By Anonymous Investment Professional, Guest Writer
My preference is anonymity, so let me give you a high-level background. I have spent the entirety of my career as an investing practitioner as well as learning by doing what I call “financial architecture design”. This is an approach to investment with the beneficiary’s return on investment, net of friction costs (taxes, liability, fees, etc.) being the ultimate focus. In addition to a Masters in Finance, I have allocated capital in virtually every asset class on behalf of myself and others. I have advised a small group of individuals and families stewarding over a billion dollars in assets in everything from generational planning, financial modeling, family office creation and design, charitable giving, and capital allocation. In some instances, experienced CPAs and lawyers call me to discuss ideas and brainstorm their other client’s situations.
What to Know About Financial Advisors
All that said, here is what I wish I could embed in every person who is, or will become, wealthy:
#1 Your Advisors Are All Salespeople
“Show me the incentive and I will show you the outcome.” – Charlie Munger
Your advisors are all salespeople. I will repeat it again, your advisors (CPA, lawyers, financial advisor, etc.) are ALL salespeople. All of them. Your CPA, your financial advisor, your lawyer, even someone like me when you ask me that one-off question at a dinner…we are or will be selling you something now or in the future. I know, I know, your _______ is different. They are not. They get a fee when you give them some form of your capital and their job is ultimately to convince you to do that (i.e., a salesperson). I am certain all YOUR friends are such because you are super enjoyable to be around. But what I see, in watching how advisors work, these advisors put themselves in your (and others like you) orbit. Your school, your church, your club, your pool, your supper club. Good actors and bad actors alike befriend you and ultimately would enjoy selling you their services. It is called relational sales and most medical practitioners are blind to it as it is not the practice of vendors or their own businesses. Hear me loud and clear, this is not always a bad thing. Just be aware. Be aware when evaluating their services. Be aware that this is a business relationship. Unless they have a differentiated business model, they receive a fee, usually a residual fee across the asset base or infrastructure created, for allocating your resources.
#2 You Need Them
“When a person with money meets a person with experience, the person with the experience ends up with the money and the person with the money ends up with the experience.” – Harvey Mackay
You need them. You need all the above. You need good advisors. You made your wealth doing X. It is highly unlikely that translates to you being able to grow and protect your wealth by managing your finances without help. The critical word above is a GOOD advisor. I know of a CPA that received a call from a doctor client. The doctor asked him some form of the following, “Hey CPA, my neighbor (who is also a surgeon) just met with his CPA and he is making some changes. They are doing the following….”. He then proceeded to rattle off a bunch of complex financial machinations that his CPA and financial advisor were laying out and asked “…Should I do the same thing? I make as much, if not more than him”. This CPA knew, without him being told, who designed the plan for the neighbor and said very simply that it was not necessary and what it was going to cost his neighbor to maintain all that financial engineering vs the benefit of same. Complexity is not always best or appropriate, so just because your advisor rattles off the minutiae of a complex trust system, or whatever, does not mean they are the best advisor for your situation. Always ask around, the more seasoned the advisor the better. They don’t typically need new business, so they don’t need to be aggressive in representing their potential value to a client.
#3 Ask the Right Questions
“If the only tool you have is a hammer, you tend to treat everything as if it were a nail.” – Abraham Maslow
Advisors are paid to think about you inside the box that is their craft and only when they are in front of you, because they do not think about you as much as YOU think about you. You must learn to ask the right questions…or you will never get their best advice. Advisors have hundreds of clients. One of the best advisors I know says to new clients the following, “I am a mirror. If you are aggressive, I can be aggressive. If you want to be passive, I can be passive.” This is a great and honest approach. If someone comes to a financial advisor and says, “Hey I read about a backdoor Roth IRA on The White Coat Investor. What do you think?” I would suspect most, if not all, advisors of any tenure have heard about it and probably done it. Now, why didn’t that advisor call YOU and advise YOU to implement it? In my experience, a small minority do this part and roll out new ideas across all the appropriate clientele. It is simply a function of the cost benefit of time. Ask yourself, how much time do doctors spend calling all their patients to suggest new health advice vs waiting for them to come in with the correct symptom or problem?
“Never miss a good chance to shut up.” – Will Rogers
So that with that, I would encourage you to
- Do your own homework when someone sells you something
- Get second opinions, especially as complexity is added, and
- Remember your advisor does not always have the complete picture (usually your fault) so ask the right questions.
Do you agree? What other critical details do you recommend people know about financial advisors? Comment below!
[Editor's Note: This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]
Having had a few financial advisors, including a family member, I think one of the most important things to consider is if the advisor matches your style of investing/planning. In my case, while I trusted the family member the most out of the bunch, his style was not a good match, i.e. specifically he was in the buy and hold broad index fund camp, while I was interested in real estate, stock options, asset protection and tax planning. We parted ways amicably, and I found an advisor associated with my law/CPA firm who was much closer to my philosophy, and the advice has been much more relevant. They are both fiduciaries, which I think is also important, as they make only a flat fee from me, rather than getting commissions from selling me financial products. Many “advisors” are the latter, i.e. basically glorified sales agents, which is really a direct conflict of interest, and should be avoided IMO, unless perhaps you already know a lot about the products they sell and know you are interested. Remember the fiduciaries are still selling you their own services (e.g. ongoing account management) but that conflict is less significant and can’t really be avoided.
