You have reached the point in your life in which you are considering working with a professional financial advisor to help you plan for the future, make important financial decisions, and accomplish your goals. Selecting the right advisor for you can be a daunting and overwhelming task / decision; you don’t want to make the wrong decision, end-up regretting it, and have to go through the process all over again – or worse, make a poor financial decision due to their recommendation. There’s many companies and people to choose from, a variety of titles (financial planner, financial advisor, private wealth advisor, etc.) and designations (CFP, CRPC, AAMS, ChFC, CCPS, etc.), and many say they help with everything (big-picture planning, investments, insurance, tax-planning, etc.).
So how do you choose? How do you determine which advisor to work with and how to work with him/her?
One major distinguishing factor is how the advisor typically works and is compensated. As you will read below, there are essentially three models under which advisors typically work and are compensated:
Product Only: Advisors utilizing this model exclusively (or close to it) earn their living through selecting and implementing financial products (such as investments, insurance, annuities, etc.) for their clients.
- Fees for Advice: No initial or on-going fees for advice
- Speed: Faster process to implement financial products and services
- Minimal ‘big-picture planning’: In many cases, these types of advisors will provide minimal ‘big-picture planning’ and will instead focus on the product implementation quickly after starting a new relationship.
- ‘Big-picture planning’ may include things like 1)identifying, quantifying, and prioritizing goals 2) financial modeling such as projecting out income and expenses, assets and liabilities, taxes, cash-flow, etc. 3) scenario / ‘what-if analysis’ such as what would be the financial impact of a pre-mature death, a long-term care event, a large drop in the financial markets, etc.
- Potentially Rushed Process and Not a Comprehensive Approach: Because these advisors don’t charge a fee to take you through their planning process, if they do offer to do ‘big-picture planning’, it is very reasonable for a client to be concerned that the advice and process will be either 1) rushed, incomplete, or not thorough 2) not truly consultative; instead focused more on getting to the product implementation or designed to sell products.
- Fiduciary: Doesn’t set them up as a fiduciary.
- Client Profile Limitations: These advisors may not be able to adequately help a client with minimal assets to invest at the moment; for example a younger doctor who needs help with cash-flow planning and risk management, or a business owner with the large majority of their net worth tied-up in the business. These advisors may have strict assets-under-management minimums.
Fee Only: This type of advisor is exclusively compensated by charging fees for their advice and planning.
- Planning Process and Unbiased Advice: They will typically have a thorough planning process and they will provide you with unbiased advice that is in your best interest.
- Fiduciary: They are immediately positioned as a fiduciary by charging a fee to go through their process.
- Fees: due to the fact that they are only compensated on planning fees the fees could be high.
- Client Profiles: They typically only work with very high net-worth clients who can afford the fees.
- Cost: May be more expensive overall (versus the other two models).
- Plan Implementation: Also, if the plan involves implementing some financial products such as investments, insurance, etc. these advisors won’t directly implement them. Hence the clients have more responsibility to find and review the providers of these products and services (some fee-only advisors may have relationships with the providers of the products and services they can recommend.
Hybrid: This type of advisor operates as a hybrid of the ‘Product only’ and ‘Fee only’. They will charge a fee to be paid for their time and expertise in planning and will take you through a thorough and unbiased planning process; they are immediately positioned as a fiduciary by charging a fee to go through this process. If the plan they help you create involves implementing financial products or services such as investments or insurances, they can also help you by reviewing the products in the marketplace and identifying appropriate ones for you based on competitiveness and quality as well as fit them to your plan, then help you implement them. Due to their ability to be compensated in multiple ways, their fees may be lower than the fee only advisors.
- Hybrid (or Advantages) of Both Models: When done well, this model can provide the advantages of the other two models and eliminate many of the disadvantages.
- Additional Complexity and Responsibility: Due to additional complexity and responsibility, solo advisors may have a particularly difficult time implementing this well. Therefore being part of a high-quality team can pay significant dividends with this model.
- Costs-Clients may pay planning fees and well as product commissions.
While our team has the ability to work with our clients utilizing any of the 3 models listed above, we prefer (and typically ask our clients to choose) the hybrid approach (#3) as we find it allows us to deliver maximum value to the client. We utilize this approach when providing financial planning and wealth management to clients in Orange County, Irvine, Newport Beach, and around the country.
Other major distinguishing factors in choosing an advisor include: 1) Open architecture / independence 2) services offered and expertise 3) solo versus team.
In future articles we will clarify these further to help you choose your future advisor!