I’m excited to introduce Madi from Madi Manages Money, a blog dedicated to educating and empowering mothers to take the reins of their family’s finances. Madi is both a Certified Financial Planner (CFP) & Chartered Financial Analyst (CFA). As an Investment Analyst, she has overseen the management of billions of dollars in client assets on behalf of financial advisors.
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News coverage and characters on Netflix (e.g., our boy, Marty Byrde) portray the more interesting and illegal things that a very small minority of advisors have done such as orchestrating Ponzi schemes, laundering money, and duping their clients.
This perpetuates an already bad rap that everyday advisors get. They are seen as sales people pushing complex and expensive products that no one actually needs, all for a pricey ~1% fee.
Admittedly, there can be truth to that. Outlier advisors still exist that would fit better on the set of The Wolf of Wall Street than in a modern advisory practice. But, they’re far from the norm.
What the media doesn’t cover is much more common: the trusted financial advisor who brings a remarkable amount of value to the table and genuinely cares for clients.
Financial Advisors get into the business to help people and have access to impressive resources including teams of financial planning experts, investment analysts, and powerful fintech.
Investors that choose to work with an advisor might all be paying the same ~1% fee, but not everyone is unlocking the same value. If you’re working with an advisor, here are three ways how you can maximize your partnership.
Ask for a Financial Plan
Placing your money with an advisor without a financial plan is like hiring a contractor to build your dream home with no architectural drawings. You’ll probably end up with a finished product, but it won’t be exactly what you envisioned.
So, how do you get one? There’s no code word or secret handshake; you simply ask.
At its core, your financial plan considers how you want to use your money over your life. This includes laying out a strategy, year by year, on how to actually make it happen. It’s where the *woo-woo* meets the road.
A thoughtfully crafted financial plan with accurate data (provided by you) and realistic investment assumptions (provided by your advisor) is the holy grail of financial advice. Clients can walk out of plan review sessions with a level of financial clarity that they didn’t know existed.
Your plan can give you a deep dive into what your financial situation looks like today. For example, you’ll learn what your net worth (assets minus liabilities) is and what your cash flow (income minus expenses) looks like.
The coolest part? Your advisor can run forward-looking projections of your money, overlaying your goals and wishes, to tell you how close you are to making them happen.
Some examples of questions answered by financial plans are:
- Should I pay down my mortgage or invest my extra money?
- How much will this $10,000 chunk of cash grow if I invest it now?
- How much money will I die with? (r u ok?)
- How much should I be investing to put my kids through college?
Building your financial plan is often when your advisor reviews what accounts you’re contributing to (i.e. 401(k), IRA, HSA, etc.) to make sure that you’re maximizing your tax benefits. More often than not, their recommendations can lead to thousands of dollars in tax savings for you, right off the bat.
Most advisors will be ecstatic to work together on your financial plan. Remember, it gives them clarity into how to best serve you, too.
If you’re already paying an ongoing advisory fee, advisors will often build a plan for you for “free.” Of course, it’s not really free. It’s just that your plan is already covered by the amount you’re already paying, so you might as well get your money’s worth.
Others may charge for the financial plan itself, especially if you plan to implement it on your own and not invest your money with them. Prices can range based on the complexity of your situation, but a reasonable expectation for your average plan is $1,500.
An advisor that isn’t willing to build a financial plan is red flag city. Planning is a standard expectation of any full-service financial advice relationship today, so what you’re asking for is totally reasonable.
Be Open & Willing to Accept Advice
Your annual trip to the doctor starts innocently enough, with a standard questionnaire asking you to quantify your health habits. You set out, hastily checking boxes with the purest of intentions.
Alcoholic drinks per week? You mark one. Last week it was about four, but you’re going to start cutting back.
Minutes of exercise per day? Eh, about thirty. You had a good week last week, and you plan to keep that up. Plus, you still have those dumbbells you bought during COVID.
Servings of vegetables per day? You say four, even though that was only true one day this week. Diet starts Monday.
One response led to another. Now, here you are, presenting a different person on paper than the one who watched season 4 of Stranger Things in two sittings. The guidance the doctor gives to these two versions of you will probably be pretty different.
The financial advice process can play out just like this. When asked to share details so intimate they feel scandalous, like how much you spend or how much debt you have, it’s natural to provide responses a shade more favorable than reality. After all, money’s a common source of shame or pride.
A common example of this? Clients that don’t disclose how much credit card debt they have at the onset of the process.
