Hiring an advisor is foolish, until it isn’t

Silvertree - Friday, Nov 12, 2021

Read the comments on almost any article or social media post involving the use of a financial advisor (AKA: investment advisor, financial consultant, financial counselor, investment consultant, retirement consultant, retirement planner………need I go on?”) and you will see two camps, those that support using an advisor, and those that emphatically denounce it.

The first problem of course is that all those names for advisors listed above are incorrectly treated as meaning the same thing, when in fact they are extremely different.  That needs to get fixed.  Michael Kitces, a well-known thought leader in the industry has been ramping up his actions with regulators and is suing the SEC to address this issue and I proudly support his efforts.  You can read about that here: https://www.kitces.com/blog/xy-planning-network-vs-sec-regulation-best-interest-separation-sales-financial-planning-advice-double-standard/

The second problem is that both camps (you need an advisor versus you don’t need an advisor) are correct to a certain extent.  In some cases, hiring a financial professional is unwise, and in other cases failing to hire the right advisor is a huge mistake.  I have outlined the different levels of wealth and my opinions regarding when you should or should not hire a professional by referencing the WEALTH TIERS chart below.

So, what can you do?  Lets explode the myth that anyone can do financial planning on their own.  A common comment I see at the bottom of an online article is something like this: you don’t need a financial pro, all the information is online and they don’t have any inside track on investments and all they do is cost you money.

Correct, investment professionals do not have access to inside information.  If they did and they acted on it, they would lose their license and potentially end up in jail.  The role of the financial professional can vary a tremendous amount depending on the scope of your relationship.  So, the first step is to clearly define what that relationship is between the consumer and the professional so there is no misunderstanding what costs you are paying and what services you are receiving for those costs.  Unfortunately, unless you are working with a CERTIFIED FINANICAL PLANNER™ professional that ACTUALLY DOES financial planning (not all CFP®s do), solidifying the scope of the relationship is often the responsibility of the consumer and often isn’t done.  If you are unsure what the scope of your relationship is with your advisor, simply ask for a copy of it in writing.  Bottom line, the reason so many folks think they don’t need an advisor is because they had a bad experience with someone they THOUGHT was a financial planner (true advisor) that turned out to be nothing more than a salesperson.

Another correct part of the “you don’t need an advisor” camp is that the information is out on the internet.  If I spend enough time scouring the World Wide Web I can find everything I need to know to perform heart surgery.  In fact, any doctor can do that so why pay big bucks to go to a cardiovascular surgeon? Why not have that stint put in by your general practitioner after he or she “do a little homework” and schedule you for surgery in a few weeks when they are “up to speed” and can do it at a discounted rate?  Or better yet do it yourself or have your very wise neighbor do it!  Seems silly, right?  The reality is while the information is out there, it is the proper, effective, efficient, and savvy nature of applying that information that makes the difference.  A single misstep with taxes, Social Security, your pension and many other facets of your financial life can cost you thousands, perhaps hundreds of thousands of dollars.  If you don’t believe that statement, with all due respect that means you don’t understand financial planning and should seek guidance from a qualified professional.  According to a recent study the average person is leaving over $200,000 of Social Security benefits on the table due to either bad advice, or not getting advice.  Getting financial planning advice from someone without the proper credentials should be treated as malpractice.  Hopefully the regulators fix that problem soon.

Naturally every situation is different, however, here are some key pointers and general guidelines I suggest consumers follow:

1.      Review your scope of engagement agreement with your advisor.  If there isn’t one (a written agreement), get one.

2.      Review the fees you are paying and what services you are (or should be) getting in exchange for those fees

3.      Learn the difference between a financial advisor, investment advisor, and a CERTIFIED FINANCIAL PLANNER™ (assuming they actually do financial planning as not all CFP®s do planning) and get a clear understanding of what exactly the professional is doing for you

4.      Ask when the fiduciary standard of care starts and stops, and get it in writing

a.       Many professionals “wear two hats” and switch them without telling you.  In other words, they may be a part-time fiduciary.

5.      Meet with your professional regularly, no less than 1 time per year.

Wealth Tiers

Net Worth Excluding Primary Residence

0 – $250,000

Wealth Tier

Accumulator – still working.

Coaster – almost retired or no longer working, primarily relying on Social Security or pensions.

Description

Accumulating money for retirement with a wide range of incomes and wide range of TTR (Time To Retirement) including already retired.

Advisory Services

This asset level often does not have a need for sophisticated financial planning.  A financial professional may assist with answering general questions and pointing the consumer in the right direction.  Consumer has greatest benefit from low cost (or no cost) investment vehicles and a limited financial coach or counselor moreso than a brokerage or sales relationships.  High income earners or those with assets not considered “investable” such as real estate (hard asset) or closely held businesses can benefit greatly from advisory services.

My take on it

Be wary of product sales that may not be in your best interest.  Many CFP® professionals will offer pro-bono financial planning services to get you pointed in the right direction without a fee.  Coasters are often the target of sales professionals due to the consumers limited exposure to the industry and absence of advisory services.  True advisors are specialists and therfor more costly making them uncommon in this wealth tier.

