Summary

In this conversation, Mike and Amy discuss essential questions to consider when hiring a financial professional. They delve into fiduciary duty, fee models, investment philosophies, the importance of specialization, and the qualifications of financial advisors. The discussion emphasizes the need for clients to understand the advisor’s approach, costs, and whether they feel a personal connection with the advisor.

Chapters

00:00 Understanding Fiduciary Duty

10:24 Exploring Fee Models in Financial Advisory

22:38 The Importance of Specialization in Financial Planning

30:31 Building Trust and Connection with Your Advisor

Takeaways

• Fiduciary duty means putting the client’s interests first.
• Understanding fee models is crucial when hiring an advisor.
• There are three main fee structures: commission-based, fee-only, and hybrid.
• Active investment management involves frequent changes, while passive management tracks indices.
• Investment philosophy should align with the client’s expectations.
• Specialization in financial planning can lead to better outcomes for clients.
• Experience with specific client types enhances an advisor’s effectiveness.
• Qualifications and certifications vary among financial advisors.
• Trust and personal connection with an advisor are essential for a successful relationship.
• Clients should always check an advisor’s disciplinary history.

Links

Schedule a call with Mike

Schedule a call with Amy

Transcript

Mike (00:00)

Hey, Amy, in our last podcast, we talked quite a bit about financial planning. Actually, I think it’s our longest podcast to date. So hopefully everybody recovered from the extra long helping of financial planning that we gave you. And today we want to kind of extend that and talk about what questions you you be asking as you’re maybe going out to hire a financial professional. so.

We’re just going to bounce some questions off each other and how we’d answer them and what you would be looking for in general if you were in the market to hire a financial professional to help with your financial life.

Amy (01:14)

So Mike, to kick it off, I think we should start with probably one of the biggest things that, one of the biggest questions that floats around out there and is a little bit confusing. And that is your fiduciary duty as a financial advisor. So can you just first tell us what does it mean? What does fiduciary duty mean and how you answer that for clients?

Mike (01:39)

Sure. So fiduciary duty, basically in English, means that the financial professional has a duty to their client to put their interest, the client’s interest, above the advisor’s. And so it just means whatever advice, recommendations, products, whatever they’re doing.

They are looking at the client situation and targeting whatever they’re recommending to that client situation. No matter if it helps the advisor earn more money or anything else, it’s always the client first is how I think about fiduciary duty. How about you? Anything to add onto that?

Amy (02:30)

Yeah, I mean, and I think that is perfect. And the only thing I would add is that the definition of fiduciary, it’s crystal clear. It means that whoever is performing this fiduciary duty, and this isn’t just in the financial advisor space, but that’s what we’re talking about today. But whoever has that fiduciary duty has a duty to the client, the beneficiary, whatever the other party is to put their needs above the advisors. And it’s important, it’s an important distinction between different levels of service. So before I get too far into that, Mike, I’m gonna, I’m gonna let you talk about how you answer this question when it comes up for you.

Mike (03:22)

Sure, and I’ll throw one other piece, kind of a wrinkle onto that. And that is, do you always have a fiduciary duty to me? There’s things that float around where you’ll hear in the industry, well, I wear a couple different hats. And so sometimes I have to act as a fiduciary. Sometimes I may not be required to be in that mode.

That’s also important to understand when you’re talking to an advisor. So yes, I operate under what we call a fee only model where the only person that’s paying me is the client. so as part of that and as part of some of my certifications, I am a fiduciary to my clients at all times.

Amy (04:20)

And that’s exactly where I was going with it is, you always a fiduciary to the client? And similar to you, I also operate under a fee only model and therefore I’m only being compensated by my clients. Now, one thing that we haven’t really talked about too much is, sometimes there are conflicts, right? So sometimes there’s a conflict in what’s in the client’s best interest and the advisor’s best interest.

And you can’t always eliminate the conflicts. So for example, even under a fee only model, many advisors charge what they call an assets under management fee if they’re going to manage investments.

In that case, there’s clearly a conflict that says the advisor does better if you move assets to them. And that’s okay. It still might be the right thing for the client to do that. But the advisor, if they’re operating as a fiduciary, has to disclose that conflict.

