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Meeting an Advisor? Understand Fees by Bringing This Checklist

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Yesterday I posted a riveting story about advisor fees.

How do you know all the fees an advisor may charge?

The good news: this isn’t my first fee-rodeo, so I’ve meticulously prepared and will present to you, hot out of the oven, a fee checklist. Now when you meet an advisor you can ask intelligent questions about what fees you may pay.

Isn’t this exciting? Of course it is. Let’s begin:

 

___ Advisory fee. This fee is an umbrella fee for services rendered.

What services are included?

  • Financial plan?          Yes  /  No  (how often is the plan updated?)
  • Budget review?         Yes  /  No  (will you advise on line items?)
  • Net worth review?     Yes  /  No  (do you make suggestions on assets for the fee?)

Often advisors say they will recommend new homes for assets, however, those new places are through them, garnering the advisor another fee. Will they make recommendations of funds/ETFs/other investments outside of their control?

  • Insurance review?     Yes  /  No  (In many states advisors can’t review insurances for a fee. However, they can make recommendations on appropriate amounts of insurance.)
  • 1040 review?             Yes  /  No (Again, advisors have to be careful here. Some aren’t allowed to give specific tax advice.)
  • Tax strategy?             Yes  /  No (Will you recommend comprehensive tax plan?)
  • Asset allocation?       Yes  /  No (Many advisors will calculate where your assets lie on an Ibbotson efficient frontier and recommend asset changes based on your goals.)
  • Estate review?           Yes  /  No

 

___ Wrap fees on personally managed funds. Sometimes an advisor will charge fees based on the percentage of assets inside of an account. Often, these fees range from 0.5% to 2.0% Remember that funds inside these plans have fees also, so ask what the average fee is for funds inside the account and add it to the fee.

 

___ Wrap fees on outside managed funds. Often advisors will recommend outside advisors to manage all or a portion of your assets. Fees generally range from 0.5% to 3.0% of assets managed, per year.

Wrap accounts are easy to remember if you think of plastic wrap around your assets managed in the account. Instead of trading and holding fees, you’ll pay the “wrap” fee on the entire amount inside of the wrapper.

 

__ Trading costs. Are there commissions for trades? What would those be?

 

__ Commissions to buy funds. Does the advisor use mutual funds? Are there fees to buy, sell or hold the fund? What are those fees?

 

__ Insurance commissions. If the advisor completes an insurance analysis, are you expected to buy insurance through them or do you go outside? What types of insurance does the advisor make recommendations on?

When I was an advisor, I’d recommend an insurance amount needed. Then I’d prepare quotes through companies I represented and recommended my clients shop other firms, such as Zander insurance (Dave Ramsey’s company).

 

__  Annuities, Private REITs and Limited Partnerships. Does the advisor recommend these product types? Do they receive commissions when they recommend these products? Annuities may pay up to a 9 percent commission. Often REITs (real estate investment trusts) will pay nearly the same amount to the advisor.

 

__ Cash products. Do you recommend savings accounts, CDs and other similar cash accounts? Are these through you, banks or credit unions? How do they work?

 

__ Mortgages, auto loans and revolving credit. Do you recommend these products for a commission?

 

__ Other outside experts. Should I expect to pay other experts, such as attorneys (estate plan) or CPAs (tax review)? If so, it’s important to know that there may be even more fees after you write your first check.

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What Type of Advisor Has Your Best Interest at Heart?

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Minions,

I’m busy kicking my nephew’s butts at board games, so you’re off the hook this week. Instead of me blathering on about some inane topic, Tom Cleveland from Forex Traders wrote us a nice piece about verifying the credentials of your investment advisor. Take it away, Tom!

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What Type of Advisor Has Your Best Interest at Heart?

 

The rally in stock prices that began last October has been nothing short of outstanding. The S&P 500 index has risen more than 27%, sitting just over 1,400. This rise is even more impressive because it has happened when volumes were low and without any kind of recovery in the housing sector. Europe seems to have temporarily stopped the bleeding, removing much of the market uncertainty and volatility in the process, but the global economic recovery is still straining to “get legs” and produce prosperity for all concerned down the road.

Where will the markets go from here and whose advice counts most when trying to find this answer? Do you want to believe someone that is looking out for your financial interests or someone trying to sell you securities on the side? Investors need consultants that they can trust that accept their fiduciary duty to assist you in planning your financial future, taking into account every variable that may have an impact going forward.

This person is surely not a broker/dealer.

Marketing types in the investment industry often disguise themselves in a “cloak of authenticity” when they approach you with the latest and greatest stock to own. They may claim to be an “adviser”, using the term quite loosely to gain your confidence and make a sale. They get away with this subterfuge because the average retail investor, as confirmed by study after study, rarely understands the various professional designations in the investment industry.

