What financial advisors do for you? It's more than just investment advice. Or it should be.
written by Brian Dudley, CFP® Founder+COO
You hear the term financial advisor and you wonder, “What does that even mean?”
I would imagine almost anyone knows of an “advisor” of some sort. Some people call themselves financial advisors. Some call themselves wealth managers. Some call themselves financial planners. Some investment managers. Others investment advisors. Even some CPAs call themselves financial advisors even if they may not provide anything more than tax advice.
“But, taxes deal with your finances so financial advisor fits, right?” I guess.
This list goes on and on, and it baffles my mind how this isn’t clearly standardized. No wonder there have been on-going legal battles over a fiduciary ruling to help people understand exactly what the term advisor means (in addition to always having their best interests in mind).
But, what does a true financial advisor actually do? Let's focus on a few things that great advisors should do for you at all levels of wealth. Once you climb the ladder and move from emerging to high-net worth, more layers of advice should be offered to you, your family, and your business.
An obvious one: Help you allocate your assets
I feel like this is what most people think of when they discuss what advisors do. Invest their money. I’m here to tell you that although this is true, if it’s the only thing your person is helping you with, you better not be paying them too much. What is too much? 1% is too much. It’s too much for just investment allocation advice. I apologize to the overpriced advisors at the big fancy firms that talk to you about how they are investment managers, when in reality, all they do is sub out your investment management to mutual fund companies or SMAs or maybe a pre-built model from either their firm or a firm that offers models to them. Isn’t the investment management component worth something? Yep, and there are plenty of bad strategies that are pre-built, so there should be a fee for the person helping select the best ones for you. However, at Pinnacle Emerging Wealth, we feel that even if there is a core model or holding at the center of your portfolio, you should customize around it based on your needs. There is more to advice than investment management. If you only are using your advisor to manage investments, their price should come down by half. If it doesn’t, move on.
A not-as-obvious one: Helping you map out your financial plan
This is where we talk about the planning that makes up the remainder of that 1% or flat fee your advisor charges. It’s all of the other topics that should be discussed when hiring someone as an advocate for your money. We talked above about how an advisor analyzes your current allocation and will help you reallocate and make portfolio recommendations. Here are just some other things that your advisor should be doing.
Cash flow analysis (aka finding out how much money comes in vs how much money you spend). From here, an advisor can use these figures to help determine which goals get funded first, how much should be put in each strategy, and can even help determine if spending habits need adjusting in order to get on a better track. I’ve never believed in budgets, but I do believe that you need to have a savings strategy. If you just wing it, guess what? You’ll probably miss out on a ton of opportunities to have a better future lifestyle. Your advisor should help work you through this process.
Reviewing outside assets. Ya, ya, but you don’t pay them for that, right? Meh. I don’t think so. If a person hires me as their advisor and pays me through a percentage of one of the accounts I manage, I help them with all. Your advisor should too. Your strategies should work together synchronously. How will they if your advisor only cares about the portfolio he or she manages? They won’t. Great advisors, even if they don’t manage the funds, have an understanding of the bigger picture and how it can impact you.
Reviewing debt. Sure, your advisor isn’t a mortgage broker or credit card provider. But wait, you were offered a mortgage through your financial advisor at the institution you already have your funds managed at in addition to hearing about their credit card benefits for customers of the bank? This isn’t debt management. It’s cross-selling. It may be beneficial if the rates are just that much better, but it’s not advising you on how to handle debt. Is a refi even right for you? Can debt be used for the greater good of your portfolio? How are you using your credit card? This goes on and on. A great advisor helps you through the debt management process.
Risk management. What does this even mean? Real talk. It’s a fancy way to talk about insurance. Here’s a tip: If an advisor leads with insurance as the core to your plan -- RUN, Forrest, run. They don’t have your interests at heart. Most insurance plans are commissionable. That doesn’t make them bad, but it should cause pause if it’s the first thing discussed in an “advisor’s” office. Your advisor should help map out a proper risk management strategy aka insurance plan for you, your business, and/or your family. Whether you implement it with your advisor or not should be your choice. A great advisor will also have contacts for insurances he or she doesn’t offer. They should be reviewing home and auto, for example, even if that is outsourced. It all ties in to your financial picture and your advisor should be aware of these items.
Tax and Estate Planning. Your advisor should have a base knowledge in these topics and be able to know where opportunities lie and where problems may arise. I plan to dive in on this a bit deeper later in this blog.
Other topics. Charitable giving, college planning, equity compensation, etc. All topics that may or may not be a need, but if they are, they should be addressed by your advisor as a part of the advice you pay for.
A true financial advisor is more than just an asset allocator. If you are paying 1% and asset allocation is all that you've ever received, you are overpaying for advice, period.
A not-so-obvious one: Be a resource and help you connect
A great advisor or advisory team knows when they are not the right specialist that you need. They do, however, know how to find them and provide you an introduction to them. This doesn’t mean that they are the finest navigators of the Google sea, but rather, they have the (virtual) rolodex to connect you to the right people. Take tax advice, for example. Basic preparation isn’t rocket science. In fact, there is software that can help you do your taxes for a minimal cost. It’s not new and I am sure even greater technologies will be available to help more complex situations in the near future. However, if you are younger, growing your wealth, and now need direction on where to head (maybe with strategy, maybe with opening a business, etc.), your advisor should be connected to a person, or a firm, that can help you through this process. Your advisor can even be present during these meetings to max out the benefit of having someone in the room who does not have an emotional attachment to the discussion and who knows your finances. The same goes for legal advice. If you do not have an estate plan, basic plans can be done using startup financial tech (I am not talking about LegalZoom), but rather real attorneys drafting your estate docs with the help of artificial intelligence for much less than seeing a traditional estate planner. However, once your life becomes too complex for a simple solution, your advisor should have a contact to help you through that process. Is that it? Estate and tax connections? Nope. Should your advisor be connected to a realtor or different levels of realtors depending on your personal goals? Yes, your advisor should have that. Should they have a builder or landscape designer who can help on a home or investment property project? Your advisor should have those. Ok, cool. But should your advisor have a consultant that can help someone create an exit strategy from their family’s business and provide guidance on that upcoming liquidity event? A person who has experience in private equity? Venture capital? Yes, yes, and yes. Your advisor should have contacts that he or she can go to when they are not the person of expertise and you need help. Even if you do not use those contacts because you are a savage who created your own dominant network, your advisor should still have them in case. These are intangibles of great financial advisors.
Lastly, another not-so-obvious one: To help create emotionless decisions
This may be the most important thing that a financial advisor does for you. An advisor is an advocate for your finances without the emotional tie that you have to them. Now, I am not saying that they shouldn’t be excited for you when they see your success or that they shouldn’t show empathy at times of failure. That’s human. They shouldn’t, however, let it affect how they manage your money or help guide you if you manage your own. Oh, Uncle Rickie gave you ExxonMobil shares that he inherited from an inheritance. Oh, but it’s a family thing. Welp, it’s dying so please sell it now before you only have the option to report it as a carry-forward loss for the next thirty years (just an example, but you get the point, right?). The one thing that is very tough for people to do is to make decisions that aren’t based on emotion. A great advisor should help you see clearly and look at financial decisions from an informed outside viewpoint. There’s a ton of value in this, but it shouldn’t cost more than you’re already paying.
I hope you enjoyed this piece. If you ever have questions, never hesitate to reach out and we can chat. It’s always a discussion, never a tell. Advice Without the Pretense was my original slogan for emerging wealth. It’s still there, but For Those Relentlessly Pursuing Growth makes more sense for this crowd.
Until next time, and as always, thanks for reading.