Qualities to Look For A Planner | Resilient Asset Management

What Qualities to Look For in a Financial Planner

Christopher D. Flis | Aug 25, 2022

Background

When I grew up, it was still the age of the Stockbroker. Seemingly, everyone had "a guy", the best of whom provided stock tips on then-unheard of companies with mysterious ticker symbols. It was alchemy....you wrote a check for a few thousand bucks and voila, your guy turned it into more with his compensation consisting of only a commission. With the rise of the internet, which provided fingertip access to stock information and the concomitant advent of the discount broker, the stockbrokers' days were numbered. The Mutual Fund, which consolidated individual investor funds for wholesale management was the death blow. Today, I don't know if any stockbrokers still exist.

The distant cousin of the stockbroker was and still is the insurance salesman. He was there to provide information and protection from all calamities ranging from disability all the way to death. The products in this space are countably infinite with every sale resulting in a commission for the salesman. The insurance industry is still alive and well today.

As with other industries, the Internet made financial information available to us all. Rather than having products or investments explained to us, we can read up on them beforehand, and thus come to meetings well-armed with information. A similar phenomena came to other industries, like automobile sales for example.

Today, it is not so much the products or the investments that are sold. Rather, financial ideas, planning, and implementation are the new hallmarks of financial services. And the conspicuous consumer of financial services ought to consider multiple things before allowing a financial professional into the hallowed sanctum of his/her personal finances.

Table Stakes

The following are some simple questions and issues to discuss with your prospective Financial Professional very early in the first conversation:

Are you a Fiduciary? A Fiduciary is someone who acts for the sole benefit of the person to whom he/she is serving. This is an all or nothing proposition...if you don't get an unqualified "yes", make sure you understand why.
What is your fee structure? In my view, "Fee Only" is the ideal answer as this means the financial professional's only compensation is the fees you pay him/her. "Fee-Based" or "Fee-Oriented" open other cans of compensation worms (like Insurance Commissions) you should investigate further. By no means does "Fee Only" eliminate all conflicts...whenever money is involved, there is always an inherent conflict of interest. However, Fee-Only does at least minimize conflicts of interest insomuch as you know the one and only way the Financial Professional is paid.
Regulatory Record. Are there any entries on the Individual's Form ADV? No is the preferred answer here.
Takes an All-Aspect view of your finances. If your prospective Financial Planner guarantees anything in the way of investment performance, walk away. Instead, the ideal Financial Planner should touch on the 5 major areas of your finances: (i) Cash Flow Management; (ii) Risk Management [Insurance]; (iii) Income Taxes; (iv) Estate Planning; and (v) Investments. All these areas are important to address, so make sure the Financial Planner will include each in his/her service delivery.
Credentials. The Certified Financial Planner(TM) or CFP® is the gold standard amongst Financial Planners. You can read more about the requirements here.
Fees. 1% of Assets Under Management is the de facto industry standard these days. Over to you on using a low-cost provider when it comes to your finances.

Now we can move on to some more specific details.

Referrals

No one person can know all that a Financial Planner, Accountant, Attorney, and Investment Manager can now....you are talking about multiple professionals there, each with its own professional designation.

In order to adequately and effectively service Clients in a Fiduciary capacity, a Financial Planner will almost undoubtedly refer Clients to other professionals. When this happens, the other professional - think Estate Attorney or Insurance Agent will get paid, frequently before the Financial Planner send his/her first invoice. Your Financial Planner should be very willing to do this for you during your relationship. If he/she tries to do it all himself/herself, watch out.

Think of your Financial Planner as the General Manager of your Team - there should be multiple professionals involved in managing your financial affairs.

Working Behind the Scenes

Life is busy, we all know that. One of the benefits when hiring a Financial Planner is that you have someone to whom you can outsource some of the financial heavy lifting, which both frees you up to do other things and insures the items are handled in a professional manner. Here are some examples:

Checking Beneficiary Designations of your Retirement Accounts
Ensuring your Trust is funded properly so you avoid unintended Probate Issues for your family
Reviewing Estate Documents for relevancy and accuracy
Updating your address when you move
Communicating with your accountant to ensure all 1099s are accounted for in your Tax Return
Reminding you of Required Minimum Distributions (RMDs) early enough so they are not missed
Informing you about the possibility to contribute to a Retirement Account
Suggesting Income Tax friendly methods to donate to your favorite charities
Planning ahead for your impending Medicare registration
Being proactive in suggesting new strategies related to tax law changes

There are a whole host of things to add to this list - it is decidedly incomplete. Suffice it to say, several times throughout the year, you should say tell yourself, "I'm glad I have my Financial Planner looking after that", or something to that effect.

Investment Management

Very few people can "beat the market" over time. Moreover, identifying this rare species in advance is nearly impossible. Sadly, even outperformance over a given period of time - say 10 years - is likely to be attributable to luck as much as skill. And don't forget, market beating returns may also be due to increased risk taking that was timely. Therefore, basing your financial planning decision solely on past investment performance is generally not advised...there are simply too many variables contributing to the performance number.