Mike (05:24)

And I need to continually disclose that even if there’s a new, you may recommend that it’s, hey, this is going to make a smart decision to roll over this account and it’ll come under my management. Well, like you said, if I’m billing on the assets I’m managing, that means my pay is going to go up. that needs to be talked about at that time, not just maybe at the beginning.

whenever you sign the first agreement type thing. yeah, it’s incredibly important. None of the fee models are perfect out there. There are a lot of them. So it’s definitely important to understand them. And maybe we would dive into that a little bit. Amy, cost is important, but you know, what are the different types of fee models that we may, you may encounter out there when you’re looking for a financial professional?

Amy (06:29)

Yeah, yeah. So, mean, there’s, for simplicity, there’s, you know, basically three different ways that advisors get paid. And I mean, I want to be clear, nobody in this industry works for free. So if you have an advisor who’s, who says that they don’t, you don’t pay them, they are getting paid somehow. So the next question, of course, is how do you get paid? If I’m not paying you, how are you getting paid? Cause the advisor is definitely getting paid.

a lot of times, not always, but a lot of times under, you if you hear that it means that the advisor is selling you something in order to collect a commission. And, you know, to be clear, you know, we’re not attacking any of these models. They have their place in the industry. It’s just that you as a consumer need to understand what that means for you and what it might mean for the advisor. you know, the first sort of idea is commission-based. The second one we’ve already talked about it’s fee only. And the last one is kind of a hybrid where, and there are a lot of advisors out there that work under sort of this hybrid model where on one side at times they are working fee only. That means just you are paying them. They’re not getting paid a commission for the investments that they’re holding in your account. You’re paying them a fee.

to manage those investments rather than the investments paying under a commission model. But that advisor might still be allowed to sell you commission-based products, whether those are insurance products or investment funds. They can collect from both sources. And that’s why when we were talking about the question, are you always a fiduciary to me, that’s a really important distinction.

when they’re fee only, then they are probably always a fiduciary to you. If they’re commissioned, they might sometimes, and same with hybrid, they might sometimes be a fiduciary to you. So it’s critically important to understand when your advisor is a fiduciary and how they’re getting paid. Who’s paying them beside you, if anyone.

Did that about cover it, Mike? Can you think, I mean, there’s lots of nuance in there, but the three big overarching ways.

Mike (08:55)

Yeah, I think that was a good piece. And then the other piece on the cost is just understanding your total cost and what’s what is embedded. If you are working with somebody that’s not the only and says, no, you’re the only one going to charge me. And even even sometimes they’re really understanding how much you’re paying for that service is important.

And a good advisor is going to be able to outline that and show you, yes, this comes out monthly from your accounts or quarterly from your accounts. And this is what we’re going to bill you directly. Or if they’re selling you a product, this is what is going to fees and costs and things like that. So really, having an understanding can help the consumer feed the clients, make sure they’re getting a good value for what they’re paying for.

Amy (09:58)

Yeah, exactly. So I mean, I think that that covers probably the fiduciary question that that’s probably one of the number one questions that I get from clients, the number two being, you know, what what do things cost? So, you know, we kind of went through cost. Mike, do you think we should break down cost any further? Or do you think the three different models are enough?

Mike (10:24)

maybe a little bit. would, I would say, you know, in general, if you’re, if you’re going to get financial planning, ongoing investment management, you’re looking typically several thousand dollars a year, you know, so it, again, the services aren’t cheap. Unfortunately, people start now that’s, that’s one of the complaints against the industry is we only want to talk to people who have a lot of money so that we can manage it. But doing the work, know you spend a lot of time on plans, putting those together and things. so unfortunately, it isn’t super cheap. So just so people have that kind of in the back of their head if they’re going out and if, again, if they hear that, well, you don’t pay me. You know, dig a little deeper because, like you said, everybody, you know, nobody’s nobody’s out in this industry doing it for free. They’re not nonprofit. You know, I mean, there are some that they can help, you know, folks that maybe have a lower income do some planning there. But overall, you know, these these huge firms are not doing this work for free. But I think we’ve kind of hit all that. Anything else?

