You might not get to pick your pilot when you fly, but when you plan for retirement, it’s important that you choose your “financial pilot” wisely.
Choosing an advisor you can trust with your future is incredibly important. Not every advisor is the same, and you’ll want to pick one with your goals and best interests in mind.
Whether you’re on the verge of retirement or just starting your professional career, all too often, preparing for retirement gets relegated to the “I’ll get to it later” pile. It feels like such a far-off, distant thing. But there are simple tasks you can take care of today that can make a huge difference when you reach retirement, especially if you have an experienced advisor helping you.
Finding out if someone is the “right” advisor for you can be difficult, so we’ve compiled four essential questions that can help you narrow your search.
1) How do you get paid?
It’s rude to ask others how much they make, so that’s not what this question is about. We’re not asking how much an advisor gets paid, we’re interested in how they’re paid.
Advisors have two approaches to their fees: they can either be fee-only or fee-based.
The two are very closely related. Fee-only firms earn their money based solely on a percentage of the funds they manage for clients. Fee-based firms earn the majority of their income based on a percentage of the funds they manage for clients, and a small portion comes from commissions earned on products they sell.
People often say fee-only is the purest approach because it eliminates commission and, thereby, any potential conflict of interest. That’s understandable from a high level, but when you look a little closer, it doesn’t actually eliminate conflict (not to mention that many “fee-only” advisors don’t even fit the definition).
TFS is a fee-based firm, but we only earn commission on a select few products and we are very careful to explain when that could potentially happen.
Side note: The size of an advisor’s fees are not a great measure for whether you should work with that advisor or not. Fees typically range from 1% to 2%, but choosing an advisor because they’re cheaper than other advisors could result in fewer products, less experience, or something else.
Side note #2: Not all financial advisors are also registered to offer investment advice. Asking how an advisor is paid can help you get to the bottom of how much advising an advisor actually does. People who call themselves advisors or financial planners may just be commission-based salespeople who don’t provide any advice or financial planning services. Look for an office with a CERTIFIED FINANCIAL PLANNER™ professional or a Chartered Financial Consultant™.
2) Are you a fiduciary?
Advisors can operate under two standards: fiduciary and suitability. Fiduciary advisors are required by law to tailor their advice to your best interests. Advisors operating within the suitability standard are only required to give you recommendations that are suitable.
Say you’re looking for a new mattress. You and your spouse go to the furniture store and strike up a conversation with a salesperson who asks you what you’re looking for. As you describe your preferences, it’s clear that the best fit for you would be one of those newfangled foam mattresses that you can only buy online.
Still, the salesperson convinces you to buy one of the mattresses in his store because it would be a “suitable” mattress for you. If that salesperson were subject to the fiduciary standard, they would be required to tell you that a mattress from somewhere else would be better for you.
Much like fee-only advisors, the fiduciary standard seems like the obvious better option (we like it, which is why we’re fiduciaries), but it doesn’t guarantee integrity. Rules and regulatory authorities are helpful, but the reality is that no rule can stop someone bent on deceit.
My point is this: finding a fiduciary advisor is a good start, but finding one who will act with integrity is even more important. One tool that can help with this is FINRA’s Broker Check, which keeps track of any marks on advisors’ records.
3) Do you follow your own advice?
Whoever you choose as your advisor will help you determine how you accomplish your retirement goals, so it’s important that their advice is worth following. When a potential advisor gives you advice, ask them how that advice has worked in their personal finances. If they say they don’t implement that advice with their finances, it might be time to say goodbye. After all, if your advisor doesn’t practice what they preach, you have to wonder if what they’re preaching is worth following at all.
4) What would it look like for me to become a client?
The underlying question here is, “How much can I expect to hear from you?” Every advisor provides quarterly reports, and many advisors provide at least monthly newsletters these days. If you’re someone who wants more than that, you’ll want to make sure you get an advisor who is available.
At TFS, we give our clients our cell phone numbers so they can call whenever they want. If we don’t answer, we’re always quick to call back. We understand that people are trusting us with more than just their money, they’re trusting us with their children’s college, their retirement plans, their legacy, their future. We believe it is our duty to be available to our clients whenever they have a question, concern, or just want to talk.
If a potential advisor shies away from the idea of being available whenever you need them, that is a warning sign that this partnership may not work out. At some point, the markets will act up and you’ll want to check in, or a nagging question will pop into your head that you’ll want to clear up as soon as possible. When you trust someone with your life savings, you should settle for nothing less than open communication.
These are just some questions to consider when choosing a pilot. To learn more about our financial planning services and how we can work with you, please contact us.