In this episode, Bridget and John share six important questions to ask when hiring a financial advisor or financial planner. They discuss the significance of credentials, fiduciary responsibilities, tax advice, comprehensive financial planning, advisor experience, and transparent fee structures.
(1). "Are you a CFP or certified financial planner?"
(2). "Are you a fiduciary?"
(3). "Will you give specific tax advice or will it be, I need to talk to my tax person about those things?"
(4). "Other than investment advice and insurance, if they're an insurance agent, or tax advice, if they happen to be a CPA, what else will you advise me on?"
(5). "How long have you been an advisor?"
(6). "How do you charge?"
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John's firm website: https://www.trinfin.com
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TRANSCRIPT:
Bridget: What should you ask when you're hiring a financial advisor or financial planner? That's what we're going to talk about in this episode. We've got six questions that we think you should ask. Hi, I'm Bridget Sullivan Mermel. And I'm a fee-only financial planner in Chicago, Illinois.
John: And I'm John Scherer. I'm a fee-only financial planner in Middleton, Wisconsin. And before we talk about those six questions you need to ask before hiring a financial planner, we want to remind everybody to hit that subscribe button. That helps other people find this content on YouTube. And with that, after hitting subscribe, let's talk about what questions you should ask.
Bridget: Sure.
John: I think about what questions do I want people to ask? In other words, if I were not a financial planner, what would I ask and what do I want my friends to ask. That sort of thing.
Bridget: Right. So the first question I have is, are you a CFP or Certified Financial Planner?
John: Yeah, what kind of credentials do you have? And I was just talking to a friend the other day. And his wife is in residency right now. She's going to be a cardiologist of some sort. And then she got into a fellowship here at UW Madison. So she's been in school, medical school, residency, and now another three year fellowship. And I was just kind of joking with him because in our world, you fill out a couple forms, you take a 50-question test, and you can be a financial advisor.
You can also say you're a financial advisor if you don't do that. So from the idea of credentials, if you’re a CFP, or if you're looking just for investment advice, CFA or Chartered Financial Analyst can be one designation, or if you're a CPA, that's another good designation, especially on the tax side, but these don't mean you're good. It means you have some base level of knowledge, and you have some basic skills.
Bridget: And you've applied yourself.
John: Yeah.
Bridget: The other thing is that in our industry, knowing that people are impressed with credentials, some people get credentially sounding things that we don't think are actually worth that much. And you have some of those.
John: I do. I should have brought our big banner.
Bridget: You get a big plaque for it. So there are things for the insurance world. If you're hiring an insurance agent, there is the CLU, Chartered Life Underwriter, or the CHFC, Chartered Financial Consultant. Those are for the life insurance industry. Again, if you're hiring somebody for life insurance advice, that's a great thing. I got those when I was in the life insurance world. There's also one called LUTCF. I can't remember what that is. That's an insurance one, too. But maybe the more letters, the better off it sounds sort of a thing.
Bridget: Right.
John: But there're some folks that have alphabet soup behind their name. But for my money, if I'm hiring a financial planner, it's the CFP that’s sort of the gold standard.
Bridget: Right
John: That's the one that I want to see. That's why I tell friends, “Listen, hire somebody else and make sure they're a CFP.”
Bridget: And I'm both a CFP and a CPA. And I got to say, the CPA test is harder than the CFP test, and you have to know a lot more. But for what we do, the CFP is great. And then the CPAs have another designation called the PFS, which is the CPA’s competing certification with the CFP, but it's similar in nature to the CFP.
John: So having some credentials, some of those gold standard ones, not the rest of the alphabet soup, and knowing a couple of those, I think is a really important question. Would you hire a dentist if they didn't have DDS after their name? Would you go see a doctor that wasn't an MD? Of course not. It's sort of the same thing as I think about that.
Bridget: And I think in the industry, there're 200,000 financial advisors, and I think there're like 75,000 CFPs, so probably most people are not CFPs, which is kind of crazy.
John: The thing that I think comes after what are your credentials? is: are you a fiduciary? And that's a buzzword. We've been fiduciaries for a long time. That means, basically, are you required to put your clients’ interests in front of your own and disclose when there's any conflicts of interest? So are you a fiduciary? And then the other one is, are you a fiduciary all the time? I know there's a lot of folks in our world who say, “I'm a fiduciary. Well, except for when I do this, except for when I'm selling insurance or except for when I'm in this stage.” So, yes, they're a fiduciary for this slice of business, but not for all slices of business, which I think can be really confusing for the consumers.