A financial planner or analyst must pass rigorous exams and educational requirements in order to earn the coveted “CFP” or “CFA” certifications. The simple fact is that the proposal from your broker/dealer may actually be a good one, but prudent due diligence would suggest that you first review the sales proposal with a professional advisor that will not bias his opinion due to some unseen commission structure.

What are the differences between these two professionals?

 

Put quite simply, a “Certified Financial Planner” deals directly with the public and a “Certified Financial Analyst” deals primarily in a corporate setting. Each has completed a strenuous college curriculum, steeped in investment issues, mathematics, insurance, and complex methods of fundamental and technical analysis. Professional examinations, actual focused time in the workplace, and continuing education round out the necessary knowledge and experience components.

A CFP will typically possess very good communication skills and enjoy working directly with clients. He will help you develop a financial plan for the retirement, protect your assets and family from risks with insurance, and advise you on proper ways to manage your portfolio of investments. Estate and tax planning are also topics within his area of competency. He has been trained to understand complex financial issues and know how to describe them in layman’s term for your benefit.

A CFA generally pursues a career more corporate in nature, performing similar functions that require complex analysis in a corporate setting. Whether managing the assets in a retirement trust for optimum return, hedging a currency risk when FX charts deems it appropriate, or minimizing the risks surrounding a business activity, he or she has the ability to use the tools of the trade to guide firms in the most prudent financial direction. Their backgrounds of study tend to be more in depth than that required for a CFP, since the amounts of money involved can be significant in the corporate world and the legal and financial issues, broader than with most individuals.

In either case, you are in good hands when you are dealing with a truly certified professional in the investment industry.

The Worst of the Free Financial Advisor #2: Top 5 Reasons We Like the Roth IRA – Are Tax Refunds Bad? – Hiring an Advisor

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Holy big topics, Batman! We’ve got a great show for you today.

First – Joe & OG talk Hiring an Advisor. Should you hire one? If so, what should you look for? What questions should you ask?

Then – Len, Carrie, Dom  and of course Dr. Dean discuss tax refunds. Should you avoid one?

Finally – Our top 5 reasons we love the Roth IRA.

Subscribe to the show (or just listen) on iTunes here.

Download the show directly by right-clicking here.

 

Hiring an Advisor

FINRA.org BrokerCheck

CFP – Questions to Ask When Hiring a Financial Planner

5 Jaw-Dropping Financial Advisor Interview Questions

Ric Edelman: The Truth About Money (Amazon page)

Our Roundtable Members Sites:

Carrie Smith = CarefulCents.com

Dominique Brown = YourFinancesSimplified

Dr. Dean = The Millionaire Nurse Blog

Len Penzo = Len Penzo (dot) Com

The Squirrelers.com article we’re discussing: Tax Refunds Are Not Taboo

 

 

 

 

5 Good Reasons to Hire a Financial Advisor and 2 Bad Ones

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The decision to hire an advisor to help with your financial planning isn’t a step I recommend lightly. I’ve been lucky: over 16 years of practice I was hired mostly for good reasons, although some others were….not so much.




Most people don’t need a financial advisor.

I’d tell individuals before they hired me that 90 percent of what I did, they could do themselves. My job was to guide them through sometimes stormy financial waters. As a bonus, I’d save them time and money by already knowing tricks they could probably find online. My staff would fill out annoying paperwork, and we had access to the best professionals in related fields. If you needed good advice, I either could provide it or knew how to find it fast.

In fact, at some points I was more of a concierge than a financial advisor….while most of my contacts were finance-related, I knew good babysitters and how to get a table at the top restaurants in town!

Here are five good reasons to hire a financial advisor:

 

1) You don’t have time.

I worked with many successful people who could have easily completed their plans alone. Most of my clients were engineers or executives working for Microsoft and Chrysler. These were intelligent people (often financially savvy, too).

They recognized that they needed a good plan drafted that they could examine and sign off on. They also needed someone to facilitate the legwork. It had to be someone knowledgeable who had their back. They needed to be able to review everything on a plane or between meetings.

 

2) You aren’t going to look at the stuff yourself.

Some of my clients were smart people, but in completely different areas. I had a client who was a very well-known artist. He needed to be forced to have consistent meetings about his meetings. Without me, he wouldn’t ever review how he was doing.

 

3) You don’t want a full financial education.

This type of client would sometimes frustrate me, but I had a large number of them as clients. Different from my artist and executive clients who were generally well educated, financially savvy people, these clients would just rather pay me to do it.

