Retirement Planning: What to Ask a Financial Advisor before you HIRE!


Jessica Cannella: Have you decided that it’s time to have a professional advisor work with your finances, or are you looking to change financial advisors? Maybe you’re interviewing a couple of different firms to figure out the perfect match for you and your finances. I’m Jessica Cannella, co-founder and president of Oak Harvest Financial Group. Today I’m going to run through a list of questions that you might want to consider asking the different firms and advisors through your interview process to help you really get a firm grasp on what that firm is offering to help you determine the best fit for your family and your finances.

Question 1: Fiduciary Responsibility

The very first question that you should ask the firm that you’re interviewing or the advisor that you’re interviewing on behalf of that firm is do they have a fiduciary responsibility. Now, this word “fiduciary” has come into popularity in the last 5, 10 years, so let me explain very clearly exactly what it means. A fiduciary is a person or organization that acts on behalf of another person or people that puts their client’s interest ahead of their own, and they have a duty to preserve good faith and trust with their clients.

How does somebody become or qualify to be a fiduciary? I’ll give you some feedback here. It’s generally with their licenses. An individual or firm’s licensure is what helps to determine whether or not they are legally bound to act in a fiduciary capacity. A couple of examples of licensure would be some of your Series license like your Series 65, 66, your CFP, which makes you a certified financial planner. Make sure to check the designations of your financial advisor or their firm to make sure that they are acting in a fiduciary capacity on your behalf and in your best interest.

Question 2: Fees

The second question that you’re going to want to ask right out the gate relates to fees. Now, I make a living charging fees and it’s never been a barrier to do business with my clients because what is most important when you are charging a fee for service is that you’re clearly communicating what that fee is and what is it covering for your client. What is the add-value in exchange for a fee that the firm is offering to you? We’re going to dive a little bit deeper into the different kinds of fees that you’ll see from my industry.

A great starting question is, are you a fee-based firm? The next part A of that question would be, do you disclose your fees in writing or are they on your website? In other words, where can you go to see the firm’s fees? It’s very important that you understand what are the fees that you’re paying in exchange for what is the add-value that you are getting. Is your fee a wrap fee, a performance-based fee, or a flat percentage otherwise known as a flat fee?

Let me walk you through a couple of the differences here. When we talk about a wrap fee, that’s typically for a broker-dealer. What that means is that any commissions, any administrative fees from the custodian, and a management fee, they’re all wrapped up into one fee. Typically anywhere from 1.5% to 4% of whatever you have under management but you won’t get any additional bills.

Next, we have what’s called a performance fee. Now, this one’s a little bit tricky. If you google performance fee, it actually sounds like a pretty good deal. It’s going to tell you that a performance-based fee is when a firm charges a fee based on you making money in the account. What I had a difficult time finding when I did the general consumer Google search is where it says what are you paying when your account doesn’t perform.

Here’s a quick example of how a performance-based fee actually works in the real world. Let’s say Bob Smith is going to partner with a firm that charge a performance-based fee and in their agreement, generally, the engagement agreement is where you would find the small print that you’re going to want to review, it states that Bob agrees to pay 2% management fee and when his account hits a certain benchmark for performance, the firm gets an additional maybe 10% or even up to 20% performance-based fee.

Here’s why I don’t recommend partnering with a firm if you’re in retirement especially, that offers a performance-based fee and that’s how they offer their fees. The reason is, it incentivizes an investment advisor or broker to take bigger risks in your portfolio. If you’re going to pay 2% in my example, regardless of whether your account is up or down and there’s a little bit more incentive for the advisor to make a buck when your account is performing, we all know that more risk is more reward in the investment world. What that tells me is that you could be taking on more risk and you have more skin in the game than the firm that’s offering that performance-based fee.

They may be incentivized through that performance-based fee to take more risk in your portfolio because there’s the chance that if they do it, there is a bigger cut in commission for them in the form of that performance-based fee. Lastly, we have what’s called a flat fee. That happens to be what my firm, we’re an RIA, not a broker-dealer, it’s what we offer to our clients. Here’s a quick example of how a flat fee works. If your account is $500,000 and your annual fee is 1% and your account drops to $450,000, 1% is 1%. Whether it’s 1% of $500,000 for $5,000 or 1% of $450,000 for $4,500, that is why it’s called a flat fee because the percentage doesn’t change.

As an aside, you’re going to want to make sure that you refer to the tiered fee schedule. This is very common for advisory practices that offer flat fees. On this tiered fee schedule, you’ll see which bracket you fall under. If you have $5 million, you might pay less of a percentage than you would if you have $500,000 under management. This is because there is a cost of financial planning. That cost is reduced for somebody that has $5 million because the cost is covered. Billing on $5 million is going to be a lot more lucrative for the investment advisor firm than it would be on $500,000. The cost for the planning piece is built into that tiered fee schedule.

