7 Secrets Financial Advisors Know but Probably Won’t Tell You

“The biggest secret most financial advisors don’t share with their clients is that the amount of work it takes to provide a client with good advice does not increase with the size of the client’s investment portfolio,” said John Stoj, a flat-fee, fee-only registered investment advisor and founder of Verbatim Financial. “Why do they want to keep it a secret? Because if an advisor charges fees based on the client’s assets under management, or AUM, while it’s in the client’s best interest to know that, and to demand to pay less, it’s not in the advisor’s best interest, because they want to maintain ever-growing fees.”

2. You Don’t Have To Hire a Local Financial Advisor

You’re not limited to financial advisors near you; you have a variety of options.

“If there is one silver lining as a result of the pandemic, it is that the virtual meeting is now ubiquitous,” said Joshua M. Flatley, CFP, MBA and managing member of X Vector Ltd. “Advisors and clients are now, to a great extent, comfortable with the video or phone interaction to conduct business. Continuous updates in the video conference software and security protocols have made a meeting with a neighbor or a client across the country as easy as logging in to the computer.

“One drawback is the lack of tactile interaction (handshakes, and hugs) and the loss in fidelity of some nonverbal cues. However, the meat and potatoes of financial planning is very feasible with an advisor anywhere who is compatible with the client through demographics, specialty or niche. One caveat is to ensure that the advisor may legally conduct business in the jurisdiction of the client.”

3. When a Financial Advisor Switches to Another Firm, It May Not Benefit Clients To Follow

Flatley said this is usually the case, especially for advisors who are compensated all or partially through commissions on sales of products.

“For instance, if a life insurance salesperson switches companies, typically, they would forfeit any commissions or trail earnings from the losing firm,” he said. “The only way to make up for that is to replace policies for clients with products from the new firm, incurring all new sales charges and possibly a higher underwriting rating if health has changed since the first policy was issued.”

4. Not All Financial Advisors Sign a Fiduciary Pledge

Flatley said not all financial advisors are fiduciaries. Fiduciaries are legally bound to put their clients’ interests first when managing any aspect of their finances.

“If an advisor is compensated in any way that is not in the best interest of the client, they cannot claim to be fiduciaries,” Flatley said. “For example, if the sole compensation method is through the sale of insurance or securities products, the interest is by design in favor of the firm, not the client.”

5. You Should Do Your Own Research Before Hiring a Financial Advisor

Unfortunately, not all financial advisors are equal, and Flatley absolutely recommends that clients do their own research before hiring one.

“First, clients owe themselves and their families the best service available, and due diligence in finding out about the potential advisor, their fee structure, their investment philosophy, other client experiences (within the constraint of confidentiality) and whether or not personalities match are all critical,” said Flatley.

Great places to start your research, according to Flatley, are the Investment Adviser Public Disclosure website and the CFP Board website.

“Secondly, a client should do as much research before, during, and after interacting with an advisor to understand about the financial planning process, potential product solutions, risk tolerance, etc. to be able to make competent and comfortable decisions with their money,” Flatley said. “There’s an adage that many in the industry promote: Don’t buy anything you don’t understand. A fiduciary is obligated to always act in the best interest of the client; part of that responsibility is to coach and educate that client to enable sound decision-making, not selling them a product.”

6. Beware of Double Fees

Asher Rogovy, chief investment officer of Magnifina, said that investment advisors who select a portfolio of exchange-traded funds or mutual funds for clients are subjecting them to double fees.

“Because ETFs and mutual funds charge their own management fees, these clients are essentially paying two different advisors,” said Rogovy. “Funds charge fees on the backend, so investors might not realize they’re paying these fees.

“Here’s an example. Typical fees are 1% for an advisor and 0.5% for funds. If the advisor’s selections aren’t outperforming the benchmark by 1.5%, then the client is actually losing money with their advisor compared to simply investing in the benchmark. Because ETFs are typically diversified and target an index, they are less likely to significantly outperform most benchmarks.

“At Magnifina, we prefer to select individual securities instead of funds. We do have some strategies that rely on funds, but we reduce our fee to compensate.”

7. Staying With a Firm After Your Financial Advisor Retires May Not Be in Your Best Interest

You may feel loyalty to a firm because you’ve been using it for years, but that doesn’t mean if circumstances change you should stay.

“When a financial advisor retires and they pass the firm off to their 30-something child, you want to make sure that person has the skills and credentials the parent had before you automatically stay with the firm,” said Paula Harris, financial advisor and co-founder of WH Cornerstone Investments. “Often your relationship was with an advisor, who you really connected with, and the younger generation may or may not relate to you and your stage of life.”

Takeaways

Even though these secrets won’t apply to every financial advisor,  it’s up to you to exercise due diligence. When hiring a financial advisor or evaluating your relationship with your current one, you should focus on receiving the best service possible with transparency of fees. Additionally, you should look for a professional who has beliefs and practices that align with your core financial goals and values and takes the time to explain, in detail, anything you don’t understand — not someone who wants to steer you in a direction that makes you uncomfortable or unsatisfied.