Bridget: Yeah. And I think consumers want fiduciaries. They want somebody to be a fiduciary all the time. Period. And coming from the CPA world, people trust CPAs, because they're fiduciaries. And so, coming from the CPA world into this world where the concept of being a fiduciary is actually innovative.
John: Or optional.
Bridget: Yeah, optional. And there's a lot of parsing going on in the industry with people saying, “We can just recommend things that are suitable. They don't have to be in the client's best interest. It just has to be suitable.”
John: And most of our industry, it's the suitability clause. Is this reasonable? Let's say for an individual having an S&P 500 mutual fund makes sense, based on the S&P 500. So if that makes sense for the person, and there are funds like that whose expenses are 0.1%, and there are funds like that whose expenses are 1%, ten times as much. As long as the investment is suitable, a person who's not a fiduciary could say, “Listen, I'm going to have you buy the higher fee one, because maybe I make more commissions,” or whatever it is. That's suitable. If you're a fiduciary, you have to have a reason for why would you pay ten times as much for this investment? Sometimes there are reasons to do that.
Bridget: Right.
John: But that would not be fulfilling your fiduciary responsibility if you knowingly had somebody pay a lot more for something than what they could have gotten otherwise.
Bridget: Absolutely. And I think that the fiduciary responsibility when you're selling insurance is extremely tricky, because generally, term insurance, I would say 99% of the time, is in the client's best interest, not these other policies that insurance people sell.
John: Well, the other thing when you're selling insurance is you're acting as an agent of the insurance company. You're legally obligated to represent the company's interest, not necessarily your clients. And not that insurance agents aren't trying to do good things, but it's just that idea of, do you want somebody who is on your side of the table all the time?
Bridget: Yeah, if you're an agent, you're not a fiduciary, is that correct?
John: Right. I liked it when you were talking about being a part of the CPA world where everybody's a fiduciary. That kind of leads into the third question that I think makes sense to ask somebody as you're looking for financial advice, is, will you give specific tax advice, or will I need to talk to my tax person about those things? That's the other place where I really think makes a difference, because as I see it, most people want to know, what should I do about my tax situation? What should I do to make donations to charity, or how should I manage this?
And in my experience anyway, the people in the investment side of things, they say, “Yeah, we do tax advantage investing, those sorts of things, but we don't actually give tax advice.” And if you look in the fine print at the bottom, it says, “We don't give tax advice.” Well, isn’t that what we want as consumers? And the CPAs, for the most part, are wired to report what happened, but not as much on the planning side, at least from the tax focused people. But if you can find people do both, and of course, you and I both do that, giving proactive, actual, specific tax advice, I think is a huge advantage. That would be one of the questions I'd ask if I were looking for an advisor.
Bridget: Yeah, I agree. One of the reasons I got in the industry was because I would see tax returns, and I would be enraged with how the investment people were handling their taxes, poorly handling their investments and the effect on their taxes and me having to give them the bad news, like, “Hey, owe a lot because of this.” Anyway, the next one is, other than investment advice and insurance, if they're an insurance agent, or tax advice, if they happen to be a CPA, what else will you advise me on? So, for instance, we talked to a lot of people about Social Security. When should I take my Social Security? Another question is, can you figure out how much I should spend on a mortgage?
John: How much house can I afford to buy?
Bridget: Right. Another question is when can I retire?
John: What should I do about this pension option that I have? Those sorts of things. And many times, when people that hang their shingle as a financial advisor, they focus on the investments, saying, “Yes, we do investments for folks and only the stuff that we manage.” And then often it'll be life insurance, so they say, “I do insurance too. Life and disability insurance.” But what about homeowners’ insurance and umbrella insurance and those sorts of things? Not that we as financial planners necessarily give advice on that, but we help people talk with their insurance agents about those things.
Bridget: Right.
John: And we address it as part of the financial plan where, jeez, you need to talk to your insurance agent to see if you have enough umbrella insurance, or do you have the right deductibles on your car insurance. And most people haven't had somebody talk to them about insurance that's not trying to sell them more insurance. But again, those are the types of questions I would ask. One of the other things that I've ended up talking with clients a lot about recently for some reason is buying cars and how to think about taking a loan and buying new versus a couple of year old one.