That fact changes the very first recommendation that your advisor would provide – which is to aggressively pay it down – followed by a chain reaction of guidance to follow.
Your advisor has seen it all, and even if you feel like you have a checkered financial past, they’ll put you on the right track.
That’s why being transparent is the first step in implementing a strategy that’s tailored to you. The second step is being willing to actually accept that advice, even when your gut is telling you something else.
According to DALBAR, Inc. the average equity investor (like you and me) only earned a 7.1% annualized return over the past 30 years. This compares to the average return of 10.7% of the S&P 500, a difference of about 3.6%. That’s huge.
If all investors had to do was buy an index and let it ride, why do we under-perform so badly? One would think with the proliferation of index funds, friction-less access to brokerage accounts, and tons of online research, the average investor has more resources than ever to succeed.
It all boils down to decisions, usually the emotional ones we’re tempted to make when markets are running hot or selling off, that cause us to buy or sell at the worst times.
Time and time again, I’ve seen clients hold on who’ve wanted to sell at (what we know after the fact to be) market bottoms thanks to coaching from their advisors. Making the right choice to stay invested could change your retirement date by a decade or more.
Understand How You’ll be Paying for Advice
Put another way, how does your advisor make money from working with you?
On the surface, this might appear to be a “gotcha” moment. It’s anything but! Ask the question earnestly, and you’ll be surprised by the alignment you gain between you and your advisor.
It clarifies a few pretty important things, including the obvious: cost. You’ll also learn if you should expect ongoing advice and if your advisor is required to act in a fiduciary capacity.
As a fiduciary, advisors are legally required to put your interests before their own and to take the utmost care when recommending investments to you.
Commission-Based Advice
In commission-based engagements, advisors earn revenue based on a transaction with you. Buying or selling investments in a brokerage account (with the help of an advisor), annuities, and insurance policies are examples of commission-based products.
Advice paid for by commission generally only meets a suitability standard, which is like a watered-down version of the fiduciary standard. Investments recommended to you under this standard just have to be “good enough.”
Further, don’t expect ongoing advice if you’re paying on commission. More crudely, but legally, the advisor could advise you on a purchase and then say, “Have a good life!”
This type of fee structure has negative connotations attached to it, but don’t let that scare you away. It exists because it serves a purpose to clients.
For instance, if you’re a buy-and-hold or DIY investor who wants up-front advice before implementing your strategy, this can be a cost-effective way to get guidance without committing to an ongoing fee.
Fee-Based Advice
Entering into a fee-based engagement means that you’re paying for advice based on a flat dollar fee or a percentage of the assets that your advisor manages for you (i.e. AUM fees).
Flat dollar fees could be upfront or ongoing (like a subscription), depending on the advisor’s business model and the help you need. AUM fees, on the other hand, are almost always ongoing, especially when your advisor manages your investments.
More often than not, if you’re paying for fee-based advice, your advisor is working with you in a fiduciary capacity.
Paying for advice on an ongoing basis is a bit like having an advisor on retainer. If you have financial needs or questions, even if it’s not at your regularly scheduled time together, ask them. Most advisors are happy to engage with their clients as life happens.
You can see how this fee structure would be desirable. Its benefits are balanced, of course, with cost. Paying for ongoing fee-based advice over time will be more expensive than commission-based advice, especially for buy-and-hold investors.
Conclusion: You Can Get More Than You Put In
I get it – It feels counterintuitive to send money out the door to someone who’s supposed to be helping you accumulate it. I’d encourage you, though, to think of this as an investment and not just a fee that you’ll never get back.
If you’ve followed these three tactics, your situation should look like this:
- Everyone (you, your partner, your advisor) is on the same page now that you have a financial plan – and you’re sticking to it.
- Your advisor is a sounding board who runs the numbers for you anytime you make big financial life choices.
- They’re guiding you through up and down markets. After all, to enjoy index fund returns, you need to stay invested.
- Your advisor helps you maximize your tax-advantaged account contributions every year.
- You’ve made an informed decision on what type of advice you want from your advisor and how you’ll be paying for it.
The tangible value is there – in the form of a benefit straight to your family’s bottom line – as is the intangible. Outsourcing some financial worry to your advisor is a path to financial peace of mind, especially if you’re a busy professional or parent.
The potential ROI from working with a financial advisor, especially with the right hacks, is high enough that they’re worth a second look.
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Full Disclosure: Nothing on this site should ever be considered advice, research or an invitation to buy or sell securities, please see my ‘Terms & Conditions’ page for a full disclaimer.