Finding a financial advisor is daunting because you know it’s important and yet it’s so hard to figure out.
Bottom line up front: Start with finding Certified Financial Planners (CFP®) that understand your situation; do a little online research and then interview a couple.
Tune into this week’s podcast to learn more about:
Hiring a CFP®. This should be a minimum bar. There are plenty of planners out there and it shows a commitment to doing your best job for clients.
Who calls themselves advisors? It could be a broker, someone working at a local bank, a wealth manager or an insurance provider. Unfortunately hanging out a shingle of “financial advisor” is not distinguishing enough.
Look for domain knowledge. Not only knowledge of financial planning, but also your specific situation. Are you close to retirement? Are you starting a family? Have you just taken your first job?
Understand compensation: make sure that you know how the advisor is paid. Is she paid by how much money she manages? Or paid a commission if you invest in a certain mutual fund or buy life insurance? Make sure you know how your incentives are aligned
- Find a CFP®: Lets Make a Plan
- Find a Fee-Only Fiduciary Planner: NAPFA.org
- Ten Questions to ask a Financial Advisor [Marotta on Money]
- Another: Ten Questions to ask a Financial Advisor [NerdWallet]
[00:00:00] Julie: And I wish I would have known to ask that the first time around, because we probably could have saved ourselves a lot of heartache and aggravation. Just. Having somebody who actually is living it and understanding it and knows the ins and outs of our particular situation.
[00:00:17] Mike: Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton certified financial planner and charter financial counselor. And with me today, back on the show is our great friend Julie, Julie. Good to have you.
[00:00:32] Julie: Thanks for having me back. You've had some great guests, the last few episodes, so I'm psyched to be back amongst a good crowd.
[00:00:39] Mike: Oh, my gosh. I love having you here. The listeners love having you here. So I'm super excited for you to be back at it. I know summer has been, in and out, so hopefully we'll get back in a little more routine. Come the fall.
[00:00:50] Julie: Yes, and I will have all three children in school
[00:00:54] Mike: Oh my gosh. Isn't that going to be amazing?
[00:00:56] Julie: at first for me in 13 years.
[00:00:59] Mike: Oh my goodness. You're like, you're not going to want to come on podcasts. I don't think I wouldn't be able to find you.
[00:01:05] Julie: I know I'll be painting or do I don't even know what I'll be doing.
[00:01:09] Mike: You'll be twiddling your thumbs, Julia. You won't know what to do with yourself.
[00:01:12] Julie: I promise you I won't be twiddling my thumbs. I have 13 years of projects to do some twittling is not on the list.
[00:01:22] Mike: Oh my gosh. I'm super excited for you. And I'm excited for myself cause I'm in the same boat. A couple of my kids will be going back to school as well. They were home, all of last year doing their school from home as many were. I get that kindergarten experience again, which you're getting for real kindergarten experience.
I get to relive it by my kids, waving goodbye to them as they actually leave the house.
[00:01:41] Julie: Excellent. Yes. Yes. That will be spectacular. And we can record these podcasts without worrying about somebody busting in asking for a snack.
[00:01:52] Mike: That's
Today I wanted to talk about why you should hire a certified financial planner, a CFP, or more generally, how to look for a financial advisor. I'm in the industry. And one of the reasons I jumped in is because I felt like there's a lot of misinformation.
There's a lot of different ways of going about it. It's not a very professionalized industry in terms of nothing's done quite the same way, person to person, firm to firm. So it's very confusing, especially for consumers had some advice. Where do you even go to where do you turn? How does that work?
So I wanted to highlight some of the things to look for when you're looking for an advisor and just try to help people out. If that's a route they want to take, or just to know a little bit more about what.
[00:02:43] Julie: This is such a great topic because we were in that boat years ago and we had been approached by a number of different financial. Fidelity and Alexander advisors. And we had somebody coming door to door at one point and trying to make it seem way more personal. And then you have a conversation with them and you realize it's a quantity versus quality game with a lot of the financial firms.
It's just give us your money and we'll try and make you as much as we can. And. Mainly because then we make money. And it's similar to, and I'm not bashing the real estate market, but realtors, there's a misalignment of values or not values, but realtors supposed to be working for you, but yet they make more money.