Ours is listed on our website for reference. I think we’re one of the only firms that does that, so make sure that you request to see this in writing from whatever firm you are interviewing so that you have a great comparison basis. Another question to ask along the lines of how does that firm or advisor get paid is specific to the insurance industry. Now, I’m referring to tools used for financial insurance. Think fixed index annuity, fixed annuity, variable annuity, really any type of annuity or life insurance, you’re going to want to ask the firm that you’re considering working with if they get paid a commission.

Why is this? It’s okay, again, to get paid in a commission if you’re making a recommendation to a client on a specific product and they choose to go forward. However, different carriers or different insurance companies are known to pay different commissions and it is crucially important that you know exactly what that commission will be, especially if it is out of your account. Now, with most fixed annuities and fixed index annuities, you’re not being charged a commission out of your own account, but rather I would call it a marketing budget, is the easiest way to conceptualize it from the insurance carriers.

It’s still important that your advisor or firm that you’re working with discloses that they make or do not make commissions from recommending insurance strategies. Since we’re talking about commissions, let’s also ask the firm or advisor if they make commissions when they buy and sell in your account. There’s a joke in my industry that a broker is called a broker for a reason. If the answer is yes, they do charge a commission to buy and sell in your account, the very next question that you’re going to want to ask is, “Well, what is the fee per trade?” They should be able to give you this information in writing.

To dive even deeper on the commission conversation, you’ll want to ask specifically about mutual fund fees. Many mutual funds have hidden fees inside of them, and more than that, there are front-loaded or back-loaded mutual funds that you’ll want to know is your advisor making a commission out of your account when they put you in a front or back-loaded mutual fund.

Here’s how that works. A front-end load mutual fund means that a fee, generally 3% to 6% of the investment out of your investment, or sometimes as a flat fee, depending on the provider, is charged upon the purchase of your mutual fund. What I just said in English is that at the point that you purchase a front-end load mutual fund, you are paying a whomping maybe 3% to 6% commission right off the top of your purchase. Less money to grow in that mutual fund. Really important question that you ask your advisor.

A back-end load, also known as a contingent deferred sales charge, means that the fee is charged when the investor redeems the mutual fund. In English, a backload fund is at the point in time that you cash the mutual funding or sell it, they’re skimming off the back-end of your mutual fund and you’re paying that price, typically 3% to 6%. Another question you’ll want to ask as it relates to fees is does the advisory firm or broker-dealer use a third-party asset manager.

This is very common even with independent firms that they will charge you maybe 1% to manage the relationship, but there’s actually a third-party investment company that is managing your fund. Guess what? They often have fees. You’re really going to want to request a breakdown all in what are the fees that you are paying to do business with this firm in exchange for what add-value.

Last question for now as it relates to fees. I mentioned earlier that mutual funds and ETFs typically have a hidden fee. You may want to know where is it hidden. It is hidden in a little white book while relatively thick white book called the prospectus that even my most enginery engineer clients do not read. A healthy hidden mutual fund fee is typically between 0.8% and 0.3%. Really anything south of 1% in a hidden mutual fund fee is reasonable.

You’ll also hear this called the expense ratio. What it is, it’s a fee that you are paying to the mutual fund company in exchange for the added value of not having to pick out single stocks but rather picking a mutual fund or ETF that gives you exposure to many different stocks all in one picnic basket. If you’re curious to learn if you have any hidden mutual fund fees in your current portfolio, we’ll spare you the hard work of digging through that prospectus. If you’re interested in finding out if you have hidden fees in your portfolio, go ahead and request a complimentary fee analysis from your advisor when you come in to visit with us.

Question 3: Financial Planning in Conjunction with Investment Management

Let’s move on to the next question to ask the firm that you’re interviewing. Do you offer financial planning in conjunction with investment management? Retirement is so much more nuanced than the accumulation phase of your life when you’re working and money is a little bit easier. If the answer to your question about them combining financial planning and investment management was yes, I encourage you to dig a little bit deeper with the individual or individuals sitting across from you. Here are some questions you may want to consider to ask.

First and foremost, especially if you’re in retirement, you’re going to want to ask if they will provide you with a written income plan. It is crucially important that you know where is your income coming from in retirement. The next question is, “Will I receive an annual tax plan?” Tax planning is so important especially when you come upon retirement. There are several different strategies to use as a distribution strategy.

In other words, in English, how do I take money out of my retirement accounts in a way that is going to be tax efficient? Many firms do not offer tax planning. If they tell you that they offer financial planning but no tax planning, that’s something that you might want to consider as you’re considering your options to select a firm to work with. How about a plan to help you with healthcare decisions like Medicare and long-term care insurance? Is that something that they’re offering in exchange for their fee?

