Wrong. I’ve gotten this question more times that I can count, and though it may not be verbatim as the title, the questions/comments come in all forms (‘I received my bonus yesterday, which stock should I buy” or ‘Wow the market really took a dive, which stocks are poised to go up the most?” or “I’ve been watching Dave Portnoy and he makes some really great points”). Sure, Portnoy is extremely entertaining (I enjoy the videos as well), but many people also fail to realize he makes money by entertaining you, and with an estimated net worth of $100 million he can afford to make irrational decisions that 99% of individual investors cannot. But this is not about whether Dave Portnoy or Jim Cramer or any other talking head on TV can predict the next market swing (Hint: Nobody Can), but it’s really about the misconception of what a true financial planner can provide.
To get started, the terms ‘Financial Advisor’, ‘Investment Advisor’ ‘Financial Planner’ are used interchangeably within our industry, and it makes it quite difficult for consumers to delineate between. On a very high level, there are 3 main types of ‘financial advisors’
- Insurance-focused advisors: These ‘financial advisors’ are really insurance salesman masked as financial advisors. They believe (or are told to believe) that insurance, primarily life insurance, is the best investment one can make, as it provides a death benefit, forced savings, and many times an investment arm that provides no downside risk. Truth is, many of these insurance policies are very high cost, and by purchasing one of these policies you can sacrifice the opportunity to achieve much higher rates of return over time with much greater flexibility. There is also an inherent conflict of interest in selling you a product in which they receive a commission. Most of these individuals are required to adhere to the ‘suitability requirement’ which means as long as they sell you a product that is suitable for you, regardless of whether or not it is in your best interest, that is ok. So by selling you a permanent life insurance policy as opposed to a term policy, in which the permanent policy is considered suitable but the term policy would in your best interest, they may receive a MUCH higher commission than the term. Who wouldn’t be tempted by a higher pay day? Just be aware of this conflict when dealing with insurance representatives. They may also sell mutual funds, which many times are proprietary and incur very high internal costs. To clarify, I am not advocating that insurance representatives are bad-natured or ‘out to get you’, I am just pointing out how their interests may not align with yours.
- Investment-focused advisors: You may find these types of advisors typically at wirehouses or regional wirehouses (think Morgan Stanley, Merrill Lynch, Well Fargo, Fidelity, E*Trade, etc). They typically charge a percentage of assets you have under their management (i.e. you have a 500,000, they charge 1.5%, you pay them $7,500 per year). This fee model claims to align the interest of the client with the advisor, as when your account value goes up, so does their fee. Seems fair, right? Well take a year like 2019, when the S&P 500 ended the year up 30%. If your portfolio also increased by 30% (illustrative purposes only), you would have paid your financial advisor an additional 30%. Did your advisor truly provide an additional 30% in value? Conversely, in the years the market declines, I would argue your advisor does more work, so is it fair for their fee to decrease? Investment focused advisors typically claim their value lies in their ability to outperform the market based on their expertise. They may offer ‘financial planning’ to their clients, but from what I’ve seen these are cookie cutter, plug & chug plans which do little to provide actual financial planning but merely provide a projection based on expected income, expenses, and returns. Many times these advisors are also highly encouraged to sell certain funds (again, back to the ‘suitability’ standard) as they may receive kickbacks, marketing dollars, or support from the fund company as a ‘thank you’ for using their product. Do your due diligence on what your advisor has you invested in. To be fair, I do find these advisors and their fee structure (assets under management) to be superior to the commission model, and if they claim that their value is in their ability to provide superior investment performance, then I would argue it makes sense to align their fee structure that way.
- Planning-focused advisors: Planning focused advisors (which includes yours truly) are more concerned with the overall financial picture and how each piece fits into the plan. These planners will spend a considerable amount of time on each topic of a person’s financial life, including but not limited to tax planning, estate planning, insurance, investment management, cash flow, budgeting, college planning, etc. Investments are a very important piece but no more important than any other area, as a great investment strategy is useless if other areas are not addressed. Many planning focused advisors also charge AUM (assets under management) fees, as these types of fees are the industry standard and ‘easier’ for both the client and the advisor. Other planners (myself included) may charge fixed annual fees, which are paid either monthly (like a gym membership) or quarterly. These fees are more transparent as the client knows exactly the amount of fees they are paying, but they also come with greater ‘sticker shock’ as (using the previous example above) quoting a fee of $7,500 is a much larger pill to swallow for the client as opposed to saying 1.5%. It is the same fee but psychologically 1.5% sounds better. So why charge fixed-fees? It goes back to being planning-focused. Our value lies in our ability to provide comprehensive financial planning, and our fee should reflect that. Many (if not most) of the financial planners who use fixed fees use some combination of income/net worth/complexity. This more closely aligns the fee being charged with the value and the work performed by the advisor. Planning-focused advisors many times operate modularly, where they and the client will have dedicated meetings to each topic. This allows for more in-depth reviews but also provides for more bite-size to do’s as opposed to listing 30 actions items you need to complete, which most always leads to inaction (think about your project list during quarantine).
There are a plethora of types of advisors and fee models that blend together, and certainly there is no one-size-fits-all approach to financial planning. But it’s important to understand that many financial planners out there are not sitting in front of a TV watching Jim Cramer yell at them or constantly checking the tickers on CNBC to see how every stock is performing today. They are focused on you, the client, and formulating the strategies that are in the best interests of clients and acting as their fiduciary as they plan for their financial future.
To find a fiduciary financial planner, look for those who are CERTIFIED FINANCIAL PLANNER™ and fee-only (meaning they do not accept commissions, kickbacks, etc). Some sites to explore:
Andrew Langdon is a fee-only financial planner based in Peachtree City, GA serving clients in the Greater Atlanta area. FivePoints Financial Planning provides financial planning and investment management services to young families and pre-retirees who are looking to achieve financial freedom. Services are offered on a project or ongoing basis.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.