I met a successful business woman recently. I’ll call her Sally. Sally shared with me that she had a fairly significant amount of money sitting in a savings account. She told me she didn’t know what to do with it or what investments she should choose. So, she just left her money in her account where it was earning pennies. Sally was great in her chosen career and, like most people, didn’t understand the details of investing. When I asked Sally why she wasn’t working with a professional financial planner/advisor, she told me she felt they all just wanted to take her money. The thought of someone, a complete stranger, managing her hard-earned money designated for a future she’d been dreaming of, would make anyone feel vulnerable and uncomfortable.
Those feelings are quite understandable and make perfect sense. But, if Sally stays stuck in her fearful thoughts, she’ll continue to do nothing and let her money just sit in cash longer than it should instead of putting it in a well-diversified investment portfolio where it could generate some nice returns over the long term. Doing nothing could end up costing her thousands, if not hundreds of thousands of dollars over a 5, 10, and 20 year period of time. A better way to say this would be…it could cost Sally her future dreams and goals.
So, how do we get beyond our fear of thinking that financial planners are in the business for their own financial gain? First, embrace your vulnerability and your fear. You can get beyond whatever you can acknowledge. Second, realize that you are and will always be the one in control of your money, but you do have to act like it. Don’t make the mistake in thinking that because someone else has a greater knowledge in something than you do that they are suddenly in the driver’s seat. That’s not true. And remember that a financial planner works for you. Their role is to understand your retirement goals and recommend the best investment options to get you there keeping in mind your risk tolerance along the way. You are the one who decides to hire them and you are the one that also can fire them. Third, and most importantly, to move beyond your fear, you’ve got to take some steps forward that are solution-oriented. This will help you move past your fears and begin to detach from what you think is the problem.
Sally needed to take action so she could feel more empowered and in the driver’s seat of her financial life. I equipped her with these 5 questions to ask a potential financial planner so she could find the right person to add to her team of financial professionals:
1. Who is your favorite type of client to work with? Maybe it’s a different client than you or maybe you’re the exact client the planner prefers to work with. The only way to find out is to ask this question. Really listen to the answer. Does the response feel genuine or does it feel fake? Some financial planners may prefer to work only with high net worth individuals. That’s okay, but if you aren’t one of them, it’s good to know who their ideal client is right out of the gate.
Also notice how you feel in the presence of the planner you’re interviewing. Are they respectful of the questions you’re asking? If not, this particular financial planner probably won’t show you respect when you’re in the middle of a conversation about your investments and want to know why they are choosing certain investments over others. I like to ask my planner lots of questions so that I can be sure I’m understanding the reasons behind her recommendations. She is always eager to answer them. That’s the kind of planner you want on your team.
2. How do you get paid? Some financial advisors are paid a certain percentage of your overall account value. It’s called a management fee. The fee is typically higher the lower the account value and decreases as the value of your account grows. This fee is usually paid from your account on a quarterly basis. Other financial advisors are paid directly by the mutual fund company of the mutual funds you own. Every mutual fund has an expense ratio and a portion of that fee gets paid to your planner/advisor.
Both methods of payment are ethical. Although, in my opinion, it doesn’t make sense to have a management fee based account until your investment value reaches the point where the fee is no more than 1% of the total value of your account. Otherwise, the higher fee reduces your average rate of return over the long term. There are certain exceptions to this rule of thumb. There are investment options that cater to high net worth individuals with the goal of reducing taxable income in a taxable account. It’s common for those fees to be more than 1% because of the tax savings and more exclusive investment options, but this exception isn’t relevant to the average investor. So, I digress.
3. How do you know what investments to pick for my portfolio? The response should be that he/she will ask you several questions to assess your risk tolerance. Your financial planner shouldn’t have you invested in only aggressive investments or maybe none, especially if you are a more conservative type investor. Your advisor should also have you invested in a portfolio made up of value and growth stocks of small/midcap/large cap companies and fixed income investments as well. Diversification minimizes the overall risk to your portfolio and reduces volatility.
4. If we work together, how often should I expect to hear from you to discuss reallocating my portfolio? Typically once or twice per year is sufficient but it can be anytime equities move a certain percentage above where you and your planner have established the baseline to be. If the advisor says they will reallocate when you give them a call to do so, or you’ll get a call every few years, this isn’t the financial planner that’s right for you. Move on!
5. How often should I expect to hear back from you when I call and have to leave a message? If the financial planner/advisor can’t give you a quick answer to this question, take special note of their delayed response. It doesn’t matter whether you have $500 in your investment account or $500,000, the answer should be either the same day or within 24 hours. For myself, I expect a call back no later than 24 hours after leaving a message because that’s the same level of service I give to my clients.
So, when you’re interviewing for the right financial planner to include on your financial team, sit up straight, know that you’re in the driver’s seat of your financial life (just like Sally), and ask these questions with confidence. You are now equipped to find the best financial planner to include on your financial team!
