Last Fall, I was speaking with a former pharmaceutical colleague of mine (let’s call him Greg), and the topic of Financial Advisors and their services came up. Greg was quick to tell me that he was already working with a “Financial Advisor,” and he mentioned the name of the well-known wire house that his Advisor worked for. Greg had been working with his Advisor for over 10 years, and he noted that the Advisor had won a number of awards from his company. Over a period of months, I learned more and more about the services provided to Greg by his Advisor. In the end, Greg’s Advisor was nothing more than an order taker who bought and sold stocks at Greg’s direction.
Many consumers are confused about the financial services industry and the services that are offered. The Advisors working for wire houses such as Merrill Lynch or Wells Fargo can assist you in buying or selling stocks, bonds, or mutual funds for your portfolio. These wire house advisors will manage your money, and typically will receive a fee based on a percentage of the value of your assets under management (AUM). Others are paid on a transactional basis, so they get a fee every time they buy or sell a security on your behalf. Some may even put together a projection of your investment assets and their forecasted growth to show you what you might amass by the time you retire. But, there typically is no goal to their investment strategy, i.e., their allocation is not specifically designed to grow your portfolio to an amount you will need to live comfortably in retirement. More importantly, a wire house advisor typically does not put together an all-inclusive comprehensive plan to help protect you from any potential financial threat to you or your portfolio.
On the other hand, a Registered Investment Advisor™ (RIA) acts in a fiduciary role and does everything a wire house does plus much more, often for a similar fee. An RIA prepares a comprehensive personalized financial plan, and updates that plan on an ongoing basis. This plan shows the client’s assets today, and how those assets will grow each year based on a recommended allocation of stocks, bonds, real estate, and cash. RIAs can recommend tax planning strategies, and some will even include preparation of your tax returns in the fee. RIAs can review your life, health, auto, and home insurance to be sure you or your family are not exposed to a financially devastating event that can lead you to bankruptcy. A good RIA will coordinate your estate planning needs with a qualified attorney with whom they closely work. This attorney will make sure your wills are current, that you have adequate Powers of Attorney for both Financial and Medical needs, and that you have an Advanced Directive (a/k/a Living Will) in place “just in case.” Ask your wire house “Advisor” about these items and you will likely get a blank stare.
Greg had a very complicated financial situation that was well beyond the capabilities of a wire house, but his Advisor had not identified, discussed, or addressed any of the following issues over the 10 years that Greg worked with him. Greg did not have a comprehensive financial plan, and did not know if he had enough saved to retire comfortably. He had company restricted stock and stock options and needed tax expertise to time the exercises so as to minimize his tax impact each year. Greg also needed to consider Long Term Care Insurance options, as he and his wife were in their 60s, their assets were large enough that he would not qualify for Medicaid but small enough that the cost of an extended stay in a Long Term Care facility would put the other spouse in financial hardship. Since he was considering waiting until 70 to begin his social security payments, he needed a tax-efficient strategy to plan for the income gap that would occur between the date of his retirement and age 70. Finally, he and his wife owned their principal residence in PA, an out-of-state vacation home at the shore, and an overseas condo. They needed to have specialized estate help if they hoped to keep the vacation home out of probate, and they would need to understand the tax implications of selling the foreign property and how to convert the foreign currency to USD.
Greg also had a “disease” typical of many undisciplined investors….panic selling disease. Clients such as Greg need a strong advisor to keep him calm when the market contracts and prevent him from “selling low.” In the 2-1/2 months ending in mid-February 2016, when the S&P 500 fell approximately 13%, Greg instructed his wire house Advisor to “sell some losers,” effectively locking in his losses. If Greg’s advisor had calmed him down and educated him that these market fluctuations were normal and that the market would recover, he could have avoided selling at a loss. In fact, the market fully recovered from its February low back to its December high within 2 months. When I asked Greg what his return was with the Advisor, he did not know. (He later told me his broker calculated that his portfolio was up 25%, but he could not tell me the period over which that growth occurred.) It was clear to me that Greg was receiving sub-optimal service.
If you are looking for an advisor, interview many of them and ask a lot of hypothetical questions. First and foremost, you must first identify an advisor that you can trust. Ask them if they provide the all-inclusive services outlined above, or if they just manage your money. Ask if they hold a professional designation for financial planning such as the CFP® or the AICPA’s PFS designation. Ask specifically if they are qualified to give tax advice (CPA or EA) and to prepare your tax return. I am sure that after collecting this information, you will make the best selection for your personal situation.
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