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2 Questions to Ask a Financial Advisor

Posted on Mon Jun 15, 2020, on Estate Planning

2 Questions to Ask a Financial Advisor

– 2 Questions to Ask a Financial Advisor is a Guest Blog By Kyle Rolek, Fiduciary Financial Advisor, and Retirement Planning Specialist

Two simple questions can help you identify a financial advisor who will be an asset and, very importantly, protects you from those who would be a liability.

Question #1 – Are you a fiduciary at all times?

A fiduciary is a professional who is legally required to act in the best interest of their clients. While the term “financial advisor” may imply some level of fiduciary responsibility between the advisor and the client, in reality, many financial advisors are not required to act as fiduciaries at all. The lack of obligation is surprising to many: some financial advisors have no legal responsibility at all to put their client’s best interest first.

There are three types of financial advisors:

  1. Fiduciary all the time;
  2. Fiduciary none of the time
  3. Only the Fiduciary sometimes 

Why does finding an advisor who is a “fiduciary” all of the time matter to you? When a financial advisor is not required to act as a fiduciary (a non-fiduciary advisor), the motivations behind their advice may be something other than what’s truly in your best interest. Not being required to act as a fiduciary can and often does reduce the quality of the financial advice, and bad financial advice harms your financial security.

The non-fiduciary advisor may steer clients towards their company’s proprietary products. Further, he may fail to mention that other companies may have better products and services for your needs or fail to say that they are working with a minimal menu of products, and you should probably shop around. Steering clients towards the company’s products are only permissible because, again, the non-fiduciary financial advisor need not put the client’s best interest first.

The non-fiduciary financial advisor may steer clients towards products that pay them the highest commissions. If the financial advisor makes more money by advising one course of action versus another, you will be left to wonder whether the advice you received was best for you. If you knew the advisor made a 10% commission on product #1 and a 5% commission on product #2, you would naturally be skeptical if they recommend the higher-commission product #1. And you would be right to be suspicious, because in general the higher the commission is for the non-fiduciary advisor, the worse the product is for the client.

2 Questions to Ask a Financial Advisor, continued!

Unfortunately, you won’t know what the commission is for the products the non-fiduciary recommends because they aren’t always required to disclose the hidden commissions and hidden fees they receive. This lack of transparency is unfair for the client. Clients do not have all the information they need to make an informed and fair decision. Again, steering clients towards the highest commission products are only allowed because a non-fiduciary doesn’t legally have to put the client’s best interest first. While morally corrupt, this practice isn’t technically illegal for non-fiduciary advisors. 

The non-fiduciary advisor will also probably make his or her company and his or her boss more money by recommending high commission product #1 instead of product #2. The non-fiduciary is stuck navigating conflicting allegiances between their company, their superiors, and their clients. You need to avoid these situations. As the client, don’t get stuck in the middle of this mess.  

A Fiduciary Financial Advisor is required to act in their clients’ best interest at all times. They do not get paid hidden commissions or hidden fees. The fiduciary advisor will communicate their fee structure and the work they’ll perform for the client upfront, in writing, in advance. The client is then in a position, as an informed consumer, to decide on being fairly presented with the material facts. Once work begins, the client knows that the fiduciary advisor’s compensation is fixed, transparent, and is not contingent on the products or investments the client ends up using when implementing their financial plan. The system can and often does lead to better, higher quality long-term relationships between the advisor and the client.

Types of Advisors.

As stated earlier, some advisors are registered to act as a fiduciary “sometimes” and as a non-fiduciary at other times. The change is particularly dangerous for clients. The same human being can claim they are a fiduciary, but conveniently leave out the “sometimes.”

Here’s how to cut through this…ask the financial advisor to sign a simple statement saying, “I will act as a fiduciary at all times. I will not get paid any hidden commissions or hidden fees.” A legitimate fiduciary financial advisor, one who acts as a fiduciary in all cases, will gladly sign. Non-fiduciaries and those who act as both fiduciaries and non-fiduciaries won’t sign. Their reaction when you ask them to sign will also probably tell you all you need to know. After completing this, you’ll then have narrowed your search for a financial advisor down to those who act as fiduciary in all cases—an important first step.

