When I suggest the value of hiring a financial planner to the public, I am often met with the response “I don’t want to pay someone else to manage my life savings” or “I don’t want someone to sell me an annuity.” Those responses are completely valid, as the financial services industry has a long history of utilizing these compensation models.
Fortunately, there is a way to receive personalized financial advice without handing over your life savings or being sold an investment product. I’ll explain how, but first let’s dig into the lingo a little.
Are all ‘Financial Advisors” the same?
The title “financial advisor” is general, and is not a regulated term. Think of it like seeing the phrase “all natural” or “fresh” on your food products, as opposed to “Certified Organic.” The financial services industry has its slew of titles – wealth manager, money coach, financial consultant, financial planner, investment advisor, financial analyst, and so on. Unfortunately, these titles don’t have any weight or standardization like we see in the medical, law, and tax professions. If we require our dentists to be licensed, shouldn’t we hold our ‘financial advisors’ to similar standards? After all, they do advise people about their entire life savings! It is important to know which professionals are at least regulated and required to have your best interest in mind when providing personalized financial advice.
So how do I know if a ‘financial advisor’ is regulated or licensed?
Before working with any advisor, confirm his/her professional experience, examinations, disclosures, and licenses; use FINRA’s BrokerCheck to look up the advisors in your area. When you find an advisor profile, you will notice one or more of the following identifiers:
Brokers are held to the ‘Suitability’ standard of care, meaning they are required to act in the best interest of his/her company, and the advice & recommendations they provide need to be ‘suitable’ for the client.
Imagine going to a Ford dealership. After you describe your dream car to the salesman, they are going to recommend – you guessed it, a Ford! There is an inherent conflict of interest, because their advice and compensation is limited to the products of their company. A Ford car may be the best choice for you, but it’s difficult to know for sure.
Investment Advisers are held to the highest ‘Fiduciary’ standard of care, meaning they are required to act in the best interest of the client, and the advice & recommendations they provide must avoid conflicts of interest for personal or company gain.
Now imagine hiring a mechanic to give you advice on which car to buy. You describe your dream car, then they suggest a list of options across multiple makes and models, based on their experience seeing different cars roll in every day. The mechanic isn’t employed or compensated by any auto manufacturers, so they are more likely to see the car’s purest form of value and suggest the best car option for your specific needs. Do you want to fit the car, or do you want the car to fit you?
What if I only need financial ADVICE, and don’t want wealth management?
Thankfully there is a way to receive personalized financial advice without the pressure or necessity for your investments to be professionally managed or sold by a financial advisor. Financial planning can be offered as ‘fee-for-service,’ meaning that you only pay for the advice – usually on a one-time or subscription basis. The professional I believe is best suited to provide holistic advice is a fee-only, fiduciary financial planner. This person should be a licensed Investment Adviser (notice the E in adviser) and also have at least the CFP® CERTIFIED FINANCIAL PLANNER™ designation – this means they have completed rigorous education, exam, experience, and ethics requirements to show they have a base comprehensive understanding of numerous financial topics and how they interact.
Here is a list of service topics you should expect your financial planner to understand:
- Budgeting & Debt Management: Cash flow, debt review & repayment, balance sheet (assets & liabilities), credit review & recovery
- Insurance: Life, disability, health, long-term care, property & casualty policy review
- Income Tax: Review of tax returns, asset tax location, tax liability reduction, deductions & credits
- Investments: Total portfolio analysis, risk capacity & risk tolerance, investment time horizon
- Employee Benefits: Evaluation and explanation of benefits packages (compensation, retirement plan, & insurance details)
- Major Lifestyle Decisions: Career & lifestyle transitions, major purchases (property & business), crossroads planning (marriage, divorce, new children, new job, job loss, aging parents)
- Education: College savings, education cost analysis, financial aid, student loan repayment
- Retirement: Review of retirement accounts, Social Security & Medicare, long-term investments, tax-efficient income distribution techniques, income needs & lifestyle expectations
- Estate Planning: Inheritance planning, gifting, account titling, review of estate documents including wills, trust agreements, & powers of attorney
When does investment management make sense?
You should consider having someone assist in managing your investments if you don’t have the time, temperament, or talent to successfully manage your own financial landscape.
Time: Do you have the time to objectively analyze and rebalance your accounts, research investment options, and look over your statements on a regular basis?
Temperament: Do you have the objective discipline to align your risk tolerance with your risk capacity, and not divert from your long-term investment plan during times of short-term market volatility?
Talent: Do you have the knowledge to create a time-sensitive investment plan, analyze and understand your investment vehicles & securities, make trading/distribution decisions with tax efficiency in mind, and know how your financial components fit together?
I hope this summary provides clarity and is carefully considered IF you decide to hire a professional to assist on your journey towards financial independence.