Can I Find An Advisor I Can Trust?

A peek into the unique mind of Harrison Hodges.

Can I Find an Advisor I Can Trust?

Most of us need a financial advisor. Behind physical and mental health financial health sits as one of the top priorities for every single person out there, whether they know it or not.

But how can you find one you can trust? One who is truly going to take care of you and not take advantage of you?

Very rarely do you hear about ethical financial advisors on the news or in entertainment. There’s nothing exciting about advisors who simply take care of their clients when you can tell the story of a Jordan Belfort or Bernie Madoff.

Financial advisors have a reputation that, quite frankly, is pretty well-earned. The industry has hurt many people on a macro (2008 housing crisis, Enron, etc.) and micro level. Everyone seems to know someone who had a bad experience or got scammed by someone they trusted with their money. There are plenty of insurance and annuity salespeople who masquerade as full-service advisors. There are plenty of advisors who don’t act fully in the best interest of their clients because of their pay structure. There are even ethical advisors out there who may fall short on human connection and communication and end up misjudging their clients’ situations.

This article isn’t for fearmongering or to scare people away from getting financial advice. Quite the opposite, in fact. Having a solid financial advisor can reap massive rewards! A study done by Strategic Business Insights found that people who work with an advisor for ongoing financial planning end up with at least 2.5x as much wealth as those who don’t*. That’s a life-changing number for most of us!

I know what you’re thinking: this all sounds great, but only ultra-rich people have access to ongoing financial planning, right?

This is another big problem with the industry: access. While huge strides have been made to reduce fees for investors, the problem is that most people don’t have anyone to help them with WHAT to invest in or how to strategize financially. And before you place a trade or make an investment decision you need to have the right kind of accounts in place to do so. So the cart has come before the horse in some ways because while normal investors can hop on an app or a website and place trades at little to no cost, they may be doing so without any direction or plan in place.

I worked as an advisor for a large financial services firm. The reality is that most in-depth, ongoing financial planning relationships are only reserved for those who come to the table with a lot of money. Which is great, don’t get me wrong—but the minimums for those relationships were usually at least 500k of investable assets, and that was the BARE minimum.

The folks who are coming in at under those numbers are lucky to get an hour a year from an overworked junior advisor. And almost ALL of these folks have sizable sales goals that encourages a sell-and-move-on type of relationship.

I worked for a small firm as well, a firm who targeted lower net worth clients. Unfortunately I found that these companies may employ sales practices to get smaller clients into high commission products that severely limit their growth, such as annuities or cash-value life insurance. While those products are appropriate in certain situations, far too often folks who are just excited to get a meeting with an advisor are walking into a sales trap for these products.

Ultimately a lot of advisors are in a position where they are subject to ever-growing sales goals and/or their pay structure is set up to make a sale and forget about you. But planning shouldn’t work that way. How can you be sure to not be treated like a number?

There’s a shift happening in the industry, and it is one that I experienced firsthand. I became disillusioned with the big firm I worked for because I felt like I wasn’t helping people who would benefit the most from having a financial planner. I was even more discouraged when I found that many smaller firms who targeted lower net worth clients weren’t acting in their best interests or charged exorbitant fees to these smaller clients to cover their overhead.

It seemed impossible to work with people who weren’t ultra-rich and be able to have a sustainable career. But that’s simply not true, and that environment is creating a wonderful niche for ethical advisors who want to help their clients with no strings attached: the independent advisor. They’re popping up all over the country—advisors who are sick of sales goals, questionable practices, and having how they work with clients dictated by bosses and execs. They’re breaking away from their firms with high overhead costs and are able to align under reputable financial institutions to provide customized guidance for clients of virtually any wealth tier without conflicts of interests or high costs.

Combine this dynamic with the modern world of connectivity and people now have the ability to find advisors who only work for themselves and their clients.

You can generally vet and shop advisors at no monetary cost to you. The time will be well worth it. Almost all advisors, independent or at institutions, will sit down with you or have a phone/video conversation with you to see if there’s a fit. Asking prudent questions is the key to saving yourself time, headache, and potentially money.

Here’s a few simple questions that will tell you all you need to know, and an explainer on why it’s important to ask:

• “What aspects of financial planning would a relationship with you cover?” This helps determine exactly how much guidance you will receive. Many planners claim to be holistic, meaning they cover everything from proper budgeting, investment choice/management, debt management, tax planning, estate/succession planning, real estate, etc. But they will tell you exactly what they will cover with you if you directly ask them if they cover these issues.

• “Can I expect an ongoing relationship with you?” This goes back to what was covered above: the reality is that many advisors are completely overwhelmed because the business they work for has a model that pushes them to the next sale. So they will likely do an initial plan with you, get you situated and in an investment model, then move on to the next. This isn’t to say they’re bad people or they’re unethical—you’re 100% better off after doing that. But financial planning is an ongoing process, and if you want an advisor who will be there for you it may be better off to go with someone who has the bandwidth to meet and speak with you more regularly. Most financial advisory companies have business models that only allow advisors to spend adequate time with a select few clients—the super wealthy ones. If you’re not getting a direct answer on this then it may be in your best interests to look elsewhere unless your goal is to get situated and be left alone. Which some people prefer!

• “How are you paid, and are you paid differently depending on what kind of business I do with you?” A lot of folks are prudent enough to ask the first part of the question. However, companies and their reps are smart, and there are ways to answer that question in ways that are not completely honest! That is why the second part is crucial—technically they can find ways to describe their practices as “product-agnostic” if they speak in generalities. There is NOTHING wrong with paying an advisor. What is wrong is when advisors are not disclosing potential conflicts of interest to prospective clients! If they can’t give you a straight answer you should be very careful. Any ethical advisor should be able to tell you directly whether they are paid equally or not. And if they are forthcoming about differences you can still feel comfortable working with them—it’s not necessarily a bad thing so long as you are aware of it. You should be afforded all relevant information to make an informed decision.

• To insert my humble opinion into the pay conversation: the most efficient and ethical pay structure is asset-based management fees. Simply put, the advisor is paid a percentage of the total money you agree to let them manage. The industry average is in the 1-2% range. That’s 1-2 bucks for every 100 they manage. Ultimately, I believe this is the best structure because your advisor’s incentive is to make your money grow by whatever means they deem appropriate. If your money grows, their pay grows. If your money falls, their pay falls. And you can fire them at any time with no cost or liquidity (access to your money) issues.

• The caveat here is that your fee should cover more than just investment choices—it should also cover those first two questions. Ultimately your advisor, unless they are a stock-picking genius, is more so there to keep your ship on the right path in your financial voyage. While performance is important, the organization and psychological support will end up being the most valuable aspect of having a financial advisor. You’re paying them to strategize on growing and using your money as a tool to achieve your aspirations. Whether that’s making sure your kids don’t have to worry about paying for college, buying your first home or a vacation home, successfully accumulating adequate retirement savings, helping pay for your parents’ long term care, or any of the myriad of things you need to invest for, you are paying them to put you and keep you on the right path.

• You can also find advisors who do one-time financial plans for a flat fee. These are useful if you just need some help getting organized and feel confident you can take it from there.

The bottom line is there are plenty of advisors out there who can provide the guidance you need to reach your financial goals. Unfortunately, the process is still not without pitfalls, and I hope this piece helps give you some insight into how to find a financial advisor who will work best for you. I would encourage anyone reading this to take the first step as soon as possible!