Broker Check

Have You Outgrown Your Advisor?

Have You Outgrown Your Advisor?

| August 21, 2023

A fellow advisor once told me a story about trying to help his grandmother with her life planning. “She refused,” he said. “She insisted that John, who had been her advisor and friend for years, was doing just fine for her. Besides, she couldn’t take away the business from a lifelong friend.” He continued by telling me what happened after she passed: “Not only did her estate pay Uncle Sam a whopping $2.3 million, but she had been paying a horrendous amount of taxes for a long time.” It wasn’t that her advisor was a bad man or incompetent - it was the simple fact that she had outgrown him.

I believe one of the hardest things to do is find the “right fit” advisor for you and your family. In a sense, it’s similar to choosing a therapist. Are there 2 out there that have the same approach to therapy or use the same solutions? Probably not, and there probably aren’t two advisors who are either. Because of this I thought I might take a minute to educate you a little about our industry.

Advisors, by definition, can come in all sizes and colors. They can be CPAs, insurance agents, attorneys, financial planners, Registered Investment Advisors, or simply an “Advisor.” Because of this disparity of fields, many do not share the same expertise. You could probably take a good guess at the primary expertise of each:

  • CPAs—taxes and accounting
  • Insurance Agents—insurance and annuities
  • Attorneys—law and taxes
  • Financial Planners (CFPs)—life and retirement planning
  • Registered Investment Advisors—investments

I make mention of this because it’s important that you know what to expect from each of these advisors. In most cases, a CPA or insurance agent would know very little about the wide variety of investments available. Registered Investment Advisors, on the other hand, would know very little about the law. For example: If you have a million dollars and chose an insurance agent as your sole advisor, you will probably end up putting your money in guaranteed income annuities. This might be a great thing for some people and not for others. And frankly, it’s probably not a good thing for anyone to invest all of their money in these income vehicles. Why? Because they are and can severely limit the flexibility of your money. If you ever needed to get to a chunk of money in addition to your normal income, you might not be able to - or you might blow up all of your guarantees.

Moreover, advisors can be captive or independent. If the advisor is captive, they often have to meet quotas on selling a certain type of product and usually have to follow strict guidelines as to what they can do for you. If the advisor is independent, they have a choice each time they meet with you to use different products from different companies and they usually have fewer restrictions imposed on what they can do for you and the investments they can offer.

Now let’s talk about how they get paid. There are two basic methods: fees or commissions. Insurance agents and most captive financial planners and investment advisors get paid up front (a commission).  CPAs, attorneys, and other financial planners and investment advisors might charge fees. Some might charge both depending on the situation. There are advantages and disadvantages to both. A commissionable product or investment might be cheaper over the long run if you are planning to stay invested in it for several years. At the same time, it could cost you more. Also, if an advisor charges you commission only, they get paid up front. Which lends the question—what personal interest do they have in you from that point forward to make sure the investment is doing well? None! The only way they will make money again is by selling you something else.

Fees may be charged in several ways—by the hour, a flat amount, or an asset-based amount. Fees could get really hefty in some instances, but let’s talk about an asset-based amount. Imagine your advisor charges you 1% annually on the amount of money he manages for you. If the assets grow, he makes more. If the assets go down, he makes less. This gives him an incentive to do a good job. I believe there is a healthy mix between commissions and fees simply because we, as advisors, are supposed to do what is best for you. Sometimes it is much less expensive to charge a commission and sometimes it makes absolutely no sense to charge a commission. The important thing is that you know how your advisor is getting paid.

Let’s refer back to Grandma for just a minute. How do you know when you have outgrown your advisor? In some cases, it’s simple to know. In others, it is not. But you can start by asking yourself two questions.

  1. Are they proactively working with you and your other advisors on your Life Plan—family support issues, charitable giving issues, business succession issues, legacy and estate planning issues, liability issues, tax issues, insurance issues, and investment issues?
  2. Are they talking to you about all of your options? You may not know everything that could be made available to you. In fact, my bet is that you don’t. Most advisors don’t. But a good start is by using this topic… “Have You Outgrown Your Advisor?” If your advisor hasn’t made you aware of the things we discussed here, you probably have.

Call and ask us about S.O.S.—our second opinion service. In the midst of our shaken economy, it is more important now than ever before to know what your risks are. This one-hour consultation is to review what you are currently doing and either let you know you are in good financial health or discover where you are assuming unforeseen risk.

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