Net Worth Excluding Primary Residence

$250,000 – $1,000,000

Wealth Tier

Mass Affluent

Description

Accumulating money for retirement with a wide range of incomes and wide range of TTR (Time To Retirement) including already retired.

Advisory Services

This group is advertised to more than any other group and have the widest range of potential choices to make regarding hiring a professional.  Most common are financial advisors selling products under the guise of advice without actually engaging in an advisory relationship.  This is done with mass marketing via mailers, free downloads, free dinners, and inexpensive “education classes”.            The vast majority of financial professionals do (and should) work in this tier.  While many pros claim to be able to serve those in higher wealth tiers, they often do not have the experience, tools, knowledge, team, or infrastructure to handle larger clients extremely well.  They can muddle through, but they are not masters of the affluent and above.  Individuals in this tier may wish to engage an advisor in addition to a sales person to expand the investment offerings provided the consumer is savvy enough to stear clear of being sold inferior products.

My take on it

Approach everything thrown your way with the understanding that no matter how much you learn from the free stuff, or even the classes you pay for, you will never be able to take that information and do financial planning.  In fact, the education courses you are invited to attend while they are positioned under a non-profit or “educational” cloak, the real purpose is for an advisor to get in front of you and show you how smart they are so you consider hiring them. I suggest you use those events as a an opportunity to get to know the professional, their style, their area of expertise (assuming they have one), and what the exact structure of the relationship would be if you hired them.  I like to call it the 1st interview since you are considering hiring them to do a job for you.  If you have zero intention of hiring someone and plan to do it all on your own, skip the free stuff or fake university classes and enroll in a CERTIFIED FINANICIAL PLANNER(tm) course and get certified yourself. Any class outside of that certification will either be a bait and switch sales pitch to hire someone, or far too basic to give you enough information or the tools to apply the information to do your own planning.

Net Worth Excluding Primary Residence

$1,000,000 – $5,000,000

Wealth TIer

Affluent

Description

Accumulating money for retirement typically (but not always) with a shorter TTR (Time To Retirement) including already retired.  Primary difference between the Mass Affluent and the Affluent is the latter are considered “accredited investors” which opens the doors to more sophisticated investments, and they also tend to have more complex planning issues to address

Advisory Services

This group is highly sought after by financial advisors and are often underserved due to the advisor lacking  sophistication or proper relationship management networks.  Most often this tier should be managed by a VFO (Virtual Family Office) that meets the true definition of wealth management by providing in addition to investment consulting, access to a private client lawyer, Chartered Financial Analyst, CPA, CFP, tax attorney, and so on.

My take on it

At the lower end of this tier many families are underserved simply due to lack of knowledge regarding a VFO.  The old cliché applies here: the one who got you here, may not be the one to get you there.  Maintaining old relationships often leads to opportunities missed or unnecessary risks and fees being incurred.  We see the greatest value for the consumer here being found within a well executed VFO structure.  Some of these consumers may have a multi-generational wealth goal which requires coordination and proper execution by the advisor

Net Worth Excluding Primary Residence

$5,000,000 – $25,000,000

Wealth Tier

Super Affluent

Description

This group typically never “retires” as they always seem to be working on something.  Their wealth typically comes from a closely held business, or working in the upper ranks of larger company.  They are often accustomed to having rank-and-file employees under them so the VFO setup is easily understood as delegation for them is commonplace.

Advisory Services

Most financial professionals are not equipped to handle clients of this tier and above, and typically the consumer knows it but is unsure where to go due to limited advertising.  Often this group sees advertising for the Mass Affluent or the Mega Affluent and are stock in a Goldie Locks situation, looking for the advisor that takes on clients that are not too big, not to small, but just right.

My take on it

This tier almost exclusively benefits the most from a VFO relationship, and are often looking for a multi-generational or legacy type planning to couple with their investment management while mitigating taxes.  Few can afford a true Family Office format so the leverage a VFO can give them is of great benefit.

Net Worth Excluding Primary Residence

$25,000,000 – $100,000,000

Wealth Tier

Mega Affluent

Description

They all know how they got there, I don’t need to explain it

Advisory Services

The gap between $25m and $100m is massive, and services required tend to be very specific on a case-by-case basis

My take on it

Somewhere in this tier the VFO becomes less favorable and the straight Family Office structure makes more sense.

The client need to switch from one to the other is driven moreso by services desired than asset size, and a good VFO will l know when that time comes and assist with the transition, sometimes giving up their VFO structure to be your sole Family Office.

Net Worth Excluding Primary Residence

$100,000,000 – $500,000,000

Wealth Tier

Rich

Description

They all know how they got there, I don’t need to explain it

Advisory Services

Institutional level of service required

My take on it

A standalone Family Office with as many as 75 employees or an institutional relationship is typically required at this level

Net Worth Excluding Primary Residence

$500,000,000+

Weatlh Tier

Super Rich

Description

They all know how they got there, I don’t need to explain it

Advisory Services

Institutional level of service required

My take on it

Anyone in this tier is definitely not reading this chart, they are busy scheduling a trip into outer space for fun, as a willing and paying passenger.