Are Financial Advisors Worth the Cost?
and what do all those letters mean…
“Don’t tell me you are still using mom and dad’s guy”
“Investing is not a game. It’s my future.”
“That’s 30% of my retirement!”
Does any of this sound familiar? I bet it does. They are all marketing taglines for a robo-advice company that is here to warn you: Your advisor is robbing you blind!
Though on occasion I feel the desire to throw my popcorn at my tv, these commercials do not bother me too much because they make one very critical error: they assume everyone has the knowledge to manage their own money. My experience has told me that this is not the truth.
This article is not one to bash robo advisors. In fact, I am here to tell you that robo-advisors are a great tool for a very specific person. A person who has an in-depth knowledge of how financial markets work. Someone who loves income tax, and the implication certain types of investments can have on the taxes they pay. A special someone who feels absolutely no emotion at all when they hear on the news that the world is ending markets are down. If I just described you, feel free to exit this article.
If you are sticking around, I assume that like most people, you are not the person I just described above.
The reality is each person, business, and family has a unique life circumstance that will need to be navigated in a way that an algorithm simply cannot provide. Life is full of surprises. Some of them are wonderful and some of them are terrible. You need a partner by your side that can help you navigate your finances for better or for worse. The question remains: how do you know that you are getting your money’s worth if you choose to go with a traditional financial advisor? It is quite simple.: It is all about understanding the value proposition of the advisors you choose to work with. In order to do that, it is time to stop painting all advisors with the same brush.
To differentiate between advisors, I am going to have to hit you with some industry jargon (stick with me).
The term financial advisor is not one that is particularly well-regulated. Mostly anyone stick a sign on their door and call themselves a financial advisor, consultant, guru, or superstar…. You catch my drift. The reality is there are only a few titles in the financial advice world that are regulated. For our purposes, the ones that matter are:
- CFP- Certified Financial Planner
The CFP is the gold standard of the personal finance world. CFP professionals are the only financial advisors that can call themselves financial planners. This distinction may seem small, but it is significant. CFPs are experts in all things money and are held to strict (and I mean strict) ethical standards by their professional organizations.
- CLU- Chartered Life Underwriter
CLUs are specialized in all things estates. Intergenerational wealth transfer and business succession planning are where they shine.
- CIM-Chartered Investment Manager
CIMs are money-managing specialists. CIMs are typically specialized in their area and are focused on building and managing investment portfolios for their clients.
- TEP-Trust and Estate Practitioners
The TEP designation is often held by lawyers but can be held by financial advisors too. TEPs have a special focus on estate planning and can benefit those who have complex estate planning needs.
- CFA- Chartered Financial Analyst
CFAs are advanced investment and portfolio analysts. While most CFAs work for investment firms managing money, they can sometimes be financial advisors too.
- CPA-Chartered Professional Accountant
CPAs are tax experts.
This is confusing to consumers and while regulators are tightening the reigns on who and what can claim to be the next financial messiah, there is still a lot of work to be done. Most financial advisors have either a life insurance license and/or a mutual funds license. This means that they are legally allowed to sell insurance and investments and are under the regulation of the powers that be for their product of choice. Their training tends to end here.
A financial planner is different. While most financial planners also hold their insurance and mutual fund license, they also must hold their CFP designation. The CFP designation is the industry gold standard for those working in the financial advice field. Financial planners tend to be more focused on your overall financial health, rather than just focusing on product knowledge. Other designations to look out for are the CLU (estate and tax specialty), CIM (investment management specialty), TEP (trust and estate specialist), or CFA (financial analyst). What these pesky little letters will tell you is that the person you are about to jump off the deep end with has spent years becoming an expert in their field. They’ve cried into their textbooks (maybe that was just me…), they’ve spent more time with their study groups than their spouses, they’ve written the board exams, and they do hours upon hours of continuing education each year; all under the watchful eye of their respective professional organization. Sounds expensive right?
Here’s the real kicker.
No matter what your education or background is in this industry, everyone gets paid the exact. same. way. You pay a fee to your advisor (or planner) that is equal to a percentage of the assets you have under their management. There are a couple of ways this can happen. The first, (and most common) is by way of the MER. Also known as the Management Expense Ratio. An MER is a fee that is automatically charged annually on your investments every year. A portion of this fee goes to the people administering the investment and a portion of this fee goes to your advisor. Contrary to what the marketing departments of most banks and firms may lead you to believe, these fees have little variance across the industry. There may be some variation depending on the complexity of the investment, but it is minimal, at best. The second option is to partake in a Fee-Based agreement. In this type of arrangement, you personally pay a fee to your advisor annually that is separate from the fees paid on your investments. The bill overall tends to be about the same, it is simply administered in a different way. This option usually only makes sense for those with assets exceeding $250,000.
Armed with this information, picture this: You arrive at the airport to fly away on your holiday (this must have been before covid) and surprise! You have just been given the option to fly first class for no extra fee. Of course, you can still decide to stay in economy too.
I’ll see you upfront with the free champagne and extra legroom.