These clients were very happy to meet with me and talk financial planning. They’d listen and nod. I was pretty sure that they were getting the basics about what we were talking about. I tried to keep it entertaining, because I knew they hated being in my office.

Some were looking for the concierge treatment. For those people, we had client dinners, good coffee in the lobby and occasionally went to sporting events or concerts. They didn’t care about how the money was managed, as long as it was done with as little input on their end as possible.

These clients sometimes scared me, because if things went wrong, they had no idea why and didn’t want to learn from anyone but me. If this sounds like you, it’s better to hire a good advisor than wreck your financial ship because nobody’s at the helm.

 

4) You want a smart coach in your corner…

…to steer your plan in the right direction.

Some of my clients I knew were only going to be with me for a short time. My job was to educate them how to do it themselves. Some advisors won’t do this. I was happy to help. I liked talking strategy anyway, so if I had a willing client who was coachable, I’d take them through the process. As a bonus, I handled most of the annoying parts (like filling out Roth IRA forms) because they were paying me a fee. It wasn’t why they wanted me as an advisor, but it was definitely icing on the cake.

 

5) You want an ally to point out flaws in your strategy.

This was probably my least profitable type of relationship, but the one I appreciated the most. I had a few Do It Yourself investors who already had a complete strategy and just wanted to hire me for a couple of hours a year so they could tell me their strategy. I always had questions, then feedback, and nearly always, adjustments I’d recommend.

One client, Paul, said he specifically hired me because our philosophies clashed and he wanted to make sure his strategy looked good from the other point of view. He thought about his plan so often that he usually had a winning approach, even though I definitely would have rarely completed the plan the way he did.

 

 

There are a couple of important reasons NOT to hire an advisor:

 

1) You want someone to do it for you.

There’s a subtle difference between this person and the one in #3 above. The person in #3 was happy to meet with me every few months and talk about money. They wanted some small amount of “here’s why we’re doing this.”

Then there’s the person who just wanted “take this cash and make it work.”

I care about my former clients. I never can care about your money more than you do. I’m the money babysitter, you’re the parent. Act the part.

 

2) You want to day trade with a partner.

I had two clients who could never get through their skull that I was very happy that they day traded…but leave me out of it.

Initially we’d separate the portfolio into two sections: the “long term investment” portion, that I’d help steer, and then the “play money” portion that they’d day trade. I’d make clear that they were on their own with the play money account.

Invariably, these two clients would call in a panic and tell me that Jim Cramer had just said something on television and they needed to sell…but what did I think first? Should they sell? Should the go contrarian and buy more? Could I look up some charts for them? Maybe call a couple fund managers and ask their opinion off the record?

No thank you.

The math on my practice worked this way: 150 families, all of whom paid for and should demand my attention.

If I met with each client on average 3 times per year for an hour and a half, that meant 675 hours of meetings. Additionally, I’d call each client twice a year minimum and talk for 20 minutes (assuming there weren’t urgent financial events afoot or you hadn’t called me first). That was another 50 hours.

We won’t even approach all of the emails I sent or returned daily. Remember that I mentioned Microsoft employees? Those people love email.

After 10 hours of preparation time a week and 10 hours of strategy/internal and analysis time (not to mention any marketing we were doing), that left 30 hours for client meetings. After holidays, I worked about 48 weeks a year.

Where was I going to find time to day trade your account?

 

 

That’s my story. Now it’s your turn: have you interviewed advisors? How did the meeting go? What did you like/didn’t like about their approach?

 

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5 Jaw-Dropping Financial Advisor Interview Questions

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Some people need professional help–not the type I’ve been told to find–but financial help. I’ve met many of these people firsthand. Over my years working as an advisor, it was difficult watching people walk into my office grossly underprepared for a meeting with an advisor know what to expect. I could tell by the look in their eyes that they hoped I was honest and actually knew what I was doing.

I know the look because it’s the same one on my face when I’m talking to an auto mechanic.

Luckily, you’ve come to the right place. There are five questions that are important to ask a financial advisor.

But is that all I need to ask? Five questions?

Nope. Hopefully these start you on the right track to building a dialogue with the advisor about your personal financial circumstances and dreams.

Whether you’ve found the name of an advisor from a friend (good idea), by their reputation (scary), or even through an internet, mailing or yellow pages search (most frightening), you’ll want to still ask these specific financial advisor interview questions. You have seen in the media that well respected names with degrees, certifications and mountains of clout have ended up as bad people. Although these questions won’t make sure that you won’t get ripped off, they will give you a better idea regarding your advisors methods and whether they’ll fit with your long term and short term plans.