The more money you pay for a house. So I think a lot of people get turned off. Thinking about hiring a financial planner because they think all you're going to do is take some portion of my money and . You're not absorbing the risk that I am. So anyway, great topic. I'm excited to chat about this with you.
[00:03:46] Mike: No, absolutely and a lot of the things that you bring up, we're going to get to aligning incentives is really important just under, just even having an understanding. And I like the real estate analogy, because you do understand that we know how realtors work, four or five, 6%, and they're going to get on the sale purchase of a house.
And so we understand that. And so even just knowing that you entered a relationship and they're great, Realtors are great people and they're doing the best for you. But just even knowing, how they're driven with their incentives just helps you frame the conversation.
So that's where we want to get to today is having a good understanding of where people might be coming from. So that at least you understand how to enter those conversations.
[00:04:24] Julie: Yeah.
And like you said, knowing what to look for, because again, a lot of these people are very passionate about their work and you need their help and you're not expecting them to do it for free. They have expertise that you don't. And so also recognizing that you have to value, it's not a non-profit industry.
And so understanding that going into it as well.
[00:04:45] Mike: So I'm gonna give you the bottom line up front at least as a starting point that you should hire a CFP. This is a certified financial planner. Those letters will be active in their name. The reason I started. Is that should be a minimum standard for hiring a financial advisor. It's not an easy process to get this certification.
It takes a few years of time, lots of study and effort. But it's not unattainable and there are thousands of them out there. You do a search in your area. You will find a local one. You can find one online as we're doing things virtually. There's , tens of thousands, . Of these CFP certified financial planners.
And the reason I like is not only because of the learning course, they're going to have education and some expertise in a variety of topics. Cause that's the education part. But it's really the commitment to better yourself and get that. I It takes a few years of effort. And so you put in that time, it shows a commitment towards what you want to be doing and how you want to help people.
And so I just think that should be a minimum standard because you can find them. It's not like they're not out there. And so I would always start with that and you can still find 2, 3, 4 different advisors to interview to get to know, to see who's going to work best with you. So I always recommend.
Using that as a minimum starting.
[00:05:55] Julie: Good advice, same thing you would use, you're not going to hire a doctor who doesn't have a medical degree,
[00:06:00] Mike: And yeah, in this industry, there's lots of different standards and stuff, and there's lots of good educations. Like I said, I'm a CFP and a chartered financial counselor. And what does that standard mean? It's just a bunch of coursework I had to do to get that designation as well. So there's other designations out there.
The CFP is just the most well-known. And so I say, look, just find some. That has that they have to be a fiduciary. If you are a CFP and you have to be a fiduciary, we can talk about what that means, but that's great. You have, there's a code of ethics that you have to abide by now. Unfortunately, the CFP board doesn't always enforce as much as we'd like.
There was a wall street journal article a few months ago that there were lots of CFPs that have marks against them, complaints against them that should have kicked them. Of being a CFP and yet, the wall street journal did some digging and found that they're still in there. So the enforcement is not as great as we would like, but at least it's a minimum starting point for finding a couple of advisors that might work for you.
[00:06:57] Julie: Real quick. Is there a way for an individual to search whether or not there were any complaints through the board of the CEO?
[00:07:05] Mike: Yes. Complaints. Yes. So to find a CFP, you can go to let's make a plan.org. I'll put that in the show notes, and you can just do a search there from your local area. And there's also, by topics that the planners typically, cover that kind of thing to find complaints. It's not going to be necessarily there where you want to go as the disclosures on the sec or FINRA F I N R a FINRA and broker or broker check.org, I think is the other one.
So you look up every financial advisor needs to have disclosures. Okay. For themselves, for the firm they work for, you can click on those typically they're long documents. Okay. That you would not usually read. Okay. I recommend you don't have to read the whole thing. But what I do recommend is that at least you go to the FINRA or the broker check and it'll show you how long they've been working, what firm they've been working for.
And if there are any complaints against them. So at least you can find that out. Pretty good.
[00:08:00] Julie: It's like the better business bureau for financial planners.
[00:08:04] Mike: Yeah. Now there are a lot of oversight of financial advisors. You have to register with the state. You have to register potentially with the sec. So that's good. That's good news. Unfortunately, most consumers is don't even go that far, but you should at least spend a little bit of time.
