. Ask them all the same questions, and take good notes. Then go home and compare their answers. Which one seems to be the best fit for you?
Not only is this important as an information-gathering step; it also gives you an idea of how well you and an advisor get along. How comfortable would you feel about telling each advisor your most personal financial information? This is a critical step. Don’t skip it!
7. Making a decision without your significant other
If you are married, engaged or otherwise partnered, it’s important to include your partner in your decision to hire a financial-planning team. Getting on the same page financially is a critical step toward creating harmony in your relationship. You both need to interview advisors; don’t assume you know what your partner would want to do, and don’t let your partner assume he or she knows what you would want to do.
What if an advisor seems great on paper or on a website, but when you show up for an appointment, he or she speaks only to one of you and ignores the other partner? That is not going to bode well for a lifetime’s worth of discussions about your financial situation. Find a team of advisors whom you both like and whose approach and philosophies you both agree with.
Now that we’ve covered the mistakes people commonly make when searching for financial advisors, let’s look at three mistakes that many people make once they’ve chosen and have begun working with their advisors.
Three Mistakes to Avoid when Working with a Financial Advisor
Once you’ve made the important decision to work with a team of advisors, avoid these three common mistakes when working with your team.
1. Being unwilling to disclose your details
Imagine that you take your car to a mechanic, and when he asks what’s wrong, you tell him you’d rather not say. Or imagine that you go to your doctor and tell him or her you don’t feel well, but you won’t tell them why or what medications you are taking. They can’t help you, and may even hurt you, if you are not completely open about your situation. This is true for financial advisors, too.
Your team of financial advisors can help you only if you are willing to share with them details about your income, your assets, your goals and dreams, your retirement plans, etc. If you have investments with many different firms, you must disclose that. This doesn’t mean you have to move the investments; it just means that your advisor has a complete picture.
If your advisors make suggestions that you resist, ask yourself if it’s a reasonable suggestion. Maybe they are encouraging you to pay off your mortgage before you retire or perhaps, they are recommending you get a mortgage when you are retired. Maybe they are urging you to pay off your high-interest credit cards. The recommendations can be an uncomfortable reality to face. But one of the important ways financial advisors add value is to be your accountability partner.
Be open, honest and coachable! You are paying your advisor team to help you prepare for the future and protect what you treasure. Let them share their expertise with you and suggest what they think are the best options. Chances are, they know a lot more than you do. That’s what you’re paying them for.
2. Showing up unprepared
The more prepared you are for your first meeting, and all subsequent meetings, the more smoothly the process will go. Get all your paperwork together before your first meeting with your new advisor team. Think about the questions and concerns you have and be prepared to bring them up.
3. Being unwilling to, or forgetting to, mention changes
Your financial advisor team needs to know when change happens for you or your family. Have you have gotten separated or divorced, had a baby, taken in your elderly parents, started a business, closed a business, bought a boat, etc.? True wealth management and financial planning is a dynamic process. The financial plan you and your team developed when you first met them was based on your financial situation at that time. As your needs and circumstances change your plan should be updated.
If you are planning to make a major purchase, or considering a big life change, you should discuss it with you advisor before implementing. Your trusted advisor can help you initiate the change in the way that is most optimal for you potentially reducing tax, saving expense or letting your assets continue to work. This is part of what you are paying them for so take advantage of the service and their advice.
Much like your relationship with your doctor, the more open and honest you are about your situation, concerns and goals the better your wealth advisor team can help you. Moreover, just like your doctor may refer you to a specialist, a great advisory team has access to a wide range of resources for you. Our team has partnered with Raymond James Financial Services giving us access to world class resources such as investment banking, trust company, legal review, and lending to name a few. At the same time, we are fully independent and can work with virtually any investment or product that makes sense for you.
We have helped thousands of people over the last 30 years and welcome the opportunity to speak to you about your personal goals and situation. There is neither a cost nor any obligation to contact our team and we work with people in all 50 states. We look forward to speaking with you. You may contact our office or me personally at firstname.lastname@example.org or (440) 974-0808.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.