Interview Questions Before Hiring a Financial Advisor

 Transcript follows below….

This is Jeff Rose, goodfinancialcents.com. Welcome everybody! I have a little neat, exciting thing to share here. I was interviewed by Laura Adams, a.k.a. The Money Girl.  She is actually a contributor to the blog goodfinancialcents.com, so be sure to check for her articles.

I had the pleasure of being interviewed by her for a little Skype interview that we did. This was our first attempt. We had a little static near the end, but we are learning. I’m getting all my technical glitches out of the way.

She interviewed me about interviewing a financial planner for your own services. In the end, I shared some tips on the five mistakes to avoid when saving for retirement or financial planning.  Be sure to check out the interview. Hope you enjoy it. See you later.

LAURA: Hi, everybody. This is Laura Adams from The Money Girl podcast and author of Money Girl: Smart Moves to Grow Rich. Today, I am here with Jeff Rose. I am so excited to be interviewing him. He is a financial planner.

He has a business that is called Alliance Wealth Management. I thought it might be a good idea to find out from Jeff what some of the typical questions are that he gets about financial planning. Jeff, why don’t you start out and just tell us what you do and what type of customers you have?

JEFF: Sure. I have been a financial planner for just over eight years or so, and along the way, I’ve helped many different types of clients.

Being younger, I got started in the business when I was 24, so I had a lot of younger clients that just wanted to start saving for retirement, start saving for their kid’s college education.

Also, I had a lot of the baby boomer generation that was approaching retirement and had a large nest egg like their 401K or their pensions that they’d been saving into their entire lives, and now they had the biggest decision money-wise to make in their lives what to do with it.

They entrusted me to basically devise an income plan for them with that money so that they wouldn’t outlive it. That is really where I wouldn’t say my focus has turned, but just my clientele has turned that way through referrals and through all the different events that I do.

Right now, I service probably about 80% of the baby boomer plus generation. Most of these individuals, I would say, are people who know they need to be invested.

They know they need to be in the market in some way just to keep up with the cost of living and to keep up with their desires in the golden years. They just don’t have the time, and they really don’t trust themselves with that amount of money, so they want to rely on an expert like myself.

I say, expert. I’m not trying to toot my own horn, but they want to rely on a professional to take care of them.

Who Needs a Financial Planner?

LAURA: Absolutely, yeah. I’m curious what your opinion might be about whether everyone needs a financial planner. Does everyone need one, or are some people able to do it themselves?

JEFF: That is a great question. I actually just took a poll of my email newsletter because I was really curious. I just had a hunch. I talk to people all the time who don’t have a financial advisor. They’ve been doing it on their own, or they are not doing anything at all.

I really was just curious, so I emailed my subscribers just curious to know the feedback. The questions I asked were: Do you have a financial advisor? Yes or no.  Why or why not? Of all the people who responded, there was only about 30% or so that had a financial advisor.

That was kind of my hunch, thinking that most people don’t. The most common reason was trust. They didn’t trust them.

They maybe had some bad stories from friends or family members, or they had a personal experience where they had a financial advisor who sold them something that shouldn’t have been sold to them, and they just didn’t trust that direction.

Other people just didn’t know if they needed one yet. They didn’t feel like they had enough money to get started. I think in all those situations, maybe you don’t need a full-time financial planner to manage the investments on an ongoing basis, but I think it’s like a doctor relationship.

You don’t need to go to the doctor every single day, but it’s always advisable to go in at least once a year to have your annual checkup. Why wouldn’t you do that with your financial life just to make sure that what you have in your 401k is where it needs to be?

Make sure that whatever investments you’ve been doing in your own brokerage account are in the right funds, stocks, or ETFs. Make sure you have enough life insurance.

I think everybody needs to have some type of advisor, maybe not on an ongoing basis, but at least someone to check up on and give them that annual checkup.

Different Types of Advisors

LAURA: Yeah, that’s a good way to put it. What are the different types of advisors that people might find out there if they go online and do a search for somebody? Tell us a little bit about the different types of advisors that people maybe would or wouldn’t want to use, depending on their situation.

JEFF: It gets so confusing now because right now, everybody is a financial advisor.  Everybody has that title. They used to be a stockbroker, investment advisor, insurance agent. Right now, I talk to everybody, and they say I’m a financial advisor. I’m like, what does that really mean?

The different types would be if you go to a financial advisor at an insurance company or insurance agency. It has just been my experience that they are just going to lead in with some type of insurance product. That could be an annuity.

It could be some type of whole life or cash-value life insurance. Personally, I’m not a big fan. I don’t want to start harping down on that, but those are the ones that I would stay away initially. I’m not saying life insurance is bad.

Just be conscious of what they are pitching to you and what they are trying to put you into. If you go to any type of big brokerage firm, it could be anywhere from a commissioned advisor where they are going to sell you a mutual fund or an ETF and they are going to earn a commission off that product.

They also could have a fee-based relationship or advisory relationship where you are paying an ongoing fee, a percentage of your total investments with them. Just make sure you are clear on that.

Where the waters get muddy there is you might pay an ongoing fee for your account with the firm, but there also might be transaction charges within the account. There could be internal expenses within the investments that you own. 

The next thing you know, you think you’re paying 1%, and you’re really paying 2½%, and that really starts eating away at your money, and it’s hard for you to grow it.  That’s why my heart goes out to the consumer because there is so many different ways. 

If you don’t ask the right questions, if you don’t know what to ask, you’re just basically at the mercy of this advisor. Just be abreast of that.  The last one -we talked about doing the annual checkup- there are a lot of fee-only advisors that basically just charge you by the hour.

These are the folks that will just meet with you and analyze your situation, and give you a game plan. I think maybe even a financial coach maybe would fall in that category of someone just giving them guidance on where they need to be.