Amy (11:58)

Yeah, I mean, I just would say that sometimes depending on when you go looking for costs, to Mike’s point, there’s a lot of expertise that goes into the plans and into the process. So it’s not cheap, if you will. But different advisors work different ways. Obviously, if you’re purchasing a product, you’re not going to pay directly out of pocket. There’s a fee embedded in the product.

But if you’re paying directly, you you might end up paying as a percent of assets under management. And typically the way that looks is, you know, let’s just for the sake of simplicity, say the fee is 1%. That means that the whole fee for the year is 1%. That fee is broken down either into four and it’s charged quarterly or into 12. So 1 % divided by 12. And that’s how much comes out monthly.

You might also come across advisors who work for a flat fee, meaning they tell you how much it costs, that’s the all in, and that’s what it costs, and then they kind of break down how you pay for it. And lots of times that flat fee comes in the form of, you know, what we sort of call a subscription, like a subscription to an app, right? So you pay that monthly. And then some advisors charge completely hourly, just like an attorney. So if you work with an attorney, you’re going to get billed hourly, some advisors work exactly that same way, and other advisors will come up with a set service, like a project, and then you’ll pay for that project. those are kind of the different ways, and those typically are falling under the fee only model. So when you hear fee only, and then you hear that somebody’s billing on assets under management, that might traditionally be…

Sort of perceived as not fee only but it is it as long as you know fee only means just the client is paying the advisor So the advisor can also charge AUM fees as well

Mike (14:09)

No, great breakdown.

Amy (14:12)

So we probably covered the costs and things like that. The next thing that I think is probably on top of mind for people in general is philosophical. So approach to financial planning, approach to investment management. What do those questions mean and how do you attack them?

Mike (14:37)

Yeah, I agree. That’s an important question that we typically get. yeah, what do I get for this service? so yes, outlining how you go about it, the areas that you focus on. We kind of ran through all the financial planning stuff last time, but that could be cashflow and budgeting, could be retirement planning, it could be reviewing folks insurance, make sure they have enough coverage. All those myriad of topics that are out there could be stock-based compensation, depending on maybe you’ve recently retired from the military, starting your second job, and hey, you’re gonna now get stock options or restricted stock units and how does that work? I never had to deal with that in the military. So lots of different things that could be covered. And then on the investment management side, some of those things are, are you an active investor or do you more tend toward passive investments? And maybe you want to kind of hit what those two, the difference between those two and why that matters.

Amy (16:07)

Yeah, I mean, there’s definitely there’s definitely advisors out there who are.

So let’s start with what they mean. So active means that you’re either the advisor themselves is actively picking and changing investments based on a variety of different factors, whether it’s economic market, et cetera. So they’re actively selecting different investments at different times, or they’re using funds that have managers that are active doing the exact same thing. They’re making changes on active.

actively, routinely based on market economic and other changes. Passive means, you’ve probably heard Justin passing of the S &P 500. That’s an index. the criteria for that index is basically the 500 largest companies in the United States by market capitalization, meaning how much they’re worth.

If you meet the criteria you’re in if you don’t meet the criteria you’re out and it’s only 500 stocks because it’s the top 500 and a fund will just track that index that’s called passive it you know when the the index makes it makes a change basically the only time that a change is happening to the investments and so that’s one sort of way to think about investment philosophy and your advisor so if you’re

If you’re into proactive approaches and you’re disappointed because your advisor is not making enough changes, it’s important to understand that you perhaps picked a passive, an advisor who believes more in the passive model. And this is why it’s important because you may be disappointed. You may feel like they’re not doing anything for you when in reality, advisors who tend to select passive strategies believe that is the best way to get better results over time. Whereas if you believe that an active strategy is better, then you might be out of sync. So that’s why it’s important to ask this question.