This is a relationship, hopefully you get into for a long period, even if you're just checking in. A lot of clients might just check in and say, oh, I just want to questions about my 401k or whatever, but hopefully you find someone good that you're going to be checking in with, every couple of years at a minimum.
So you want to have a good working relationship.
[00:08:35] Julie: For sure.
[00:08:36] Mike: Okay. So we talked about, there's not very many standards. In the financial planning, financial advising industry. So who could be a financial advisor? They come in all shapes and sizes and flavors. It could be somebody that's working for a small independent firm could be working for a massive firm like fidelity could be working at a local bank and be a financial advisor.
So you have a hundred thousand dollars in savings there and the bank would say, Hey, do you want to come in for a free consultation with a financial advisor? Oh, that sounds good. So it could be somebody, there could be wealth managers. You mentioned that earlier people knocking on doors, rattling the trees, you know, seeing who has money to invest.
So they could be having more of that management bent to them. It could be people in the insurance industry, life insurance agents could help you with some financial advising, some financial planning. Understanding that they're in the insurance business. So they come in all different forms and you really want to understand who's sitting across from you and who they're working for and why they're working and the incentives and other things.
So let's talk about incentives. How did, how do financial advisors typically get paid?
So it's super important to understand. we talked about this earlier, how your advisor's being compensated. Why is that important? Just so that, you know how they're getting paid because we're all here. We all at the end of the day, when you're, when your head's hitting that pillow, you're thinking about the next day or the next week or year and your vacations and your time you want to take off or whatever you want to be doing.
A lot of times it comes down to money. Hey, how's my life situation. How's my family. How could I make more money? Or how could I do a better job or have more time? So as humans, we're always aligned with our incentives and financial advisors are. A lot of different ways. So it's really important when you're sitting across the table from one understanding, Hey, how's this guy making money.
So let's talk about the different ways that financial advisors could be getting paid. One. You mentioned Julie is the wealth management, the assets under management, where AUM, we call it and you're getting paid by how much you're managing.
[00:10:40] Julie: commission.
[00:10:41] Mike: It's not commission. Let's not. So yeah, you could feel that way, but that's a particular word that I want to use.
The commission in another context. Okay of how you get paid. So this would be your assets under management AUM, we call it. And it's the typical 1% you might've read that. And there, and it's all over the place a little bit higher than that. A little bit lower than that, but generally speaking, that's been the industry standard that if I'm managing $1 million for you, Julie, you pay me 1% of that.
You pay me $10,000 a year to do that work for. Okay. Now I might do other things for you. I might do financial planning. I might help you with insurances. I might help you with estate planning. I might look at retirement planning, you know, all kinds of different aspects, but the way I'm getting paid is however much money you give me to manage.
I will charge you 1% of that. Now this has been historically the way it's worked and it's pretty nice. It works well. But recognize that. , the reason it works well for the industry is 1% sounds very small. And so that's why we use 1%. And we don't say, Julie, I'm going to charge you $10,000 a year.
That sounds way bigger. Okay. And it comes out of your portfolio. So you actually never send me a dollar. You never swipe a credit card or send me a check. I just handle all that. Now, these guys do great service. All right. I always like to couch it in dollar terms so that you're aware, $10,000 for that.
All right. So that's one way that they're paid. So recognize that now there's pros and cons for any of these. All right. So I'm not here to debate, good or bad, but just recognize one instance of this is Julie. If you said, Hey, I'm thinking about spending some of that money for a nice vacation home.
And that's really the way I want to live. So I would like to take out 500,000, to do that rather than get a mortgage. I might have an incentive to say, you know what? The mortgage might be better for you because if you take 500,000 I'm suddenly my pay is cut in half.
So just again, if you understand the framework, no problem. Okay. They'll probably get great people giving you great advice, but just understand where incentives come from. Alright. That's one way really quickly. I spent a little more time on that. Cause it's typical way others commission, you mentioned the word commission.
All right. And this would be more for selling products. So again, I'm a life insurance person. Hey, I can help you with some financial planning. We can do that. And maybe you need some life insurance as part of your planning. So I sell you a life insurance product. I might make a couple thousand dollars, so I'm gonna make money based on life insurance.