Rather than exclusively zoning in on investment performance, here are some other factors related to your investment manager you may want to consider:

What types of investments do you recommend? For those just starting out, Passive Index Funds and their low fees are for you...when you first start accumulating, how much you save will have much more of an impact than how it is invested. As your assets grow, a Financial Planner may want to add other investment vehicles to the periphery of the portfolio - REITs, Actively Managed Stock Funds, and perhaps an individual stock or two....these investment should make up a small portion of the overall portfolio.
Trading. Your Financial Planner should trade rarely as activity typically hinders overall performance die to trading fees and income tax consequences. Both Financial Planner and Client should be thinking Long-Term.
Tax-Loss Harvesting. While we hope all investments will work out well, not all do, thus making losses unavoidable. Therefore, throughout each calendar year, your Financial Planner should look to advantageously take investment losses, while also considering the impacts on other parts of your financial situation.
Re-Balancing. While we do not want to trade every day, we do want to keep on eye on Asset Allocation to make sure rocket-like stock market performance does not undo our desired asset allocation. Aggressive saving may also upset an initial asset allocation. Thus, examining the portfolio periodically ought to be part of the Financial Planner's tasks.

Does the Financial Planner recommend strategies that will decrease his/her compensation?

If a Financial Planner is compensated by the amounts of assets under management (AUM), then he/she may be persuaded to drive that number higher in a myriad of ways. A top-notch Financial Planner should not let compensation enter into the decision matrix in his/her recommendations to Clients - this logic is a cornerstone of the Fiduciary Standard. Here are a few cases where a true Fiduciary is doing his/her job:

Delaying Social Security Claiming.

Delaying Social Security increases a Client's eventual monthly pay-out. In most (not all) cases, this is advantageous to the Client. However, to compensate for the foregone income, the Client may have to draw down investable assets from age 62 to 70, thus decreasing AUM and the Financial Planner's compensation. If your Planner is recommending claiming early - especially at 62 - and you are sitting on a mountain of assets, keep asking questions.

Paying off a mortgage or Home Equity Line of Credit (HELOC).

Debt is a serious issue for retirees as there is typically no more salary to make monthly payments...assets are what they've got. Most people are a bit uncomfortable carrying debt into retirement for this reason. If your Financial Planner is recommending to keep the mortgage, or even worse, to take out a HELOC instead of using your assets for funding living expenses, which will decrease his/her AUM, watch out.

Utilizing an Employer Provided Retirement Plan to maximize the Client benefits.

Most of our Employer-Provided 401(k)s have matching funds, thus making them an enviable investment option. A prudent Financial Planner should be steering your first investment dollars this way as the matching funds provide an immediate 100% return on your investment. If your Planner is recommending you direct funds exclusively towards accounts he/she manages, watch out.

Telling you what you may not like hearing.

Sometimes a person's financial situation is difficult and the Client may be wanting to do something that will clearly lead to dire financial straits later. In these instances, it is the Financial Planner's job to have the difficult conversation with the Client. While this might jeopardize the relationship, the alternative - financial disaster - is best avoided. From time to time, there ought to be a few uncomfortable discussion points.

Recommending the Survivor Benefit Plan to a Military Retiree Client.

The Survivor Benefit Plan (SBP) is one of the more weighty decisions a prospective Military Retiree must make. The Military Retiree choosing the maximum Military Pension protection via SBP takes money right off the top of his/her monthly pension payment, thus decreasing take-home pay for the retiree. I have seen many well-intentioned presentations on alternatives to SBP, most of the permanent life insurance variety - none has convinced me that any other option aside from SBP can accomplish the same goal in a cost-effective way. Choosing SBP denies a healthy revenue stream to the would be insurance agent.

There are other examples. This small set should give you some indicators that you hired the right person.

Putting It All Together

There are a number of outstanding Financial Planners out there today. Even better, specialization is becoming increasingly common - we call it a niche in industry parlance. This has been great for those seeking financial advice: If you are an Active Duty Military Person who is about to retire, wouldn't it make sense to talk to a Financial Planner who is a military retiree? If you are a small business owner with business-specific financial issues, wouldn't a Financial Planner specializing in serving Small Business Owners seem like a prudent choice? I have even met a Financial Planner specializing in Cross-Fit Gym owners...I am not making that up.

And the new breed of Financial Planner is tech-savvy, on-line, and ready to service Clients in a variety of convenient ways - Videoconferencing, Text Messaging, Digital Signatures, and fingertip (smartphone) access to data. Moreover, the new breed is migrating away from the investment management and commission-centered world of the yesteryear and evolving to a more all-aspect form of financial advice. There really are some fantastic offerings out there for Clients. And even better, one of the primary boundaries - location - has been seriously torn down. I service Clients literally around the globe with the timezone difference being the biggest challenge...all else is about the same as if they lived down the street from my office.

At the end of the day, Financial Planning is a relationship business. So while the above attributes and mindset are vital, it is also critical that you have a great working relationship with your Financial Planner. You may not want to be best friends with him/her; however, you do have to be able to have a pleasant chat every now and then.

Comments, criticism, and suggestions are always welcome. If you would like to provide any or would like to discuss your personal situation with Resilient Asset Management, please contact us here.