The 5 Years Before You Retire: Retirement Planning When You Need It the Most | Chapter 4: Find the Right Financial Planner

Nobody is born knowing that stock prices deviate from underlying company value, that IRS income tax rates are progressive, the average cost of healthcare in retirement, etc. Anything anybody knows related to financial planning was learned. And while it’s possible to learn something on your own (often the hard way), you only retire once. As a rule of thumb, if you’re only going to do something a handful of times let alone once in your life, it’s worthwhile to find someone to help you through it. You might learn what you need to know 5 minutes after it’s too late. In Birken’s words “Going it alone is not a good strategy for handling your retirement.”

That said, she demonstrates that the field of those willing to help with your finances is confusing, and I don’t blame people for wanting to throw their hands up in frustration. Birken offers a wonderful summative piece of advice. “When someone offers you a solution to any financial problem, your first thought should be to wonder “What’s in it for him or her?” I’ll share below a set of questions she recommends asking anybody in financial services, but Birken notes that the most important one is “How are you compensated?”

While it’s crucial that your advisor is trustworthy and of high character, Birken shares that trustworthiness (which for many simply means friendliness) can be faked and is not correlated to competence. It is just as important to evaluate their skills and knowledge. There are many I would trust with my life, but not my investments. Beyond the legal licensing required to give financial advice (which is frankly a shockingly low bar), Birken highlights the “Certified Financial Planner (CFP)” designation that’s well known as the standard of excellence in our industry. I don’t say this because I have this designation — I got this designation because it was and remains the standard. I wanted to go through the best program to prepare me to serve our clients. And while book knowledge can only take you so far, multiple years of experience are also required in order to use this designation.

Birken offers this helpful lay of the land on types of advisors and their compensation.

• Types of financial advisors

  • Financial planners

  • Insurance agents

  • Registered investment advisors

  • Registered representatives

• Financial Planner Fees

  • Commission

  • Fee only

    • Percentage of the account value

    • Hourly rate

    • Flat fee

  • Fee based

Here’s where we fall on the first list. As our website says, We Only Do One Thing: Comprehensive Financial Planning. This means that we won’t give you investment advice without looking at your insurance, we won’t do tax planning without having written financial goals, we won’t discuss estate strategies without having reviewed all your estate documents, and otherwise always evaluate how decisions in one category of finances positively or negatively impacts all the others. This is the core of who we are, what we do, and drives all the other decisions we make.

In regards to the rest of the list: we are also licensed insurance agents. If we create financial plans that require a life insurance policy, we don’t ask you to go somewhere else to get it. Confusingly enough, registered investment advisors “RIA” are not individual people (those are called investment advisor representatives “IAR”), but instead the businesses that employ them. So IARs are the people representing the RIAs (don’t worry, there won’t be an exam). Registered representatives on the other hand are those who represent a broker-dealer. You might be familiar with Woodbury, who changed their name to Osaic. Osaic is both our broker-dealer and functions as our RIA. In other words, of the list of four types that Birken offers above, we are all of them. Clear as mud?

If so, not to worry. Birken’s second list on compensation is more important, so we’ll review these terms here. Put aside all the governing bodies, licenses, regulated and unregulated titles. At the end of the day, how do these people get paid? The first initial distinction is commission vs fee. With a commission, the financial “person” only gets paid if you buy something (and it’s important to know that you’re not the one paying them, the company who makes the financial product pays them to sell their stuff). Maybe you should buy what’s being presented, maybe you shouldn’t, but just like any other salesman on commission, you know when you’re being sold.

Fees are instead paid directly from consumer (you) to advisor solely for their advice. When a financial professional tells you “you should do this” or “you should not do that”, and they get paid the same either way (some caveats below), you should ask Birken’s question: What’s in it for them? As a business, what’s in their best interest is to give you the best advice possible so that you achieve your intended results with as much ease as possible. That way, you continue to come to them when you need advice in the future and send others their way who also need good advice.

Some tout that while commissions clearly have conflicts of interest, fees do not. Unfortunately, that’s not the case. The most common type of fees charged by financial advisor is a percentage of the account value, which is what we do. We make more money the higher your account value goes. For the most part, this aligns our interests. When there’s a potential conflict is when you want to distribute significant portions to pay for vacation homes, paying off large amounts of debt, etc. If you talked with our retired clients, you’d know that far more often we are twisting their arms to spend more of their savings, but it’s still a conflict of interest that clients should know about. There’s no compensation model that’s free of conflicts. Hourly advisors are incentivized to take longer, flat fee advisors (which often consider complexity to determine the flat fee) are incentivized to overly complicate your service needs.

Lastly, Birkens offers wonderful “Interview Questions for Prospective Financial Advisers.” Given the length we’re at here already, I’ll share next week our answers to these questions.

Let us know

• What’s a good piece of advice you’ve received recently (financial or otherwise), and how much was that advice worth to you?

• When have you been sold something in the past and regretted it? When have you been thankful for a good salesman who convinced you to make a purchase?

Until next time, happy reading!