Mike (18:30)

Yeah, that’s and and somebody comes in and talks to me and they’re they’re very focused on the performance aspect of, know, how’s the portfolio going to do? What are we, you know, how much are we going to earn? How much are we going to beat the market by? I will try to find them somebody else they can talk to because that is not aligned with my philosophy. I. Mainly stay passive.

you know, a little bit of flavor of some, you know, they call it, I guess, smart beta where you’re doing a little bit around the edges. But overall, trying to keep the fund, the expenses low for the investments that I’m recommending for folks because it’s very hard to beat the market. And so that’s just not the game I play. So if somebody’s looking for that.

I will help them find somebody else because otherwise, like you said, it’s going to lead to disappointment down the road and probably them going somewhere else at some point.

Amy (19:41)

Yeah. And I think it’s important to, you know, to understand that, but also to understand, you know, investment focused advisors versus financial planning focused advisors. So, and I think the easiest way for me to explain what this means is to talk about my philosophy. So for me, everything is driven by the financial plan. We do the financial plan first. if, if there’s urgency around an investment, you’re, very worried about it. We’ll take a look at that as a separate thing. But for the most part, your plan, your financial plan, your long-term financial plan needs to drive the amount of risk that you need to accept in order to make the plan work.

Of course there’s other factors in there, but for the most part, so I’m a planning first planner. it’s not that I don’t, I don’t care about the investments, but they are a tool as far as I’m concerned, they’re a tool that we use to achieve the financial plan. So if you’re, if you’re a person who is hyper focused, and maybe that’s not the right way to say it, but if you’re a person who really just thinks about. When you say somebody says financial planning, the first place you go is investment management. it’s important to understand if that advisor has a different perspective, like I’m a planning first advisor. And I’m very clear with that, you know, with people upfront, because there are people who come thinking that financial planners are really investment managers. Mike, what about you? How do you approach this?

Mike (21:12)

I would say the same thing. the plan is in my mind more important. The investments are a tool that you use to implement the plan and meet the goals, but it is not what I lead with. So yeah, I think we’re kind of in sync on that. Nope, nope, go.

Amy (21:36)

Now there are investors in, I’m sorry, go ahead.

I was going to say there are plenty of financial planners. In fact, I would say the preponderance of financial planners maybe or financial advisors at this point are sort of investment heavy. It’s not good or bad. It’s just about understanding who this person is that you’re interviewing and figuring out whether or not your philosophies align well enough to work together over a long-term relationship.

Mike, you know, we’re working on a podcast for military folks. think one of the key questions, and this is, if the fiduciary question isn’t first, then this question is probably first. And that is, how much experience do you have with military specific things, whether it’s TSP, survivor benefits, all that kind of stuff? How important do you think?

that is to our clients and how do you answer that question?

Mike (22:44)

Yeah, I think it’s incredibly important. And really, for somebody who may not be military that is listening to this, it’s broader. It’s who do you work with? Do you have kind of a specialization in clients that look like me? Whatever that is, if that’s tech industry folks with huge stock option package that they have to manage, whether it is military, whether it’s retired folks that are having to make the Medicare decision. There are folks out there that’ll work with kind of across the board, and that’s a lot of how it used to be in the industry because you went to somebody who was in your town or local.

And you were limited by what the options were. Now with virtual meetings and that, know you have clients all over the country. I have clients all over the country. You can really find somebody that specializes in you or clients like you and can answer your questions. So what’s the benefit of that, Amy?

trying versus the generalists that, can do financial planning for anybody.

Amy (24:18)

Yeah, I mean, I think, you know, the first thing is it’s somewhat obvious, you know, when you encounter a planner who knows all the ins and outs of whatever it is that’s special to you in our in our case, the military stuff, right? So the VA stuff, all of that, when your advisor knows that stuff, and they know it really well, they they probably know it better than you do. And they can help bring to light benefits that you didn’t know about benefits you didn’t know how to use or how to access.

So just the standard knowledge, right, of how things work is really important. going beyond that, think what really brings a lot of value when an advisor is working with a specific type of client, they see the same kind of people over and over and over again at different stages of life.

And so what, yes, there’s the straightforward, how does the VA disability process work? What does my state have for 100 % VA disability rating? That’s the stuff that, just kind of the knowledge, right?