Obviously , you're going to recognize right away. I'm probably going to recommend life insurance. If I quickly review your situation, you don't need insurance. I'm probably knocking on the next. So those would be the agents life insurance. The other thing is like the local bank the free financial advising at the local bank you have some money stored there.
They say, Hey, maybe you should invest some of this money. Let's take a look, should we invest this for the future? They're probably going to be paid to sales commission based on what they invest in. So they recommend some products some mutual funds say, Hey, this is a good mutual fund. I think this would be good.
That free meeting someone's getting paid. Like you said, it's not a nonprofit industry someone's getting paid. And so that free meeting is probably being paid by a commission based on what they recommend the products. So this leads me to another distinction or I should pause there, Julie, any questions on the AUM or the commissions?
[00:14:12] Julie: No, that's clarified.
[00:14:14] Mike: Cool. Lastly there's by the hour some advisors you can just pay by the hour, like you would a lawyer there's pros and cons to that, of course. And some advisors pay flat fee kind of monthly or yearly, just a dollar figure, $400 a month or $5,000 a year. And, and you spell out what you're going to do with that advisor.
Oh, we're going to do X, Y, or Z. Here's the service. And you can decide if that's worth the value, for pain for those. So those would be like, hourly. Or flat fee. You'll see that. Now the other thing that you will see when you go look for financial advisors is fee only. . So if you see the words fee only what that means is that there is no sales related commissions.
Now that you could be the AUM that we talked about. It could be a subscription flat fee per month. It could be anything around those, but you're not getting set. You're not getting commissions from products. And I think that's it. Because for me, I think that if you were looking for total financial planning .
And financial advice that you would be the one compensating that individual, rather than that individual getting compensated in other ways that are a little bit unknown to you. So I like it. Financial advisors that a hundred percent of their income is coming from there. it's AUM or subscription or whatever it is, but they're not getting commissions from insurance products or mutual fund products, because then they have incentive to drive you towards those products, which may or may not be an absolute best fit for your situation.
[00:15:45] Julie: give context. What immediately sprung to mind is pharmaceutical companies going into doctor's offices and incentivizing doctors to prescribe their medications. And we saw what happened with that and it was disastrous. And maybe there was a story in the news yesterday about the estate of the family that owns the company that developed oxycodone.
And, When we talked about incentives, you want to make sure you're aligned.
[00:16:13] Mike: Yeah. That's exactly right. And I'm not saying these other places, aren't like, if you need life insurance using an insurance agents. Perfect. Because you don't have to pay out of pocket for that. No, of course they're getting paid. Okay. So we know that it's the same as your realtor example. If I'm the buyer.
I don't actually pay for my realtor. That's great. So just, understanding that if that's your situation, you need some life insurance go work with a life insurance agent. Cause you don't have to pay out of pocket for those guys and they're going
[00:16:38] Julie: have the expertise.
[00:16:39] Mike: they had the expertise. So we're gonna talk about that next domain expertise.
It's perfect. They're going to give you, maybe X, Y, or Z , a couple of different solutions and you can review those decide what's best for you. It's going to be perfect. And I work with insurance. As a financial advisor for my clients, I don't do the insurance. I don't get paid for that, but I recommend certain ones say Hey, these guys are great.
They do a good job and you can.
[00:17:00] Julie: what I was just gonna say. Wouldn't it be best to have a. Certified financial planner who has a network of people that they know and trust that they can guide you to in order to find the right policies or products or whatever it is that you might need.
[00:17:16] Mike: Yup. And I think those are the kind of the best advisors. I view them as the quarterback for you looking across being a team, but coordinating the rest of the team. it could be in house, larger firms are going to hire in-house expertise in different areas.
That's great. Or it could be a smaller financial advisor that, outsources stuff, either way just, you want those domain experts in area.
[00:17:39] Julie: Huh.
[00:17:40] Mike: Speaking of domain experts. That's the other thing we talked about , how will financial advisors are compensated is super important?
The other thing I would look for is domain expertise for your situation. So if you're about to retire, you want somebody that knows a lot about that. If you are at the other end of the spectrum, if you're just starting off in your twenties with your career. And just need some help picking 401k funds, or you want to just make sure that you're set up for success over the next couple of decades.
Find somebody that works with young people.
[00:18:11] Julie: If you are an entrepreneur, find somebody who works with entrepreneurs.