Question #2 – What is your expertise? 

Moving onto phase two of 2 Questions to Ask a Financial Advisor.

Now that you have narrowed your search to those who are fiduciary financial advisors in all cases, next up is to find an advisor who has expertise in precisely what you need. The value of an excellent financial advisor brings to their clients is expertise in a particular area, expertise that’s hard-earned through experience over the years.

A generalist financial advisor may be helpful for someone who is just starting out. However, the risk is that your generalist financial advisor is overlooking some important nuances that a specialist wouldn’t miss, and you, as the client, wouldn’t realize this is happening. It’s better to work with a fiduciary financial advisor (one who is a fiduciary at all times) who also specializes in what you need.  

As an example, this article covers a few areas of advice that a retirement planning specialist is well-equipped to handle that a generalist may overlook entirely or handle poorly. 

Retirement income planning:

A retirement planning specialist will create a customized retirement cash flow statement unique to you. The cash flow statement will help answer questions such as “How much income will I need from my investment accounts each year?” and “Can I retire now?”

Retirement investment planning:

Retirement investing is investment advice with retirement income needs in mind. How much should be in cash? In stock? How much in bond? Many generalists do a poor job of answering this. They use very generic risk questionnaires, a client’s age, and computer models they don’t even understand to determine the client’s investment allocation. The investment allocation you choose will have a material impact on your bottom line. Poor retirement investment planning can cost clients a lot of money and create unnecessary risk. A retirement planning specialist will create an investment plan with a client’s unique income needs in mind. Client #1 is 65, retired, and doesn’t need to / doesn’t want to touch her investments at all until age 72. Client #2 is 65, retired, and needs her investments to provide her with supplemental income right away. These two clients have very different needs and should not have the same investment allocation. Yet oftentimes, when working with a generalist, they’ll end up with the same allocation because they have the same age. A specialist will do a better job.

Social Security and pension strategy:

Help with deciding when to begin social security retirement benefits, making sure you’re taking advantage of social security spousal benefits when applicable, and factoring the social security survivor benefits into planning decisions is well within the purview of a retirement planning specialist. Similarly, a retirement planning specialist will be well equipped to put your various pension options within the context of your overall retirement plan. These steps can help you make a well-informed decision that you won’t regret later on.

Retirement tax strategy:

 A retirement planning specialist will be thoughtful about tax strategy. They won’t overlook the fact that you may be able to contribute to an IRA during your retirement if there’s still earned income coming in from part-time work. They won’t miss opportunities to consider Roth conversions in years when your tax bracket is low. The impact of Required Minimum Distributions, both during the original IRA owner’s life and upon the IRA becoming an inherited IRA, will be carefully considered and built into the overall retirement plan.

Healthcare planning:

First, factor healthcare costs into the retirement cash flow statement. A retirement planning specialist pays close attention to healthcare costs during retirement so they can help clients reasonably estimate medical costs into their plan. Second, a retirement planning specialist will usually get a Medicare planning specialist involved when appropriate to make sure clients get enrolled in the appropriate type of Medicare Supplement Plan. Third, a retirement planning specialist will help clients consider steps to take to protect assets from potential long-term care expenses down the road.

Estate planning:

In coordination with an experienced estate planning attorney, a fiduciary financial advisor specialized in retirement planning will nudge clients to keep their estate plans up to date. Examples include items such as wills, powers of attorney, trusts where appropriate, taking steps to avoid probate in situations when doing so is beneficial, and potentially shielding a portion of assets from potential future long-term care costs.

By asking the two questions, “Are you a fiduciary at all times?” and “What is your expertise?”, you’ll be on the right path to finding a fiduciary financial advisor who will be a long-term asset to you and your family. I hope you enjoyed this article on 2 Questions to Ask a Financial Advisor!


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