LAURA: Great! So, what type of advisor are you? Tell me a little bit about how you or your firm charges people. What’s a typical customer’s fee structure, or what compensation do you get for a typical customer?

JEFF: Sure. That’s a great question. Just to give you an insight, I worked for the big brokerage firm, so I’ve been that direction. I know that structure.

Then we left and we started an independent firm. When I became independent, I had the ability to do commission, and I had the ability to do fee. I was doing that for about three years, and the conversations got so confusing because it depended on the client and their situation.

I liked it because, in some cases, maybe a commission relationship was better for the client if they weren’t doing a lot of active trading. They just bought one thing every once in a while.

The majority of my clients I did on the advisory relationship, the fee based where I was managing their portfolio, helping derive income stream.  Whenever I was having that conversation with people, I was like here I’m doing this, and here I’m doing this.

I just got frustrated with it and really wanted to have a more streamlined presentation or approach when talking to people. Recently, I just created my own registered investment advisory firm where now it’s completely a fee-based relationship.

The fee ranges anywhere from 1-1½% as my ongoing fee. That is all-encompassing. There’s no more transactions charges. There’s no IRA fees. At this time, that covers doing a financial plan for the client and updating that on an annual basis.

Basically, the client can call me, not preferably on the weekends, but they can call me whenever they need to if they have a question about anything. I help clients figure out how much they need to save for their kid’s college. I’ll take a look at their 401K.

That’s not even part of what I’m managing, but I’m going to take a look at it for them just to make sure it’s where it needs to be.

The Big Misconception

LAURA: Excellent! That actually sounds like a pretty good deal compared to some of the fees that I’ve heard. As a registered investment advisor, what type of responsibility do you have to the client?

There’s a lot of confusion in the marketplace about what is a financial advisor’s responsibility versus a broker’s responsibility in terms of recommending a stock or an exchange-traded fund.

I think it’s important that people get to know an advisor who can give them some level of responsibility versus just throwing out a stock here and there as a good pick that they think is hot right now.

JEFF: The big thing the consumer may never understand this. I know the profession or our industry is trying to do a better job of making them understand, but basically, the two keywords here are suitability and fiduciary.

With the previous relationship, it was more of a suitability issue where I would take a look at a client’s situation, and then I would recommend an investment that I felt was suitable for their needs. It may or may not have been the right thing, but that is what I felt based on the situation.

Now, as a registered advisor as a fiduciary, I am solely responsible for my client’s best interests. I have to make sure I am doing what is absolutely right for them, and I am absorbing that role.

Before I did an RIA, I saw that word thrown out there a lot and know a lot of other RIAs were throwing it out there, and I’m like, what does that really mean. Now that I finally get it and grasp it, it’s really important to me.

When I talk to other attorneys and other professionals, and you talk about the word fiduciary to them, they get it. They understand what that means and that client-advisor relationship. There’s a tremendous level of respect for it.

Women and Investing

LAURA: Yeah, I come from the real-estate world years ago, and fiduciary relationships with clients were very important in that industry as well. So yeah, I want to make sure everybody gets that. 

If you go to a broker, they may or may not have a responsibility to look out for your best interest, basically, but a registered advisor (RA or RIA) that’s part of the title.

That’s part of the designation that they have a higher level of responsibility.  I think that is a great designation to look for in an advisor.

Also, Jeff, I wanted to ask you maybe a little bit about the differences you see in men and women that come to you.

I get a lot of questions, different types of questions, from men and women about finances and planning, and I am wondering if you see a big difference working with a couple or just a husband or just a wife.

Is there a big difference in the way that men and women approach money and financial planning?

JEFF: Yeah, there is much more to it with women and financial challenges. Not to say it’s 100%, but it’s so funny when I look at my baby boomer generation of husbands and wives versus the Gen X generation of clients husbands and wives.

In my baby boomer generation, I have husbands that worked 10-12 hour days, and the wife was the homemaker where they basically have relied on the husband to make all the big money decisions. I always make sure I bring in both clients.

She’s still a part of the equation because that is the root of happiness or unhappiness if we haven’t had the proper discussion. I want to make sure I want to understand what her thoughts and concerns are. For the most part, they’ve relied completely on the husband.

Whereas my Gen X, I’m seeing more of the wives now having more of a say in the money matters.  The experience I’ve had in my own office is where wives are now saying we need to do this, we need to do this.

I think that sound good, that sounds good, but I see more of a leadership role than I have ever seen before, especially with the baby boomer generation. I think that is neat to see that.

LAURA: Yeah, it is. I do a lot of one-on-one coaching with folks, and the majority of them are women who tend to be, like you said, taking more of a leadership role for whatever reason. Maybe they are going through a divorce, or they’re just waking up and realizing, hey, I need to be involved.

I need to know what’s going on for my best interests. I think it’s great that younger women and younger couples are approaching money much differently than older generations, and it’s a really good thing.

JEFF: Another thing I will say I have noticed, and I think it is pretty well universal, is that women generally tend to be more conservative in their investment tolerance.

Even in that leadership role, the husband wants to make 12-15% return, whereas the wife generally is more on the conservative side, which could be good or bad.

I just want to make sure we’re where we need to be. That’s another thing I have noticed is that women are generally more conservative.

LAURA: Yeah, definitely. I think women have that bag-lady syndrome fear that we always hear. Sometimes, women are really afraid of the consequences of poor planning.

That’s a wonderful thing, but you can take that to an extreme where you don’t invest aggressively enough, and therefore, you’re not going to hit your retirement goal.

I think having a balance there between a man and a woman’s perspective really probably ends up helping overall if you blend both of those perspectives. That’s great if people work on money together.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.