By Howard Hook, CFP, CPA
Howard Hook is a fee-only Certified Financial Planner and CPA with the wealth management firm of EKS Associates in Princeton, NJ. He has been named to Medical Economic’s list of top financial planners for physicians for nearly a decade and is a member of the Forbes’ Finance Council and contributor to that publication.
It is natural for reasons that soon will be apparent that investments tend to lead the focus when it comes to finding an advisor. Questions about performance and investment strategy often come before questions about the competency of an advisor’s financial planning advice.
Advisors do so as a means to quickly and easily explain their “value.” “Our firm outperformed the stock market by x percent” is a statement easily understood by most prospective clients. “We use a proprietary investment strategy to maximize your returns given your tolerance for risk” sounds, well, sexy.
The media has a hand in this focus on investments as well. Whether it is for print, broadcast or social media, the goal is to get as many eyeballs reading or viewing the content that a particular brand of media is “selling.” The rise and fall of Amazon’s or Apple’s stock price will attract many more listeners to CNBC than a segment on how to efficiently withdraw assets once retired. Part of the issue is that the amount of time that can be devoted to a topic is
limited and planning topics are not easily explored within the confines of a brief television or radio segment.
But at the end of the day, handing over your financial life to an advisor should require a much more thorough explanation of their overall competencies. The investment piece, in actuality, if done wisely, may be the easiest part of your financial plan. That’s because sound investment management boils down to following just a few tenets. For instance:
• Diversify your investments amongst many different types of investments; never own any one specific investment that represents more than 10% of your total portfolio. Hire professional money managers (mutual funds) with long- term track records to choose these investments.
• Understand the time frame for when you will need to take withdrawals from your investments and allocate your money into investments that line up with the time frame you have. As an example, if you are saving for a new home then you should allocate your funds into safe, secure investments such as money market funds. The allocation of funds to be used for a retirement that is 10 years away can be more aggressively invested into a mix of stock and bond mutual funds.
• Know who holds your investments and keeps track of the transactions being done in your accounts. This seems like a no brainer, especially since there are so many reputable custodians tasked with this role. Yet, year after year, people get burned because they write checks to a third party who is supposed to custody their funds, but in reality has their own agenda. The biggest example of this continues to be Bernie Madoff. After the Madoff scam, this should have no longer been an issue. Yet, it still is.
Truth be told, there is one part of investment management that is tremendously difficult to do on your own and so may warrant professional assistance. Behavioral finance is the technical term to describe it, but the layman’s term can be boiled down very simply to: “Don’t be your Own Worst Enemy.”
Our desire to try to time the markets; to sell when the market is dropping; to buy when the markets are going up without regard to prudent asset allocation; or to buy the latest stock or fad (think cannabis or bitcoin stocks) is something we, as human beings, are very bad at controlling. The urge to do any of these things is an itch that is hard not to scratch with the results more times than not infecting an otherwise beautifully drawn up plan.
So what competencies am I referring to and how do you go about finding out if your advisor measures up?
The best way to start is to identify your goals and then ask your advisor if they have experience helping other clients like you reach those goals. Asking an advisor if they have helped clients retire, is too broad a question. Instead, ask if they have helped other clients who are within 10 years of retirement, live a similar lifestyle as you do, and may have not saved as much as they would have liked. A good follow-up question if the answer is “yes,” would be to have them to describe the strategies employed to help this client. The same strategies may or may not be appropriate for you, but just hearing them, can reveal a thought pattern. An answer such as: “I sold them an annuity,” can provide insight into how an advisor handles clients as much as the answer: “We sat down and went through a retirement projection. We ran different scenarios, such as spending less now or less in retirement versus the willingness to work part-time to determine if there were acceptable ways to reach the client’s goal without changing too much.”
Another good question to ask is how competent the advisor is with any tax and legal issues you may have. Not all advisors are CPAs and even fewer of them are attorneys. Be clear that you are not asking for legal or tax advice, but instead wish to know how comfortable they are identifying these issues so that they can bring in or work with the appropriate professionals licensed to provide this kind of advice. Unfortunately, tax and legal advice may play a huge role in the planning advice you receive and working with an advisor unskilled in identifying these issues or unwilling to work with other professionals can lead to less-than- optimal planning for you and your family. Credentials are important, but should not be used as a replacement for answering any of the above questions. Instead, asking how an advisor’s credentials help them assist their clients can validate both the credential and the advisor’s proper use of those credentials.
The above are not meant to be a complete list of questions to ask of an advisor, but instead point out that the main focus should not be on the investment side of planning but rather on the other areas of planning – i.e., retirement planning, distribution planning, estate planning, etc. Finding the right fit is more than finding the advisor whose investment returns are the greatest; instead, it’s about who has the experience and expertise to help you reach the goals you set out to achieve for you and your family.