Finding a Good Financial Advisor and Three Red Flags You May be Getting Ripped Off!

What is the value of a good advisor to your retirement? Three red flags that you might be getting ripped off, and an example of how it’s possible to save over $350,000 in taxes in retirement. [MUSIC]

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of The Retirement Income show, a CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and author of the upcoming book Core4. The first thing you need to determine is am I receiving retirement planning or just investment management or are you receiving both?

Many advisers charge 1% to 1.5%, and they’re only providing investment management. If you’re paying one and a quarter or 1.5 and all you’re receiving is investment management, you’re probably paying too much. If you’re receiving financial planning, retirement planning, and that’s where the take in come from. How to keep taxes down, when to take Social Security, what about long-term care?

These things that all of us have concerns about in retirement. If you’re getting all of that, then that may justify a little bit of a higher fee. Industry averages are about $200 an hour for a good financial advisor, a certified financial planner professional to put together a retirement income and tax plan and look at some of these different aspects such as Social Security, long-term care and bring it all together. Generally, it’s about $3,000 to $5,000 a year. On the investment management side, Vanguard has done a study and also Russell Investments have done a study. What both of their studies say is that a good financial adviser, one that’s doing planning and also investment management can add an additional 3% per year, Vanguard says, or 4% per year according to Russell Investments, the value of an advisor study over doing it yourself or not doing any of this at all. There’s several similar components in these two studies.

The common themes are asset allocation in both of them, that’s a big one. Asset allocation is the process of determining which dollars of yours go into which assets and how they build out that plan. How much are you going to put into stocks? How much you’re going to put into bonds, into mutual funds, into real estate, into CDs and annuities, large-cap stocks, small-cap stocks, international, domestic? Determining this asset allocation structure is very critical. I want to point out a big difference here. When you’re in the accumulation phase, an asset allocation structure should be based solely on your risk tolerance because your money that you’re investing is for the future. If you’re young, you should be heavily tilted toward stocks because historically, that’s the best place to see your money grow. As you get older though and start to get pre-retirement and into retirement, most people want to dial down that risk, so the asset allocation strategy changes as well in retirement.

You don’t just want an asset allocation based on your risk tolerance. In retirement, you want an asset allocation based on your risk tolerance, but also your needs and your retirement vision. How much income do you need? When do you need that income? What is the impact of taxes from taking from the different accounts?

What do I ultimately want my money to do? What’s the most important thing to me about my money at this stage of my life? Your asset allocation, the guiding force behind how your funds are allocated across these different tools changes through time. A good financial advisor is going to be able to provide a tremendous amount of value there just by structuring that initial asset allocation.

Rebalancing is the process of once a year, as stocks continue to grow and outperform your less risky assets, if you’re not bringing things back in line, you can end up having far more risk in your portfolio if you don’t rebalance. This exposes you, of course, to greater swings, to the downside when the market corrects, or a recession, or a crash occurs. Rebalancing is going to keep things in line. You’re going to have the appropriate percentage in the assets that your advisor and you initially agreed upon. That’s going to give you less risk and give you the potential for better returns and more consistent returns over time, according to these two studies.

The Vanguard study says 0.2% per year, the Russell Investments study says about 0.35% per year. Doing it more than once a year creates extra charges. Most of the studies that I’ve read, quarterly, semiannual rebalancing doesn’t provide a large enough positive impact in the value of your portfolio when you’re taking to account the expenses that you incur from rebalancing everything. Once a year is good for rebalancing.

A good advisor is also going to make sure you stay in low-cost investments. Now, this is one of the things that irks me to no end. When a prospective client comes in here, more than five out of ten times, more than half the time, when we look at their portfolio and we start to provide a retirement income analysis and look at their investments that they’re in, probably six, maybe seven times out of ten, they have mutual funds inside their portfolio that have hidden fees of over 1%.

If you’re paying your advisor 1%, and then he or she is putting you into investments that have an expense ratio maybe of 0.5 and hidden fees of 0.5 or 1%, or even greater sometimes, you’re starting to have large chunks of your portfolio over time eroded by all these fees that you’re being charged. A good advisor is going to make sure that you are completely aware of all the fees in your account. What are you paying that advisor and the investments that you’re in, not just what are the expense ratios. This has happened for many, many years. Consumers often believe that the expense ratio that’s very easy to find is all the fees that’s inside the mutual fund. That’s not true.