  1. Tell me about your education. Listen to their experiences, any testing they’ve taken and professional credentials, such as a Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC) or one of a host of other designations. For “vanilla” financial planning, the two listed above (CFP and ChFC) are the two broad certificate designations. Others, such as a Chartered Retirement Planning Counselor (CRPC) or Chartered Financial Analyst (CFA) either are more narrow designations or focus on one aspect of a financial plan.
  2. How long have you been practicing? Suze Orman recommends hiring an advisor who’s been practicing for at least ten years. Back when I started, I thought that advice was complete baloney. Once I’d been an advisor for ten years, I completely agreed with her. Why? Because there are so many nuances and situations that are new in the wide world of financial planning that for the first ten years you’re often running into brand new situations. Your financial life is important enough that you shouldn’t have your paid professional help “practicing” on you.
  3. How does your financial planning process operate? Here’s the scoop: you can throw investment darts as well as any advisor, so you aren’t hiring him for that purpose. People hire an advisor not for the 80 percent of stuff you can do easily yourself, but for the 20 percent that he can do with far more accuracy and efficiency than you.
    • The base of any advisor’s work should be encompassed in a written financial plan that’s backed up by hard data. You’ll use this to mark your progress toward your goals and to hold the advisor accountable to their promises.
    • This plan can only be written if you’ve taken home some type of survey about your expenses, income, assets and liabilities.
    • Finally, you don’t want an advisor who’s only concerned with your assets (unless that’s all you’re concerned about….but I dare anyone to tell me that your budget, estate plan, insurance needs and tax situation don’t all tie into your asset mix). Your plan should place weight on those areas of your financial house that need work now. If you’re talking budget and he’s talking Roth IRA, you know it isn’t a match.
  4. Who will be working with me? In larger practices, experienced advisors often have less-knowledgeable associates who work with some clients. I don’t want to hire one advisor only to find out later that I’ll end up working with another. Make sure you know how the relationship will work before entering into an agreement. The advisor might also have specialists that help out in areas outside their knowledge base. Ask how referral arrangements work between the advisor and any other professionals they recommend.
  5. How are you compensated? Advisors are paid three different ways:5 Financial Advisor Interview Questions
    • Fee only. Some people prefer these advisors because they’re only paid to dispense advice. You decide whether to take it or not and generally implement solutions on your own. Although I understand this thinking in a perfect world, I’ll tell you that the people who hired me did so NOT because they weren’t smart enough to plan on their own. On the contrary, I worked with people who were CEOs and CFOs of corporations, experts in taxation, engineers and entrepreneurs. These people had drive. I learned that they didn’t just hire me for knowledge. They hired me to make sure they took the time to implement the plan.
    • Fee based. These advisors charge a fee for planning, but may charge an additional fee for managing assets OR receive commissions for some products. I was this type of planner, charging anywhere from $750 per year to $5,000 per year, then collecting both fees and commissions. Critics say these types of advisors “double dip” on charges, and you can end up paying large sums of money. That’s all correct, if my client wanted it that way. I ALWAYS told my clients how to avoid my fees and commissions, and often helped them set up accounts at other places. Once again, it depended on the client. My job was to identify strengths and weaknesses. If they wanted me to babysit their money or there was a product through me that helped better than those elsewhere….I was paid for that additional support.
    • Commission only.  These advisors will perform financial planning analysis for free, and are only paid when you implement solutions through them. Critics (like me) believe that these plans have to be slanted toward the methods supported by the advisor’s company, because that’s the only way they’re going to bring home a paycheck. I must say, though, that I knew some commission-only advisors who were top people in their field. They would only support a product they sold in the correct situation, and would actively refer people away from their product if it didn’t fit the need.

As you can see, it’s difficult to find a “perfect” set of financial advisor interview questions for your needs. But by asking these five questions, you’ll gain an understanding of the process the advisor uses, their fee structure and how their practice operates. You’ll also see the advisor’s personal history and gain an understanding of their personal feelings. This is a good start. Once you’ve asked these five questions, move toward your goals and find out how you like the advisor’s answers. It’s like hiring a coach: if you don’t listen to them, it was a big fat waste of money.

Want more questions? Try these resources:

NAPFA.org (National Association of Personal Financial Advisors) How to Find a Financial Advisor

CFP.net (Certified Financial Planner Board of Standards) Questions to Ask When Choosing a Financial Planner (.pdf document)

Photo attribution: Icon Checklist (Wikimedia Commons, Ckepper), Discussion (Wikimedia Commons, HBS1908)

That’s my story, now it’s your turn: have you interviewed an advisor before? Any good questions or stories from that experience that our readers might like?

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