[00:18:16] Mike: Yeah. Small business or something like that, or mid-career with families, if you have a family find somebody that works with family education plan. Is a big deal versus if you're single and have no kids, you don't care about education planning. Or if you are retired, find somebody that works with people who are retired that really have that dialed in the reasons, not only the domain expertise, of course.
But you should get cost efficiencies as well, right? If someone's focused on a certain area, they're really good at it, so they can do it quickly and efficiently. And they have systems for that. Oh, if you're young, like stick a person in their twenties, It doesn't have to be super complicated.
So you could probably find somebody where you're not paying a lot out of pocket. You don't have a lot, but you're just getting the great nuggets. Hey, you do this for five years and you'll be great. And we'll see in five years, for instance, versus if you're about to retire that's a really big decision.
Do I have enough to live, the next 20, 30, 40 years, what's it gonna look like? You want to make sure you hire somebody that really knows all the ins and outs of that and can guide you through that process.
Any other questions on that now seems to make sense.
[00:19:19] Julie: no, that all makes sense.
[00:19:20] Mike: And what's cool now is that, cause we're living in a virtual online world, it's not, Hey, I just, only have access to a couple of guys, girls down the street, you can look online and find people that are focused on your particular needs.
Anything else, Julie, that we haven't covered finding a financial advisor.
[00:19:39] Julie: You know, What I would, love is in this doesn't have to be all discussed, but maybe in the show notes you could put the top five questions to ask when trying to choose a financial planner, I think back to. Choosing a pediatrician and our first pediatrician, I thought she was wonderful.
And a couple of mishaps in, I realized that she doesn't have children. And not that you can't be a good pediatrician, not having children, but. new pediatrician we have has kids around the same age as mine. And therefore she says, here's what the textbook would tell you to do, because this is the exact right.
However, in practice, that's not going to work. So here are some other things to try to help you through this, whatever it is.
So top five questions.
[00:20:30] Mike: Julia. I'm so glad that you said that. That's probably the most important factor when findings and a trusted advisor. In that case, a pediatrician trusted advisor. In this case, we're talking about financial advice.
We often look for someone sitting across from us that looks like. That physically looks like us, that makes us comfortable. And that also isn't the same place as us. Oh, you have kids too. Suddenly we have a connection. Oh, you understand my situation. Okay. That's I was talking about a little bit with the domain expertise, but I think you highlight it even better that interviewing a couple advisors, finding someone there.
You have that connection too, that not only has the textbook, but also is living the situation just makes a lot of sense, both for the advice that you will be given, but also the comfort level that, oh yeah, this person knows me. I'm trusting their advice that we're going to be implementing with my kids in the pediatrician or financially with moving money around and how that's going.
I'll definitely put some questions in the show notes. I would also just recommend Googling that because there's so many forms out there already like top 10 questions, top five questions, and then pick the ones that make sense for you. So I would, in that instance, I would go out and just go to a couple of different websites and then have my little note.
And say, oh yeah, this is, these are the ones that I want to. Oh, that's a good one. I didn't think about that. Write down the ones that would make sense and in your situation, but we'll definitely link to a couple of, yeah.
[00:22:04] Julie: I was just thinking too, something that I probably would check is a quick read of a bio. What do they put in their bio? If it's all about education and that's really important to you that they have the book smarts and the degrees to back up their financial planning, then.
Great. If it's. They enjoy some of the same activities that you do. They also have kids they're living like you said, the sameness factor that, okay. I think this person would be better suited to help me given that their lifestyle is similar to mine. So a quick bio check, I think would, might even be better than a top five questions to ask.
[00:22:41] Mike: absolutely. The number one webpage for financial advisors of course is their homepage. But the second one is the bio page because yeah, you want to just go straight to that bio and get to know that person? Yeah, absolutely.
[00:22:53] Julie: Awesome.
[00:22:54] Mike: All right. Thanks Julie. Any other comments or questions? Of course you can reach out to myself and if you got anything for Julia, I'll forward it on to Julie other questions and love to hear from everybody.
And thanks again for being on the show.
[00:23:06] Julie: Thanks so much for having me.
[00:23:08] Mike: All right. Cheers.
Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at email@example.com. Until next time thanks for tuning in.