The mutual fund also has taxes that get passed through to you. They also have trading costs that get passed through to you. Some of them even have what we call 12b-1 fees which are essentially trail commissions that go to the advisor that sold you the fund. These taxes, these trading costs, and these 12b-1 fees, these are the hidden fees that are inside the mutual funds. Oftentimes, if your expense ratio is 0.5, 0.6 or 1, you can have hidden fees that are equal to or not greater than what you’re paying in that expense ratio. A good adviser is going to make sure your expenses are kept at a very minimal level that the least possible so more money stays in your portfolio. The next one is one of the most important. The last two are more important than this, I believe, but this is right up there. Being a behavioral coach. What I mean by this is a lot of times we see investors allowing their emotions to dictate their decisions. The decision part of our brain is the prefrontal cortex, it’s this part right up here.

This is where rational decisions are made. This is where we process logic and decide what we’re going to do based on the given information that we have. You have to understand that we’re hardwired a little bit differently when it comes to our emotions. The emotions, the emotional part of the brain is the midbrain, it’s called the amygdala. This has been pre-programmed, and this is how we’ve been for years. It’s the fight-or-flight response. Whenever we have emotions, the midbrain activates, it overrides the prefrontal cortex, and this is how we survive when a bear is chasing us, or a lion, or a wooly mammoth thousands of years ago. It’s no different when it comes to investing your money. This is all the money that you’re going to have for the rest of your life if you’re in retirement. When you see the market start to go down, that fight-or-flight response kicks in, the amygdala overrides the prefrontal cortex, and we tend to make an emotional response that’s not rational, that’s not logical. Idiot. Get back in there at once. I’m so sick.

This is why we consistently see investors putting more and more money into the market as it’s going up and things are going really well. We consistently see investors wanting to take money out of the market when it’s going down. It’s the exact opposite. You should be doing the exact opposite. The primary cause of this, of course, is the emotional response. A good financial adviser is going to have these conversations with you. They’re going to keep you updated with what’s going on in the market, what’s going on in the economy.

One of the things we pride ourselves on is staying in contact with our clients on a consistent basis. If you go to our website, we have, if you go to the investment management tab, it’s right here under Stock Talk podcast. Chris Perras, he’s our chief investment officer. I couldn’t be more proud to have Chris as part of the team. Not only his education, but his track record, his accomplishments. He’s an amazing asset for our firm, but one of the most valuable things that he does is he provides us weekly podcast that he puts on the website.

This is one of the things we send out to all of our clients. If you come down here and look, you’ll see every week we have a different podcast, and this is keeping our clients informed. What’s going on in the market, what are we doing behind the scenes, why are we making the investment decisions that we’re making. When you see in the fourth quarter of 2018, the market SMP 500 corrects over 20%. We got one phone call. One phone call from our client base during that timeframe that had questions about what was going on. I believe the reason we only got one phone call was because we stay in contact with our clients on a consistent basis so they’re informed, so they know what’s going on. A good adviser is going to stay consistently informed with you to help regulate the emotions. The amygdala, the midbrain, can be shut down, and that prefrontal cortex, the rational, logical decision-making part of the brain, can help you have a more successful retirement because you’re educated and you’re informed.

The next two are kind of similar, tax aware investing. A good financial advisor is going to have tax aware investment strategies. Now, all these means is whether you invest in CDs or stocks or bonds or real estate or annuities or mutual funds, they all have different tax characteristics, and you also have these different accounts. You have an IRA, you have a non-IRA, maybe have a Roth IRA. These accounts have different tax characteristics as well.

Tax aware investing simply takes your goals, your needs, your objective, your vision for retirement, and builds a plan, an asset allocation plan, monitors it through rebalancing, but initially, the assets and their tax characteristics should be aligned with the account and its tax characteristics that best execute your vision. Very important here, so that’s what we call tax aware investing. The next part, or the next thing a good advisor will do, and this is the most important, I believe, over the course of your retirement is tax distribution planning. I’m going to show you an example here. This is startling. It’s going to be startling for many of you but it’s powerful. It’s something that you need to grasp. Two identical scenarios. Husband 65, wife 60. They have $1 million, retiring, both have Social Security, all the variables are the same.

