Financial Planning- Who Should You Trust

by Geoff Sgarbossa, CD,CFP,RIS, Financial Planner, Keill & Associates Wealth Advisory

Why Seek Professional Advice? 

I’m too embarrassed with the state of my finances. I don’t have any money to invest. Every time I talk to my advisor, I’m committing to another payment of some sort. I’ve heard of all sorts of scams out there and I don’t know who I can trust. I only work with a fee-for-service, or fee-only-advisor to avoid biases. I prefer to do it myself. Fees are too high.

What do all these comments have in common? They are all justifications I hear for why people do not seek professional advice. You do not need to be a millionaire to surround yourself with a team of professional advisors. I would argue that more millionaires are made because they have learned to delegate and surround themselves with professional advisors early on. There are only so many hours in the day, so make the most of them! A true professional is not there to judge. Don’t be embarrassed and don’t wait. Success starts with taking the first step, no matter how uncomfortable it may be!

Planning vs. Sales

Let’s address the elephant in the room! Everyone in the financial industry is in sales. We all need to sell a product or service to pay the bills; it is the approach that makes all the difference. Sales pitches generally focus on select few benefits, and rarely address any downsides. A well-prepared and delivered sales pitch will tug on the heart strings, making you feel guilty if you do not act now! Planning, on the other hand, helps remove emotion from your decision-making process and puts you in the drivers seat.

The planner provides you with multiple options- Course of action (COA’s) for you military types. All COA’s will achieve a desired goal(s), but all will come with their own set of pros and cons. It’s up to you to decide which COA provides the best pros, and with cons that you're willing to live with-is the “juice is worth the squeeze”, so to speak. Both processes may ultimately end up with the same product or service recommendation, but one leaves you feeling taken advantage of and dirty. The other provides you with information required to make an educated decision for yourself, and leaves you feeling empowered as the hero of your own story.

In your best interest

All professionals claim to have your best interests at heart. To be able to make a recommendation based on your best interests, the advisor first needs to know and understand you, your family, your goals, your attitudes towards money, life, economies, people, investment styles, and so on. Discussions may get uncomfortable, or even stray into embarrassing territory, but remember, the true professional is not there to judge. The advisor that truly has your best interests at heart will not be able to provide any recommendations without getting to know you first. If an advisor provides recommendations despite your refusal to provide personal info, or leads the conversation with product or service discussions, “in your best interest” is impossible since they have no idea who you are! As uncomfortable as it may be, the advisor who has your best interests at heart will tell you that they can’t proceed until they have the information required to be able to show how recommendations are in your best interest. This is the advisor you want to be working with despite the uncomfortable conversations, because they are proving that they actually do have your best interest at heart. Anything else is a well-dressed sales pitch!

What am I paying for-really?

As stated earlier, nobody is in the business to work for free. Fees are a fact of life! You generally get what you pay for, but fees without value are just silly. Broad strokes, fees are going to be broken down into 2 main categories. Product and Management fees, and Advisory fees.

• Product and management fees are fees that go to pay product/service providers for the various products and services being provided. This could include insurance companies, fund companies, accountants, lawyers, trade fees, ect.

• Advisory fees pay your advisor recommending the various providers above, as well as the organization providing all licensing, compliance, legal and back office support for the advisor.

  
  

Fee Structures

There are many forms of fee structures depending on various things like, licensing, jurisdiction, how the business is set up, type of client they are trying to attract, and so on. It is important that you know what you are paying for, how much, and to whom that money is going. The fee structure that is best for you is not static, and will change as you grow. Some firms allow for various fee structures and will grow with you, and others will require you to leave for another once you outgrow their services and fee structures.

Fee Structures Remove Biases

Fee structures do not make honest advisors! The ‘find a fee-only planner” advice that I hear a lot is not the advice you think it is. The average cost for a fee-only planner will be about $1,000 - or more - for a complete financial plan, that is not biased towards any products they sell. Then you need to go purchase the products and services recommended in that plan. Why not go to a financial planner who doesn’t charge you the $1,000 for that same plan, and sells the recommended product instead? If you're just getting started, you may pay that advisor $20 in the year. Why would you pay an extra $1,000 for the same result!? Does that fee-only planner have your best interest at heart and tell you as such, or did they pocket the $1,000+ and send you packing? Fee structures will change biases, but will never remove them. See the above factors to ensure an advisor has your best interests at heart.

Apple to Apples Comparisons

There are all sorts of slick marketing materials around knocking one product and fee structure to another. A common one I see a lot is comparing the fees of actively managed mutual funds through a licensed advisor to a self-directed index ETF. These are two very different products targeted at very different needs.

Remember we both pay management and advisory fees. The index ETF will have lower management fees due to the lower trading volumes, different record-keeping requirements, and far less mouths to feed since all they are doing is copying what their applicable index is doing. Actively managed funds require many more mouths to feed- multiple fund managers, armies of analysts, facilities to house them, and more. Remember that advisory fee? If you remove the advisor and go with self-directed plan, you are also removing the associated advisory fees - but be prepared to do it yourself. Everything stems back to knowing what you are paying for, and you get what you pay for! An arbitrary lower fee for a completely different product type is not a reasonable comparison, but like any good sales pitch, it does tug on those heart strings and makes you angry! Know what you are paying for, and only pay for what you need.

Summary

Finding a firm with the products and services you’re looking for, with fee-structures and processes that prioritize the best interests of their clients, and an advisor that you would be comfortable inviting to your kids’ wedding is a daunting task! Don’t be afraid to shop around and ask a lot of questions- as a matter of fact, we highly encourage it! The first discovery meeting should consist of hard questions if they truly have your best interests at heart, but this is a two-way street. Don’t be afraid to put the advisor and the firm in the hot seat as well! The advisor is determining if they will be able to add any real value to your situation, and it is also your opportunity to determine if this is a firm and advisor you would feel comfortable working with and trusting. Here are some preliminary questions you should ask about:

1. Licensing, training, experience and  disciplinary history

2. Fee structures and flexibility to grow with you

3. Type of client they typically work with and areas of specialty

4. Work flows, complaint processes, deliverables

5. Team members and other specialists, such as partners

   
   

Most of this information should be offered as part of the discovery and engagement process, but if it isn’t, don’t be afraid to ask - and question why it wasn’t offered up. Reach out to our team to see how we can add real value and peace of mind to your life.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as financial, legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional financial, tax and legal advice should be obtained for the readers’ own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory Team.