Frequently Asked Questions

Without knowing your individual situation, it’s difficult to know whether the services of a financial adviser make sense for you.  However, there are a wide variety of reasons to consider seeking out a financial advisor:

• You don’t have the time, ability, or desire to manage your own investments.
• You want to invest your money, but don’t know where to start or what to invest in.
• You’ve researched various investments but are unsure of their advantages and disadvantages.
• You are worried about the risks and volatility of the stock market.
• You are concerned about current events and are worried this is a bad time to invest.
• You worry about investing at the “top of the market” and often find yourself waiting for prices to come down.
• You are worried of being taken advantage of by big institutional traders (which is possible if you’re not careful).
• You’ve accumulated a significant amount of cash in bank accounts or CDs, simply because you are not sure what else to do.
• You’ve invested in the stock market but feel unsure of the investment decisions you’ve made.
• You’ve acquired various investments over the years, but are not confident your current portfolio is well suited to your present situation and goals.
• You are worried you may have taken on too much risk, and are fearful of a market turndown.
• You want to diversify your portfolio to minimize risk, but are not sure how best to do that.
• You are unsure if or how to invest in foreign markets.
• You are worried that your current investments have high fees or expenses.
• You are uncertain of the tax ramifications of your investments, and are worried you are paying too much tax.
• You don’t know how or don’t have the time to reduce your taxes by tax-loss harvesting.
• You simply buy-and-hold because you’re not sure how to manage your portfolio over time (rebalancing, tax optimizations, Roth conversions, etc).
• You seem to have less and less time to effectively manage your portfolio.
• You are not sure what investment advice to trust, and tend to get ideas from family, friends, or influencers.
• You rely on a one-size-fits-all newsletter to choose your investments.
• You think that a professional could improve your portfolio performance.

If you have an advisor you like and trust, it may not make sense to switch.  However, there are a variety of reasons to consider switching advisors:

• You don’t feel like your advisor has your best interests in mind.
• Your current advisor is hard to reach or difficult to schedule time with.
• Your current advisor seems to hand you off to others who you don’t have a relationship with.
• Your current adviser doesn’t seem to know what’s going on with your account.
• Your account is too small to be important to your adviser.
• Your adviser is really a salesperson who has outsourced management of your account.
• You are concerned that your current advisor charges high fees, or that you are not getting enough value out of their services for the fees they are charging.
• You find yourself worrying about “hidden” or undisclosed fees with your current adviser.
• Your current advisor tends to push certain investment products (likely because they make commissions).
• You are concerned that your current advisor selects investments that have high fees or expenses.
• Your current adviser’s performance has lagged the market.
• You believe your current adviser makes too many trades, resulting in significant taxes on your investments each year.

In addition to building and optimizing your investment portfolio, financial advisors are often able to assist with a wide array of financial questions that arise over the course of our lifetimes, such as:

• When will I be able to retire?  Will I have enough money in retirement? 
• Which type of accounts should I use (401k, IRA, Roth, etc)?  How should I contribute to them?
• What should I do with 401(k)’s from prior employers? How should I roll them in with the rest of my investments? 
• How conservative or aggressive should I be with my investments?
• How can I avoid incurring unnecessary taxes?  What can I do to invest in a tax efficient way?
• At what age should I begin taking social security?
• What can I do to prepare for the unforeseen (health challenges, disability, layoffs, etc)?
• How much of an emergency fund do I need?  How should that money be set aside?
• How do I diversify away from my employer’s stock in a tax efficient way?
• If I need cash, how do I withdraw money in the most tax efficient way?
• How much house can I afford?  What is the best way to pay for it?
• How can I prepare for my children’s education costs?
• What should I do about my debts?  How do I pay them down in the most efficient way?
• What do I need to think about as I navigate a career change or start a business?
• How can I optimize my charitable donations to accomplish the most good?
• What should I do to prepare my estate for the next generation?

Broadly speaking, there are three ways that financial advisors are compensated: 

• Fee-only advisors are compensated exclusively by the fees their clients pay directly to them for advice and services. They do not receive any commissions, referral fees, or kickbacks for recommending or selling certain financial products.
• Commission-only advisors are compensated entirely by commissions they earn from selling financial products (mutual funds, annuities, insurance, etc).
• Fee-based / hybrid advisors are compensated using both of these methods, earning a portion of their fees directly from clients for advice, while also earning commissions from selling financial products.
  

Note: Fee-based / hybrid advisors often use the term “fee-only” in their marketing, even thought they wear both hats. While it is true that they are “fee-only” part of the time, the fiduciary standard does not apply to all aspects of their service. From the client’s perspective, it is virtually impossible to understand the ethical and legal standards that apply to the services offered by hybrid advisors because they can change from moment to moment, even within the same conversation. (Tip: when meeting with an adviser that claims to be fee-only, ask them if they are a fiduciary in all aspects of their client relationship.)

There are two important benefits to using fee-only advisor:

1. Fiduciary duty: Fee-only Registered Investment Advisors (RIAs) are fiduciaries, which means they are legally and ethically obligated to act in their client’s best interest at all times, putting their client’s needs ahead of their own or their firm’s.  
2. Reduced conflicts of interest: Because they don’t earn commissions, there’s no inherent incentive for fee-only advisors to recommend a particular product or investment that pays them more. This aligns their interests more directly with the client’s.

In contrast, commission-only advisors (and hybrid advisors when they choose to wear their “suitability” hat) are not fiduciaries. They operate under a lower “suitability standard,” which means they recommend products that are merely “suitable” for the client’s needs and risk tolerance, but not necessarily the absolute best or lowest-cost option.  This presents an inherent conflict of interest as their income is directly tied to product sales, often resulting in:

• More frequent trading, as commissions are earned when new products are sold.
• Higher-commission products, when less expensive alternatives are readily available.
• Improperly structured portfolios, with investments that benefit the advisor more than the client.  
• Poorly performing investments, since commissions are inversely correlated with returns.
• Annuities or insurance arrangements that are not in the best interests of the client.
• A drop-off in service or care over time, as commissions are often earned in the early stages of a client relationship (incentivizing getting clients in the door rather than an ongoing relationship and oversight).

These types of behaviors not only fail the “best interests” fiduciary standard, but arguably fail even the more lax “suitable” standard that commission-based advisors operate under.

The goal of any (good) financial advisor is to significantly improve the return on your portfolio beyond the cost of their fees. In a sense, the advisor seeks to pay for their services out of the value they add to your portfolio.  In our experience, this is a very achievable goal.

Indeed, a variety of studies have attempted to quantify the value added by financial advisors:

• Vanguard’s Advisor’s Alpha study estimated that financial advisors can potentially add up to 3% in net returns for their clients 
• Morningstar’s Gamma study estimated that financial advisors can generate 22.6% more in retirement income, equivalent to an annual increase in return of 1.59%
• Envestnet’s Sigma study estimated that financial advisors can produce around 3% of value-add annually for their clients.
• SmartAsset’s Value of a Financial Advisor research estimated that, after accounting for advisor fees, annual rates of return for advisor-guided investors are 2.39% to 2.78% higher than investors without an advisor.

If you have the time, interest and capability to build and regularly monitor your portfolio to maintain proper and effective diversification, tax-loss harvest to reduce taxes, manage commissions and expenses, and (most importantly) avoid “timing the market” or making emotionally-laden decisions, then it may make more sense for you to manage your own portfolio and save the advisor fees. 

If you don’t have the expertise or time to regularly do these things, then it may be worth it to hire an advisor.