There is >90% Chance you have the wrong Financial Advisor

Statistically speaking, there are greater than nine chances of ten that you have the wrong financial planner.

The question is ‘how to hire a financial advisor’, or, ‘is my current financial planner the best I can get.’ The answer for the much of the population is just don’t hire one. How can that be, given the onslaught of advertising and publicity around this industry that clearly just wants to help you to financial independence? People in the FIRE movement (financial independence retire early) have known this for years. They invest directly in Index funds. You get a very decent return, and are only dealing with fund fees, so if you pick the right fund, you are under .5% fees and don’t experience the double dip of a financial planner and the fund. With the recent advent of low fee roboadvisors, and crowd funding options, the need for a financial planner is waning.

If you want financial planning help, it must include full service, from budgeting, account consolidation in a single data base, and risk adjustments. Most of all, you must get a promise of a portfolio that is risk reduced and will outperform index funds. Even though I consider myself an effective user of on-line accounts, I still choose to have a large portion of my portfolio held by a financial planner, simply because I want higher returns and lower risk that I can generate myself.

90% or more of Financial advisors are salesmen that offer some services to get you on board. They are compensated by your fees up front, which most of the investing population is aware of, and also by commissions from the funds and entities in which you invest. Read that again: they are incentivized by moving you into certain funds, or salary incentives by getting your money into funds. This is either done by their bosses, who brow beat them into funding certain areas, or direct compensation.

I caught my Fuktart Firm moving portions of my money into their new funds they had just created. So without my knowledge, they put me into funds that put the fees in their pocket, moving me into brand new funds with no history. These fees are hidden with the funds and are hard to find unless you are willing to read the individual fund prospectus and statements, btw. I was seething mad. By the way, this is not a tiny firm, but one of the three largest firms in the US. This behavior is common.

There is a way to avoid this insidious behavior. There are financial planners using a Fiduciary standard that are audited regularly to ensure they are working your best interest. Having talked with a few of them, the all quote the 90/10 rule, where they believe only 10% of advisors follow this standard. The other standard used is “suitability”. This means that you will be delivered products that suitable for your situation, but may not be optimal. They can have high fees or low returns, and that is acceptable. So 90% of the time, you will be working with a financial advisor who makes money from having and moving your assets, not making you money. BTW I am not kidding nor did I make up the “suitability” term; look it up as its most likely being applied to your portfolio.

There are firms that openly bandy about the term Fiduciary but that can be a falsehood. You should look for an advisor that is a Certified Financial Planner, and one who is listed by NAFPA, the National Association of Financial Planners. There are standards and certifications beyond that that are very useful, but this is what the call ‘table stakes’ in Vegas. These are pay for play guys, and take payment up front form you. They do not receive any money from funds, nor any other compensation, like travel bonus, etc from funds.

Some planners call themselves Fee Based. That means they take your money and receive no direct compensation from funds, but receive other perks from funds. Stay away from them also. This term was developed as a marketing scam by investment firms to trick you into thinking they are not evil. Your first question with all financial planners is tell me exactly how your and your firm is compensated. If the answer is anything other than ‘you pay me’, thank them and walk away.

The problem here is that to be effective, most of the CFP firms have higher minimums. You may find firms that take $100K as a min, but typically you are looking at $500K or more. Haven’t we all seen the commercial on TV explaining how high minimum firms are elitist and evil? How do you bridge this gap? Quite simply, do it yourself. Don’t go to some guy or gal that makes you feel good and lightens up your wallet. Use a roboadvisor, layer on a few high interest CDs, or invest directly in index funds. Remember, the average investment return for the US population is 1.9%. You can easily achieve over 4% in the long term if you don’t panic and sell out during the downturns. You are not launching the Space Shuttle here; save as much as legally possible pre tax, and as much as you can after that by reducing expenses.

This is not a job interview and you can discriminate in this process. You will want someone with a little grey hair that has some experience. I personally was looking for a person mid 40’s, who realized they needed to get their personal retirement laser focused. In addition, I needed firm who communicated well in person, and also effectively over the computer. I expect same day call backs on my messages and not meetings that were weeks out. I was looking for someone who showed extreme confidence in beating the market, not producing standard market results.

I was surprised how few made it past the simple test of fee based and NAFP certified. I found 2 in Vegas, a couple in Salt Lake City, and three in the Boise Valley. I interviewed two, and also interviewed Personal Capital, on on-line CFP, who met all the criteria but was on line based. With Personal Capital, you could use their budget and investment software for free, and optionally could use their CFPs. We ended up choosing a firm in Vegas, due to proximity, experience, and their technical use of Dimensional Funds, which is an entire blog unto itself. If you have a smaller account, Personal Capital is a great option.

Again, we did not move 100% of our money to the new FP. We maintained some peer to peer lending in Lending Club, some REIT money in Fundrise, some real estate investment, and a small Roboadvisor account with Betterment to make sure my service level with the FP is appropriate.

Good luck!!

Potential Financial Advisor Questionnaire

Advisor:

The Basics. Eliminates 90% of advisors.

*Do you follow a Fiduciary standard? Does your company receive audits to guarantee such?

*Are you a CFP? NAPFA member?

*How are you compensated? Fee only or Fee based?

How do they work with you. Make sure you can have a successful working relationship.

*how do you communicate w/ clients? Face to face, remote, or both?

*Who will be my advisor? How old and what qualifications?

*What is your minimum account size?

*What is your average account size?

*Over a ten year period, what is your expected returns? How does that compare to Index funds?

*Do you follow a classical or modified investment strategy model?

*Do you do passive or active investment?

*how often do you rebalance?

**Do you “eat your own cooking’, meaning do you follow your own advice? Is your mother or some other close relative also using your service? Do you consider yourself personally successful with this advice?

Things specific to your situation.

*What have you seen to be the largest expenses for retired people?

*Are you familiar with Obamacare requirements and have you helped achieve those objectives for clients?

*Have you used a tax harvesting strategy?

*Explain how you handle the milestone ages in retirement (59.5, 65, 85)