Medicare can be very confusing. Be sure to ask that if they don’t offer Medicare help and assistance in their practice if they have a list of referrals that they could refer you out to. How about social security? Social security is a stream of income. Does the firm that you’re interviewing offer social security analysis to help you maximize every dollar that you can from social security in the context of an income plan? Last, you’ll want to ask if the firm offers any assistance when it comes to estate planning. There is a lot of benefit to having a CPA, estate planner, and financial advisor on the same page with you acting in your best interests and on your behalf.

Question 4: For Your Protection

Next, we’re going to address some questions that you’ll need to ask for protection, consumer protection. You the consumer must know who is the regulatory body that governs the institution that you’re considering working with. Is it the SEC? Is it FINRA? Is it the Department of Insurance? Please ask who is the regulatory body that governs your agency. The next question for your protection is who is your custodian. Now, I want you to think of a custodian as the bank that the money lives in.

It’s very common, my firm is structured this way where we have our custodian at TD Ameritrade soon to be Charles Schwab and we act in the best interest on the behalf of our clients in a discretionary capacity. What that means is we can go into TD Ameritrade at this time and we can buy, sell, and trade in the best interest of our client on their behalf without having to call them and ask them for permission every time.

What we don’t have is custody of their funds. This is crucially important especially if you’re not privy to the financial world. You’re going to want to make sure that the custodian is an institution that you’ve heard of before, one that is federally insured. Unless a firm charges a predetermined one-time fee for a written plan, never write or sign over a cheque to the firm directly. Cheques, transfers, and rollovers should be transferred directly from an institution to another institution. That’s the fraud protection for you. In other words, you would never write a cheque to Oak Harvest Financial Group but rather to TD Ameritrade. Specifying your account number is important as well.

Question 5: Strategies Offered

Now we’re going to talk a little bit about strategies offered by the firms that you’re interviewing. You should ask upfront do they offer insurance strategies. Replay the earlier part in this video when we talk about some important questions around fees and commissions in insurance if the answer is yes. Another consideration if the answer is yes is you want to ask how many different companies is that firm contracted with. Contracted with simply means they can write business on behalf of these other insurance companies.

This is an important question that consumers generally wouldn’t think to ask unless you’re in the industry. Here’s why, having independent capacity to have different contracts with various carriers allows more consumer freedom. It is a way for a consumer to protect themselves from, “You get carrier A, you get carrier A, you get carrier A,” if carrier A is not the one that meets or exceeds your expectations or goals. It is important to work with an independent firm that has access to not just one or two insurance carriers, if that’s on the docket for investment choices in your portfolio, but several. You’ll want to check to see what the ratings of those insurance companies are.

You’ll also want to ask if your firm that you’re considering working with is contractually obligated to any third parties. In our industry, it is not uncommon to have, let’s say that you have only carrier A, and this could be in the investment space or the insurance space, and they have a deal with carrier A that X amount of business gets maybe a higher commission, or they get some perks for putting clients with carrier A. It’s very important that you address this at the outset as a conflict of interest because you might not benefit from being in a strategy that carrier A offers.

Again, you really want to make sure that you’re working with a fiduciary, that they’re acting in your best interest, and that they are disclosing any conflict of interest. Working with a carrier that offers incentive for placing business with them is a conflict of interest that needs to be disclosed for a consumer, so you’ll want to ask that question as well. When it comes to the relationship aspect of the firms that you’re interviewing, one question to ask here will be, “How often are we going to meet to review my investments and my financial plan?”

If you want to visit once a quarter, you ought to find out if that’s something that the firm offers. If you’re more of a, “Hey, I’d like to come in for two reviews a year,” same thing there, just get some clarity on in exchange for a fee, what is the add-value, how often are you meeting, and what is the agenda for those meetings? Lastly, you’ll want to ask what is their specific area of expertise. Finance comes in all flavors. A retirement specialist is about as different from a wealth manager as a cardiologist is to a proctologist. In both examples, you need a professional who was working on the right end.

Lots of information and questions to ask your advisor as you’re out there in your interview process. I tend to recommend to interview two to three firms. Otherwise, you’ll start mixing them up. We’ll put in the description box of this video a link to this PDF. You can print it out and fill in the blanks right there, have the list in front of you. As you’re going through the interview process, one word of caution, if these questions, especially the ones around fees seem to tick off the person in front of you, run the other direction, that’s a red flag. Your advisor should come to you with a heart of service and really want to make sure that you’re just as good as a fit for them as they are for you.

Click here to get these questions in a document, and happy interviewing. I wish you the best of luck and hope that you find the perfect fit for your family and your finances.

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