I’m going to show you two identical scenarios. The only difference is going to be the order and the sequence that they start taking income from their account. The first one we’re going to look at is conventional wisdom. This is you defer your IRAs until 70 and a half, then start taking required minimum distributions. You defer Social Security as long as possible till age 70 and you spend down your non-IRA assets first. This is conventional wisdom. In a large number of cases, this is conventional wisdom that many advisors are still recommending to clients, it’s completely wrong, and I’m going to show this to you. I’m going to prove this to you mathematically in a second. Then the second one I’m going to show you, identical scenario, except for the order or the sequence in which we take income, is one of the strategies we use here at Oak Harvest called our Core4 framework. Core4, what that is is that’s our blended model for integrating investment management and retirement planning. We call it the Core4. We’re going to add a Roth conversion strategy in here, too. The difference in the taxes paid and the total value is astounding. If we come here, we have– Let me get my highlighter pen on. This is the conventional wisdom strategy right here. The total taxes paid $487,279. The total value of the retirement income strategy is about $3.9 million, the portfolio lasts about 37 years.

This is a couple, age 60, age 65, that has $1 million using conventional wisdom of how and when to take income from their portfolio. If we look down here, first and foremost, we have several different possible combinations. You see the amount of taxes paid, the longevity, the total value. It’s different in all these combinations. The number one strategy right here, our Core4 strategy is this one. The ending balance after 37 years is zero. The ending balance here after 40 years is $288,000 still remaining in the portfolio, but here’s the best part. Cumulative taxes paid with our Core4 framework in a Roth conversion strategy, this is done up to the marginal average tax rate of 10% for this couple.

Everyone’s retirement income sequence and strategy is different based on your personal situation. This is just what’s best for them. As you can see, there are dozens and dozens, if not hundreds, of possible combinations that we look at to determine what’s the best sequence to take income. $117,000 in cumulative taxes with the number one retirement income strategy versus $487,000. This couple runs out of money with conventional wisdom after 37 years. This couple, same couple, different strategy, $288,000 after 40 years, so nothing is different here. Nothing is different except the order in which we take income, so a great example of how you can save over $350,000 in potential taxes in retirement just by changing the sequence that you take income from your account. Three red flags you might be paying your advisor too much.

Many advisors outsource the management of your portfolio to a third-party firm. It’s called third-party asset management or a separately managed account. My question is, what are you paying your advisor 1% for if he or she is then taking that money and going to a third-party firm and having them manage it? If you’re paying your advisor 1%, and then they’re outsourcing that to another firm, and you’re paying them 0.5% to 1%, and then your mutual fund’s paying another 1% to 1.25%, we see this structure all the time. In this structure, there’s a very good chance you’re paying too much, you’re getting ripped off, and you’re not getting the quality of service that you deserve.

The second red flag that you’re paying too much is if your advisor tells you they can get you out of the market before it crashes. No one has been able to do this in the history of the country consistently. If someone tells you they can do this, let them know you want to see the exact results of every time they’ve ever recommended they get out of the market, when they got out, when they got back in. When you really dig deeper and you look at the strategy, if they’re willing to share this with you, you’ll see that they’re not able to do it successfully. No one’s been able to do this successfully. It creates high costs. You miss out on the market rebounds, and the problem is you have to guess right the first time when to get out, but then you have to guess right a second time when to get back in. It’s just no one’s been able to ever do this consistently. It’s a fear-based marketing strategy that unfortunately many people fall for.

The third red flag that you might be paying your advisor too much, if you’re paying them 1%, 1.25%, maybe 1.5% which is common, we see this all the time, is if you don’t have a written tax plan and you don’t have a written income plan. This example I showed you here earlier shows you the difference between having a tax plan, $487,000 in taxes versus $117,000. We’d all rather pay $117,000 over the course of our retirement than $487,000. If you’re paying 1%, 1.5% and you don’t have an income plan– An income plan says, “When am I going to take my income? From which account and how much and what is the impact on taxes over time?”

If you don’t have this, you probably shouldn’t be paying your advisor more than 1%. I encourage you to visit the website. We have a ton of great content on there. It’s oakharvestfg.com. Make sure to subscribe to our channel, hit that little bell icon to be notified when we upload a new video. Please send this video to a friend or a co-worker or maybe someone in your family that you know that, hey, they may have a financial advisor and they may be getting ripped off. Please share this video, and if you have any questions or ideas for future videos, comment below. [MUSIC]