Very well said; compatibility and credentialing and experience matter. The most important issue from the start is knowing the licensing structure of your advisor, whether dually registered as both an advisor regulated by the SEC and also with FINRA as a broker selling products.
I wouldn’t think that an “index fund advisor” could not do asset protection and tax planning, but you’re right that it is pretty hard to find an advisor who specializes in helping you invest in either direct or private passive real estate and almost none who do options. Most investors I’ve met with interests there don’t really want an advisor anyway. They tend to just use an accountant and lawyer as needed.
After going to so many free dinners and sit downs I can’t count, I haven’t found a planner I really like. My plan is to have a list so my wife will know who to see if she out lives me. I always start out will your not getting all the money, just a part and will be competing with the other planners and the SPY/ Index fund. For some reason all the planners don’t like this want to know how much you have and don’t let up. Does any one have a good reason why this is so? It’s really painful and after the last visit with an expert I give up. Thanks.
The answer that made sense to me when I was in your same position was: splitting your money between advisors and having them compete against each other provides the wrong incentives. You don’t want to encourage your advisor to take ill-advised risks with your money in an effort to earn a higher return than their competitor. Not to mention, short-term outperformance might just be luck.
Instead, you should think about finding a “registered investment advisor” (this is the phrase you should look for in order to ensure they are required to be your fiduciary) who emphasizes financial planning and has a clearly-articulated investment philosophy that doesn’t include promises or allusions to “beating the market.” Once you find an advisor like this, give them most of your money and see how you like working with them. If it’s not the right fit, it is very easy to switch to someone new. In my experience, changing advisors is easier than changing your checking account.
Stop looking at advisors that do free dinners and sit downs then! Why not start with this list:
https://www.whitecoatinvestor.com/financial-advisors/
But there is a good reason a real, highly qualified advisor wouldn’t want to work with just part of your assets and it has nothing to do with AUM fees. It’s hard to do real financial planning and put together a solid investment plan with just part of the stash. I wouldn’t want to provide such a crummy service so I’d just refuse clients like that. An asset manager (like a mutual fund manager or a real estate syndicator) would be fine with that, but when I think of a financial advisor, I expect them to also do some serious financial planning and you can’t do that when you don’t even know about 3/4 of the assets.
This makes me worry about your wife’s financial stability. I can not imagine any financial advisors in the good guy/gal column agreeing to your proposed arrangement. It is just wrong on so many levels. How can an advisor possibly create a long term investment portfolio that meets your needs under these conditions? How do you avoid ending up with a plan that lacks diversification or has excessive risk if the advisors do not know about the rest of your portfolio? I would further be afraid of ending up with some type of regulatory complaint being filed by someone with these expectations. I would be curious about how you manage your own investments.
This makes me worry about your wife’s financial stability. I can not imagine any financial advisors in the good guy/gal column agreeing to your proposed arrangement. It is just wrong on so many levels. How can an advisor possibly create a long term investment portfolio that meets your needs under these conditions? How do you avoid ending up with a plan that lacks diversification or has excessive risk if the advisors do not know about the rest of your portfolio? I would further be afraid of ending up with some type of regulatory complaint being filed by someone with these expectations. I would be curious about how you manage your own investments.
I would also mention to check their record against the “Broker checker”, some of them have bad records 🙁
https://brokercheck.finra.org/
Even better to read their ADV2. No ADV2? They’re not a real advisor; they’re just a broker.
https://adviserinfo.sec.gov/
Some on broker check do have bad records, but many others have had their bad record expunged.
Is your doctor a salesperson? Genuinely curious on your take.
I am a lawyer and represent individuals. I agree that a lot of my day is sales in the traditional sense–getting clients–but a lot of what happens after the client retains my services is also sales: I present my work so that the client sees the value and takes the advice.
Financial advisors play an important role. I’ve never had one, and I would have greatly benefited early on from paying for good advice.
There are many good financial advisors. Just as in any occupation – including physicians – not all financial advisors are good advisors. By the time you figure out how to differentiate between the two, your need for a financial advisor may have decreased.
One characteristic that I notice among financial advisors is conservatism. IMO, there is a tendency among advisors to prefer a higher bond allocation. Leverage should be uncommonly used, but even taking that into account, it’s rare that an advisor would recommend it.
It’s much harder to be aggressive with other people’s money. Perhaps we shouldn’t be so aggressive with our own.
If you’re investing in a taxable account and the higher tax rates are relevant to you, you almost have to be aggressive, if you want a positive aftertax real return.
Under the circumstances that I mention in the preceding post, you can make the case that aggressive investing is less risky than nonaggressive investing. With nonaggressive investing, your probability of having a negative aftertax real return may be considerably increased.
Just use hourly fee advice only advisors.
Don’t have them manage your investments.
They will not care where you custody your assets. They will not care if you seek advice from others.
They can present a plan, asset allocation, advice on where and how to invest, insurance, estate planning and so forth, with no need to do the minor work of managing your investments. A handful of index funds does not require much management.
Pay for useful advice.
Don’t pay anything for a service you don’t need.
We use a flat fee planner as well. There is a minimal conflict of interest here. The biggest one in this realm is that they are not very motivated to work on your finances for you.
But for those of us that are mostly DIY, that may not be an issue. A side benefit is that the spouse (who may not be a DIYer) has a professional to tap if something should happen to you.
Regards,
Psy-FI MD