And those sorts of discussions can be a big part of our conversations with people. And again, asking your prospective financial planner, well, will you help me give me specific Social Security claiming advice or give me specific advice on how to talk with my estate planning attorney and those sorts of things that, again, so often you'd expect that, I think, from your financial planner, but so many people in our world are in the position where they don't do that or they're not allowed to by their companies.
Bridget: Yeah. And the last thing I would say is, what about your wills and your estate plan? It would be nice if you could run that by your financial person so that it's all coordinated.
John: Yeah. We talk a lot about that. And just to be really clear, we don't sell insurance. We don't give specific insurance. We're not attorneys; we can't give legal advice. But we can read through the contract and say, “Jeez, here's what it looks like to me. Maybe we should ask your attorney about this.” If this isn't clear to me or to you as the client, maybe we should go ask the attorney about it, and we can be an advocate, not necessarily giving advice from that side of it. Whereas on the tax side, giving advice is really useful. When people come in and talk to me, or if you're interviewing an advisor, if they don't look at your tax return, how can they give you tax advice on things? And they're talking about investments that are tax efficient, tax advantage, but they don't know what your tax return looks like. That's a red flag.
Bridget: Well, taxes sell a lot of investments, but they don't necessarily pan out. Okay, next topic is, how long have you been an advisor? So that's our number five. And that can really go either way, because I think some people who are young advisors, just starting out can give people more attention, and they might work with younger people with less assets than older, more experienced advisors. So I'm not saying that how long have you been an advisor is a deal breaker. It's more just something to be aware of.
John: Well, as somebody who's been around for 20 years, I would say if anybody's got less than 20 years of experience, you should never talk with them😊. When you're starting off, when you have ten clients or so, you have more attention compared to somebody who's got 100 clients.
Bridget: Yeah, I took clients at the beginning and helped them, and I had thought we had great relationships, but unfortunately, I wouldn't be able to do the same thing now just because I need more assets to work with. Last is, how do you charge? So we try to be very upfront about our fees, but I actually think that clients don't care that much. Most clients want to know that it's fair, but they realize the financial advisor is going to charge them.
John: For me, it's put it in dollars. And we work on a fee-only basis, but there’re places where you sell things, and it's on a commission basis. And if you know what you're paying in dollars, part of the problem in the fee-only world is, well, 1% of your assets or 1.25%. Well, what does that even mean? People are bad at math.
Bridget: People can't do that math.
John: And you go, hey, this means that your quarterly fee is $5,000. That puts it in context, so you know what you're paying. Putting it in dollars makes a big difference, I think. And knowing what you're paying. Most people don't even know or can't figure it out. If you know what you're paying, you know it in dollars.
Bridget: And they want to admit that they're not going to do the math in their head. We do math in our head just as a thing. I don't see that as a badge of honor. I just think of it as a natural thing that I do.
John: But currently, if you have it, a financial advisor, if you don't know, find out, what are you paying them?
Bridget: Nothing's free. So it could be baked into the cost of your insurance or your investments, but it's interesting to know.
John: “Nothing” is not the right answer. “You're not paying me anything.” Nobody works for free.
Bridget: “Oh, don't worry about it,” or “I don't know” is not an acceptable answer. “I got to get back to you.” That would be the answer that I would actually not accept.
John: Yeah. And for me, it depends. “I got to get back to you.” If they get back to you on something, sometimes you have to do the math on some stuff. Maybe they need to do the math on it themselves. You go, “I don't know.” Some advisors have a thousand clients, and you go, “Oh, geez, I don't. Hey, I'll figure it out. I'll get back to you today.” It's not a two-week process.
Bridget: Good point. Because for us, we have to see everybody's information before we can tell them how much it'll cost anyway. So those are our tips for what to look for when you're hiring a financial advisor or financial planner. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, so if you want to ask us those six questions, we'd be glad to talk to you. But we're also members of the Alliance of Comprehensive Planners, which is a group of nationwide fee only financial advisors who think similarly to the way we do. So if you like what you hear on Friends Talk Financial Planning. Check out acplanners.org to find an advisor in your area.
Bridget: And please subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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