How do you sort your mail?
You probably start by making two piles — a “read” pile and a “trash” pile.
A letter addressing you as “the homeowner”… TRASH.
A card from your mother… READ.
A “25% off” coupon for something your family never buys… TRASH.
Hiring a financial advisor is a lot harder (and way more important) than sorting your mail. But getting it wrong could make the money you worked hard for vanish if you’re not careful.
There’s a veritable mob of available choices with varying levels of expertise (from world-class to “yikes”)… working at firms of all shapes and sizes… ready to make you all kinds of promises.
So how do you sort them?
Here’s how to quickly decide which candidates belong in the trash heap and which ones deserve a closer look.
Question #1 – Does he have credentials?
For someone to earn a first meeting, let’s start with two non-negotiables:
- They must be qualified enough not to lose your money
- They must be honorable enough not to steal your money
But how can you figure that out quickly?
That’s easy. Pick from the 75,000 Certified Financial Planners™ (CFP® for short) on the planet. That immediately eliminates ¾ of your choices.
The truth is, anyone who passes an easy licensing exam can dispense financial advice and put “financial advisor” on a business card.
In fact, the Financial Industry Regulatory Authority (FINRA) states clearly on their website (my emphasis added):
“Also be aware that Financial Analyst, Financial Adviser (Advisor), Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are generic terms or job titles, and may be used by investment professionals who may not hold any specific credential.”
But the term “Certified Financial Planner™” is different because it is highly regulated and has strict requirements by the CFP Board. It is a specific credential.
It’s like the difference between an “accountant” and a “Certified Public Accountant” (CPA). Either person can do your taxes, but one is certified by a respected organization (AICPA) whose mission is to keep jokers from using those three letters.
For the record, I’m a CFP®… so I’m clearly biased. But I’ve personally jumped through the many challenging, time-consuming hoops before and after I could call myself a Certified Financial Planner™.
- Submitting to a detailed background check (criminal, regulatory, bankruptcy, etc.)
- Passing a brutal 7 hour written exam with a pass rate similar to (and sometimes lower than) the New York State Bar.
- Completing a college-level program in financial planning covering investments, retirement planning, income tax, insurance, estate planning, etc.
- Getting at least 3 years of industry experience before using the marks.
- Graduating with a bachelor’s degree or 4 year degree equivalent
- Completing ongoing Continuing Education after you get the marks
After reading these exhaustive demands, don’t you see why ¾ of advisors either can’t hack it or don’t bother trying?
(And yes, I’m aware of the alphabet soup of acronyms you might see like ChFC, CLU, CIMA, etc. All good programs, but the CFP® curriculum is best.)
Question #2 – Does she use a smart approach?
Now how can we make that pile smaller and better?
According to research by CEG Worldwide, you can separate financial advisors into two piles based on their approach. Pile A and Pile B.
Pile A advisors:
- Use a consultative process to gain a deep understanding of your goals, wants, and needs.
- Offer customized solutions to fit your individual needs in areas including estate planning, retirement planning, insurance, and charitable giving.
- Deliver these solutions in close collaboration with your other professional advisors–CPA, attorney, insurance agent, etc.
- Serve 101 clients on average.
- Have a minimum asset size (73% do).
Pile B advisors:
- Focus on selling and gaining “just enough information” (CEG’s words, not mine) to solve a particular issue.
- Offer a wide range of products.
- Are transactional and event-driven.
- Serve 269 clients on average.
- 38% have a minimum asset size.
Pile A, please.
Smarter, deeper approach…fewer clients, more attention…higher standards for new clients. Pile B sounds exactly like the “advisor” (salesman) you don’t want.
Would you believe that the same study found 93.4% of advisors belong to Pile B? Yikes.
CEG calls folks in Pile A “wealth managers” and Pile B “investment generalists”.
Now before you break into a cold sweat, here’s a quick shortcut–Pile A looks at your whole picture, not just investments.
So when you sit down with someone, focus on their actions, not their title.
Investment generalists (Pile B) may have a business card showing “VP of Wealth Management” at the fancy firm “Big Deal Wealth Management.”
But actions are a better barometer. Here’s what to consider:
- Are they asking a lot of great questions to gain a thorough (not basic) understanding of your life and situation?
- Are they pitching an investment product or a financial plan?
- Have they smoked out non-portfolio issues like your outdated wills and dangerously inadequate insurance coverage?
- Are they keen on collaborating with your accountant or attorney on important items that must be addressed?
- Do they have legal, tax, or insurance sharpshooters on call if you need a specialized matter handled?
Question #3 – Does his compensation align with your interests?
All of the Certified Financial Planners™ I know personally who employ the Pile A wealth management approach are fee-based, not commission-based.
Do you want someone paid to give you unbiased advice (called a fiduciary) or someone pushing a product based on the highest commission payout?
An annual percentage of assets fee is most common…likely around 1% a year, depending on your account size.
Fees put you on the same side of the table. You prosper together when your account grows, and you suffer together when it declines.
Fees also discourage financial “one-night stands” where an advisor never calls you back after a huge one-time commission.
Remember, pay fees for investment advice. If your advisor sells insurance too (I don’t, but some do), it’s perfectly ethical to earn a commission on the new life insurance policy they helped you buy.
The only 3 questions you need to ask
There you have it. Now you know how to separate the ones you want from the ones you want to avoid.
You only need to know three things:
- Certified Financial Planner™ or not?
- Wealth manager or investment generalist?
- Fee-based or commission-based?
If someone can meet these three requirements, then you might have a serious candidate on your hands.
Now that you know what to look for, how does your current advisor compare?
If the answer is disconcerting, give me a call and let’s get you sorted out.