Our Blog Post today is brought to you by a fellow NAPFA fee-only financial advisor, Rich Feight, CFP®, at IAM Financial, LLC.

Being a financial advisor can be very rewarding career. But it can be comical too because of the awkward conversations when someone asks you “What do you do?” and you say you’re a financial advisor. Most people think – financial guy = salesman, and immediately regret asking.

One time on a flight to Europe, the lady next to me asked what I did for a living while we were taxiing down the tarmac. “I’m a financial advisor” I replied. She immediately grabbed a blanket, rolled over, and pretended to sleep for 10 hours.

Unfortunately, most people that hold themselves out as financial advisors are really salesmen. Which is fine if you need their product. It’s not so good if you don’t.

A few years ago I was at a local estate planning group’s meeting and was approached by a financial advisor for a large insurance company. He knew I was a fee-only CFP® and didn’t sell insurance. He also knew I had a young family and naturally saw an opportunity to sell some insurance. I bit. We met a couple weeks later over a coffee and discussed his service. Also being a CFP® I thought he might ask me some questions about my situation, put together a quick needs analysis, and suggest an insurance product that fit my situation. That was not the case.

He began to tell explain how whole life insurance could be a great investment. He then showed me illustrations of 20-year whole life policies with a 5% return. At first I was impressed with the returns. “A 5% guaranteed return over 20 years is great!” I said. “It’s not guaranteed” he said. “Still, that’s not bad even if you start getting 5% for the next 5 years while most rates are below 2% that’s really good” I said. “You don’t get those rates right away” he said. “You have to hold the policy for 20 years to get those returns.”

“So, I have to pay a high premium for 20 years, and hope that I get a 5% return?” I asked. “Yes” he replied. Hmmm…. I still have my 30-year term policy today.

My “financial advisor” friend was an insurance salesman first, and a CFP® second. He can sell mutual funds and stocks, but his planning centers around insurance products because he works for an insurance company. If you don’t need insurance, watch out. You’ll be advised on getting a policy anyway. And that’s the reason, that lady was so uncomfortable sitting next to me for a 10-hour flight to Europe.

So what should you do if someone says they are a “financial advisor” and you want to avoid the awkward sales pitch? I suggest asking them the following:

1. Are You Fee-Only?

A fee-only advisor is only compensated by the client. There are no hidden fees buried in disclosure. There are no high commissions and subsequent surrender fees. There are no kickbacks when they recommend you visit an estate planning attorney to have estate planning done. When you work with a fee-only advisor, you know exactly what you are paying because the fees are completely transparent. Being fee-only also eliminates most conflicts of interest associated with compensation.

A prospect came to me that had retired out of a local Fortune 500 company only to take a consulting job at one of their suppliers. He had just met with another advisor that sold him an IRA annuity for his $400,000 401k at the last job. That advisor $28,000 off 7% commission on that single sale of a product that my new client was beginning to question. After reading information online he heard that annuities might not be the best thing to put inside an IRA and was beginning to have second thoughts about his choice. He asked me to do some analysis on the product as an investment solution. After reviewing the prospectus and disclosures we figured out that along with the 7% commission and 7-year surrender fee, the internal fees totaled 2.5% each year. These fees included sub account investments expenses and the mortality and expense insurance portion of the product. The new client wasn’t happy, which leads me to the next criteria for choosing a financial planner:

2. Are You A Fiduciary?

At my blog Thinking Beyond Number I wrote an article entitled Does Your Advisor Use the “F” Word. This article details what a Fiduciary is, and why your advisor should be one. Basically a Fiduciary has to put your interest ahead of their own with your money, even if they make less money doing it. Most investors think their advisor already has to put their interest first. But their wrong. Not everyone is a Fiduciary like myself and Addis & Hill. Most people that hold themselves out to be a financial planner or advisor are actually held to a suitability standard where the recommended product only has to be suitable for the investor based on consideration around their income, net worth, investment objectives, risk, etc. It doesn’t necessarily have to be in their best interest.

If my client above was told, you’re paying me $28,000 to help you with this decision. And you’ll pay $10,000/yr in expenses every year for this amazing product, he wouldn’t have bought it. It may have been a suitable investment for his risk tolerance, but it was not in his best interest.

3. Are You Independent?

Independent advisor aren’t tied to any particular product or fund company so they can choose what is really in the best interest of the client. When I get a prospect from Broker X they usually have the same fund companies as all the other prospects from that same broker. Sometimes it’s American Funds, Blackrock, or Riversource, depending on the brokerage, but the fund companies rarely change, which makes me question why they all choose the same mutual funds. It’s the same for the guy selling insurance as an investment plan. Are whole life policies really the solution to all retirement questions? I actually had a surgeon come to me that was investing $25,000 a year for retirement in a whole life policy with no other savings vehicle. The crazy part was he was single and didn’t even need insurance. So if your advisor recommends a certain fund company or product, ask them why they are recommending that product over another.

4. Are You a Certified Financial Planner™?

The CFP® is the standard in financial planning. A financial plan is the starting point for any good decision with your money. When someone asks me how my returns are versus the market, I reply, are your goals funded? Returns mean very little without a reason for returns. Most financial plans center around retirement. If you could retire within the next six months’ even if most of your money was invested in CDs and made little return, would you risk losing half your money and not being able to retire by buying all stocks?

A CFP® Professional will create a plan that will define your desired investment returns based on your risk tolerance and planning needs. They will put together a portfolio to get those returns, and periodically update your plan to make sure you’re on track. Of course you won’t always get the desired return, but that’s why it’s a planning process, not transaction.

5. Will My Plan Focus on My Needs?

The last criteria for hiring a financial advisor is key for making your plan efficient. As I mentioned before, some advisors focus on returns. Others on products. But a good financial planner will take a Personal “Holistic” Approach and look at your personal situation to create a plan. This plan should fit your needs by coordinating your investments with your financial plan, and your tax situation.

Right before the Great Recession a prospect came to me that had their investments switched to a high risk, stock portfolio by a big box bank. To add insult to injury, they did so at cost of a $90,000 capital gain only to watch their investments plummet faster than their lower risk portfolio would have during the recession. Fortunately, when we met, I was able to analyze their situation, put together a plan based on their needs, and pick an allocation that met their plan.

High risk stocks were switched to a more appropriate allocation for their risk in low cost, tax efficient index funds. Unfortunately, I met them the year after the gains were captures, so the losses we captured during the Great Recession didn’t offset the $90,000 capital gain on their 2007 tax return. However, the losses we captured have been used to offset gains ever since. They still have $24,000 in losses we can use to offset gains with today. So we were able to put together a tax efficient plan that funded their goals, at a risk level they could handle.

In Summary
While most people cringe meeting a financial advisor for fear of being sold a product. You can avoid the awkward conversation by asking them if they are a fee-only, Fiduciary, independent, Certified Financial Planner™ that uses a personal holistic approach for you.

For help finding planner with these qualifications, check out AddisHill, or NAPFA.

About the Author
Rich Feight, CFP®, EA is a fee-only Certified Financial Planner® in East Lansing and Grand Rapids Michigan that help self-employed business owners and professionals organize their finances so they can retire on time at IAM Financial, LLC