Chances are you probably don’t know what a fiduciary financial advisor does or what makes them different from every other financial planner that comes down the pike. We are amazed every day how few people really know the difference – even those who are sophisticated enough that they should know the difference!
Most generally assume that there is some kind of sales pitch coming from most advisors, and that is true. For most “financial advisors” are commissioned sales representatives. They get paid when you buy an investment or insurance product like life insurance or annuities. Sales representatives work for their employer and not required to work in your best interests. Where do you find a good number of salespeople waiting to invest your money? Banks! They are notorious for having reps camped out inside the branch waiting for people who have excess cash needing to be invested. Annuities are the product of choice for these types of “advisors” as they are an easy sell. After all, annuities solve all your problems, right? They provide you with tax-deferred growth, guaranteed death benefits and even living income guarantees. Best of all they are free! What’s not to like? They deal with all your fears. But, what they might not tell you is that you are locked into the product during a surrender period ranging from 7-10 years. If you cancel your policy during that period the company assesses a charge on a decreasing schedule that reimburses the insurance company for the commission they paid to the agent on the front end. Plus, you will pay 2.5 to 5% in expense charges each year for all the guarantees. We have run into many clients who were sold annuities and had many regrets. They are a product that is sold, not purchased. But, that is pretty typical of an advisory relationship that is based on you buying a product of some kind. Now let us be clear there are instances where a product purchase is necessary. You go into the relationship expecting to buy a product such as a term life insurance. We hope you are getting the picture and the potential conflicts of interest.
The other kind of financial advisory relationships is working with a fee-only fiduciary advisor. These kinds of advisors are required by law to work in your best interests, not in the best interests of some investment or insurance company. They charge fees for the services they perform for you. Now these fees can be paid in a variety of different ways. They can charge a planning fee, work on a retainer basis, or charge fees based on the amount of money they manage for you. The kind of fee arrangement should align with your immediate and ongoing objectives. But, these advisors are usually faced with very few conflicts of interests. If there are conflicts they must be disclosed in their company form ADV that they are required to provide to you when entering into an advisory relationship. The ADV is very revealing of the culture of a company as well and worth a read so you are fully aware of how they operate.
The third type of advisor is a fee-based advisor. Fee-based advisors can go either way. They could sell you a financial product and/or charge you a planning or ongoing fee. They can adjust their service offering based on your situation. People mistakenly think that fee-based and fee-only fiduciary advisors are the same as clients use these terms interchangeably. Be careful, they are not the same! We would offer that there are conflicts of interest because fee-based advisors can go either way in terms of how they are paid. It’s a small but significant nuance in terminology. Usually if an advisor is not completely transparent in how they are paid, they are fee-based advisors. They are waiting to see where the opportunities are then they will deal with the issue of compensation, if you happen to ask.
Clearly you might be gathering that fee-only fiduciaries might be the advisor of choice. We think so since we have operated this way since our founding 19 years ago. But, there are three distinct reasons why we think fiduciaries are important to your financial future and worth their fees:
#1 Big Picture People
Fiduciaries tend to provide comprehensive planning. They look at everything associated with your financial situation. They want to know your medical history, family history, family relationships, and your hard wired thoughts about money. They are more than willing to spend the time upfront with you to ensure their eventual advice is the best it can be. They do so because they must work in your best interests and are not posers waiting to sell you a financial product. For example, they should look at your tax return and analyze how everything is flowing through and make recommendations to limit the amount of tax you pay. They should look at all your insurance coverages to make sure you are adequately covered in the event of premature death, injury to self or another, protecting from the costs of nursing homes, or reviewing property coverage. Fiduciaries also usually provide a financial plan that serves as a guide for making their recommendations. They might perform a variety of what if scenarios to see how your plan performs under different stressors during life. Fiduciaries will also determine the best way to invest and manage your 401K, IRA’s, or other non-retirement accounts. Also, and maybe most importantly, comprehensive planning involves spending the time with you to really understand your life and objectives. For all these factors contribute to helping you develop a solid financial plan that will stand the test of time.
#2 Proactive planners
Fiduciary planners are proactive. They are getting ahead of issues before they happen. They will push you to take care of things that are identified in the financial planning process. They hold you accountable for doing the things that you agree to do as part of a financial planning engagement like supplying tax returns, spending data, and other things that pop up in the course of living life. It’s important to these kinds of advisors for you to hold up your end of the bargain. Another important part of being proactive is conducting regular review meetings. These meetings are vital to keeping the lines of communication open. They are a time to review the financial plan and make adjustments due to changes in or anticipated in your life. They are time to pause and look at investment allocations. They are a great time for you to ask questions and make sure you are on track to reach your goals and objectives. Fiduciary planners can also save you from yourself during times when things are not going as planned. The volatility of the markets can be a time they really earn their fees so you don’t make emotional reactionary decisions. Fiduciaries don’t like to learn about decisions you’ve made after the fact. They want to help you before you make a decision.
#3 Transition Experts
Life is about transitions. Fiduciary advisors help you navigate smoothly through the various stages of your life. Some of the more key transitions are having children, experiencing a death in the family, receiving an inheritance, retirement, downsizing, and issues that develop during the later years of life. A fiduciary advisor should be able to accompany you through these stages and provide ongoing advice so you continue to make well informed smart decisions. The true value of an advisor is quite evident during transitionary periods. Good advisors want you to lean on them during these periods.
We have found over the years that most people who are seeking the services of a financial advisor tend to be experiencing some sort of major transition in their lives. Finding a fiduciary financial advisor can make all the difference in making the transition a smooth and successful one. Interestingly, we have seen many who chose another advisory model other than fee-only come back years later wishing they had engaged our services originally. Why? Usually the theme is that they went straight to the implementation phase with an advisor who was selling a product without doing the proactive comprehensive planning work. While the planning process takes a little more time to work through, it is always well worth the investment of time and money to get it right. Isn’t your future and peace of mind worth the effort? Fiduciaries think so!