But what’s important, I think too, is that that advisor has better questions to ask you to help you think about the kind of life that you wanna have, the things that you probably haven’t even considered because they’ve seen the same kind of people over and over and over again. It also allows that advisor to make, we can’t know everything when we’re doing a plan. We’re doing plans for 20, 30, sometimes 40 years.

You can’t know everything, you have to make assumptions. And when a planner’s worked with the same kind of clients over and over and over again, they can make better assumptions based on their experience. So to me, those are, you know, besides just the standard, they know more about it, about the stuff, the key stuff. They can make better assumptions and they can help you think through things in ways that generalists probably couldn’t.

What about you, Mike? Any other reasons that having an advisor with we’ll call a niche could be beneficial?

Mike (26:41)

No, I think you hit it. Yeah, the ability to know that info and be an expert on it versus having to be an expert on every different thing that is out there, which is big in the financial planning realm, just can give you more confidence that they know their stuff.

Amy (27:07)

Yeah, to wrap it up, mean, I think there’s just a couple other questions that come up. And honestly, these usually come up at the end of a meeting with a potential new client for me. A lot of times people will ask me about education, qualification, and experience. So you just talk about that, why it’s important, how you answer it.

Mike (27:34)

Yeah, again, you will see a variety of planners out there with different skill sets and skill levels and certifications. Honestly, to hold yourself out as a financial advisor, the bar, you’ve got to take a test called the Series 65 test and have a high school diploma.

and you can become a financial advisor. understanding what the education is, there are tons and tons of certifications out there. Some of the more well-known ones are certified financial planner. Again, this is mainly on the, it’s run, but a lot of times fee only planners hold that designation, but there are tons of different ones. asking about that, what schooling did.

Did your advisor do? And really just what’s their background? How did they get into this? Why are they doing this? Or kind of the things that I think are important out of those questions.

Amy (28:45)

Yeah, I agree. Now the last question, I don’t get a lot. And I’m surprised that I don’t get it more often. And maybe people are checking. whether you’re asking the advisor directly or you’re doing the research to find it out, this is an important question to ask. And that is, have you been disciplined by a regulatory organization? Do you have any complaints? Or disciplined even by your, for example, the certified financial planner?

board has their own disciplinary process for those who are holding the CFP credential. So asking about those kind of things is important. But if you don’t want to ask your financial your potential financial advisor directly, you can go to a couple different websites, either broker check by FINRA, or there’s a there’s a SEC website that you can go and look up every single advisor and find out whether they disciplinary history. Mike, how important do you think that is? And do you get the question a lot? I don’t get it very often. How about you?

Mike (29:53)

No, don’t really get, I don’t know that I’ve ever been asked that question. You know, unfortunately there are bad actors out there. So if you’re not asking at least, you know, do the check and see before you hire somebody is really, yeah, the last thing, you know, there are a lot of good advisors out there. So if there’s something that you know, did wrong in the past, you’d want to know about that.

Amy (30:29)

Yeah. Yeah.

And then the last thing, just to wrap up, I know we’re running long again, here we go, just loving on our profession, but just to wrap up quickly, I think this isn’t a question, but the last thing perhaps to consider or another thing to consider is when you talk with the advisor, do you click? And there’s not really criteria for that. Do you like them? Did you have a nice time? Do you feel like they’re a person you can trust? And it’s weird in the virtual world. I feel like I don’t have any, I don’t notice necessarily a difference, but for some people having an in-person relationship is important. So did you feel that connection if you’re meeting them in person or if they don’t meet in person do you feel like you can develop that connection with them? Because you should just you should just like and trust the advisor that you have. You should enjoy spending time with them because whether you want to or not you will need to meet with them at least a time or two each year.

So it’s important to like and trust them.

Mike (31:34)

Yeah, 100%. But yeah, I think this was a good overview, of things that you should be asking your potential financial professional. these will just help you narrow down to that right person, like you said, who you click with, you trust, and is aligned with how you want to pay and what they do for you and making sure you’re getting the value out of what you’re paying for.

Amy (32:08)

Yeah, this was great, Mike. It was good to chat with you again and we will see you next time.

Mike (32:13)

All right, have a great couple weeks till we do it again.