The financial advice industry is changing fast. In the past, financial advisors and financial planners played more limited roles in their clients’ lives. Financial success, however, involves a lot more than just investments or creating a one-time plan. To achieve our financial goals, we need to live below our means and avoid overspending or bad financial decisions. And we need to consistently put new money aside, through good and bad markets. This limited help probably didn’t address those issues.
Today, fortunately, the financial industry is evolving. Automation frees up advisor and planner time to provide more of this full-service help. So a good financial advisor or financial planner can help you with your entire financial life, far more than just your investments. Then, these advisors can also help keep you accountable so you achieve the goals you set for yourself.
Surveys, however, make it clear that many people don’t understand the financial industry. For example, per a survey by McAdam, over a third of Americans don’t understand what financial advisors do.
This puts you at a distinct disadvantage when you hire one. What should you expect from your financial advisor (Pasadena)?
We’ll clarify that in this article, to make sure you actually get what you are paying for.
What Should You Expect from Financial Advisors and Financial Planners?
1. Fiduciary service and transparency. When you’re dealing with your savings, you can’t afford to take chances. Too many people have not gotten the results they wanted at the hands of salespeople they thought always had their best interests in mind. Instead, insist on a fiduciary (read this article if you’re not sure why) and get it in writing. The best financial advisor and planner will have no problem providing that for you and will fully understand your concerns.
2. Ongoing coaching. You can have the perfect investment portfolio and retirement plan, but if you’re consistently overspending, you can sabotage your long-term financial results. So your financial advisor should help you adopt and stick to wealth-building habits. This starts with a financial plan up front, which should include concrete action steps to lead you toward your goals. Frequent check-ins keep you accountable to your own goals, and the advisor can help you make adjustments when obstacles come up (which they always do).
3. Help with important financial decisions. The habits that build sustainable wealth are nothing mysterious: live below your means, consistently save, avoid impulse spending, always seek value, invest in a disciplined manner, and stay diversified. These are the habits that help you get ahead, but the problem is we are all susceptible to emotional decisions with our money. Should we buy that bigger home? Should we invest in our brother-in-law’s new business venture? Should we take money out of investments to help our child buy a house? A good advisor can help act as a buffer between you and your money. They can help you weigh the pros and cons objectively.
4. Help avoiding the big mistakes. We’ve all made them at one time or another. Whether it was buying the timeshare or second home that turned out to be a money pit, putting way too much into tech stocks or real estate right before the market turned, or buying Bitcoin at the height of the froth, these big mistakes can often set people back considerably. This is where an advisor can help save you from these mistakes. Do you really need that new car, or is a late model used car a better solution? Should you double up on those tech stocks now after they’ve risen for many years? Should you buy that second home that will create ongoing expenses and maintenance for you all year long? A good advisor should make him- or herself available for questions like this.
5. Build your confidence. A good financial advisor should help demystify the market and money for you so it’s fun and interesting, not intimidating. The days of the “guru” are gone; today’s advisor should help simplify the jargon so it’s easy to understand. That way, you can follow along and feel comfortable with how you’re invested. That may not seem too important after the markets have gone up for nine years, but it will become very important to your peace of mind when the next bear market hits (which could be any time).
6. Stay in touch. One big complaint people have about their advisors is that they often don’t stay in touch, or return their calls quickly. The best advisors have systems in place to reach out to you frequently and to return your call or email within a specific time frame. Or they may have a team in place so one member will get back to you quickly. Either way, you have the right to clear expectations about communication.
7. Carefully manage your risk. Since we’ve been in a very long bull market, most advisors’ performances probably look good right now. That’s what a bull market does. What is hard is managing risk to protect your capital in downturns. There’s a cost to that, of course—there’s nothing free in the market. You may need to give up some of the upside to protect the downside, but if you think back to 2008 and 2009, most would have gladly traded a few percentage points on the upside to minimize losses. Have this conversation with your advisor frequently. And ask for their independently verified investment track record (using Global Investment Performance Standards, or GIPS®). Only with a verified track record can you be sure exactly how well your advisor is managing your money. Learn more about GIPS and why it’s important to you here.
8. Make you money after fees and expenses. A good, experienced financial advisor should be able to do better with your money than you could on your own. Here again, GIPS® standards provide you with an easy way to determine how you are doing after fees and expenses. Not all advisors are GIPS®-compliant, but if they are, it’s a sign that they are committed to both good results and transparency. If your advisor doesn’t provide an independently verified track record, you are probably not getting the information you need to evaluate their results.
You deserve the service level that will help you achieve your goals. However, not all financial advisors and planners are created equal. Especially with the recent collapse of a proposed fiduciary rule which would have provided more protections, you need to be especially aware. Use this article as a checklist to make sure you’re getting what you are paying for.
John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial planning and investment management firm based in Pasadena, California. As a GIPS®-compliant firm, we bring institutional quality, high performance investment management and comprehensive financial planning to individuals and families. Together with Capital Research + Consulting, our sister firm, we collectively manage over $4 billion of assets for individuals and retirement plans. Visit us at https://arroyoinvestmentgroup.com/.