In this week’s episode Josh and Austin are answering a common question in the finance world: how do you go about finding a good advisor? This is not a clear cut answer for everyone – so tune in as the guys walk through a couple questions you should be asking your current OR potential advisor!
Main Talking Points
[2:54] – Fiduciaries
[3:59] – Conflicts of Interest
[5:56] – How Do They Get Paid?
[9:10] – What Services Are You Getting?
[11:20] – What is Their Investment Philosophy?
[13:32] – Dad Joke of the Week
[14:23] – Your Relationship With Your Advisor
[16:20] – How Do You Know If You Need an Advisor?
[18:57] – Closing Thoughts
[20:25] – Performance Matters
Links & Resources
How to Evaluate Your Financial Advisor – Forbes
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to the Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to the Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.
Josh Robb:
And I am Josh Robb, Director of Financial Planning, also at Hixon Zuercher Capital Management. Austin, how can people grow this podcast with us?
Austin Wilson:
Yeah, we would love it if you would subscribe, if you’re not already subscribed and you can get every episode as we drop it every single Thursday. We would love it if you would leave us a review on Apple Podcast or Spotify or whatever podcast player you are listening on and we love to hear from you. If you could email us any ideas for future episodes to hello@theinvesteddads.com, we would really appreciate that and we would love to talk about what you want us to talk about. And if you hear anyone talking about what we’re going to talk about today, which we’re about to get to, please share this episode with friends and family. Today Josh, we are going to be talking about how to find a good advisor or how to know if your advisor’s a good one.
Josh Robb:
Okay. I was a little worried there, if you’re looking for a new relationship there, I thought you and I were friends.
Austin Wilson:
I know.
Josh Robb:
Looking for a new advisor friend.
Austin Wilson:
Thought we had something special. That’s not exactly what we are going to be talking about. This is looking at other people looking for an advisor but like I said, it could also be good if you want to do a little audit of your relationship with your current advisor.
Josh Robb:
I get this question a lot actually, and they say, “Okay, I’m new to this whole thing. One, how do I know if I’m a person who needs a financial advisor? And then two, how do I know if I find a good advisor?” we’re going to talk about that. And then for people who say, “Well, I’ve had an advisor and I think they’re good but they’re the only advisor I’ve ever had. How do I know?” We’re going to walk through that. There was a good article in Forbes, which will link in the show notes, but there’s a lot of checklists and things out there that you can get online for free, but that kind of walk through some steps or questions to ask an advisor. We’re going to take kind of the most important ones and talk about those today. And then from there, that’s how you got to then kind of decide is this the right fit for me? Because it isn’t a clear cut answer for everybody. But here are some of the main questions you need to ask, again, it could be your current advisor or one you’re interviewing. And by the way, interviewing is not a bad thing. When people come to our firm, at Hixon Zuercher Capital Management, and they’re looking potentially to hire us, we’re usually one of a handful that they’re talking to. And in fact, I feel good about a client like that because they’re doing their due diligence. They’re doing their research. Don’t think that’s insulting to say, “Well, I’m going to be talking to a couple people.” No, that’s good. Something you want to do.
[2:54] – Fiduciaries
Austin Wilson:
Absolutely. Let’s put the rubber on the road here, Josh. First question I would ask is, are you, this actually could be you, are you a fiduciary?
Josh Robb:
Yes, good question. First a fiduciary, there’s different levels of accountability or obligation that advisors have. Fiduciary is the top level and a fiduciary is one who’s obligated, required to by law, they have to give you the best advice for you and your situation, regardless on how it impacts them. That is the highest level. And so that’s something you should look for. If your person is not, doesn’t disqualify them but you need to understand.
Austin Wilson:
They’re not the worst thing in the world maybe.
Josh Robb:
There’s nothing bad but that’s the top level. That’s the highest you can get. If they’re not there, they usually have a suitability standard where they have to give something that’s suitable for you, has to be right for you. Doesn’t have to always be the best but has to be right for you.
Austin Wilson:
Absolutely.
Josh Robb:
And we’ll explain it a little bit kind of why there’s a difference there and why maybe sometimes that’s okay. That falls into the next piece of it.
[3:59] – Conflicts of Interest
Austin Wilson:
It absolutely does. The question that you could ask next is, you want to get on the same page with your advisor, understanding conflicts of interest. And regardless of the situation, there are going to be conflicts of interest. Explain that a little bit.
Josh Robb:
Let’s say they are a fiduciary, then you say, “Okay, what would be some conflicts of interest I need to be aware of?” Because even a fiduciary, the highest standard you can get, will have some conflicts. For instance, our firm, we are a fee only advisory firm, meaning we charge a percent of the assets that we manage and we do not receive compensation for the trades. We don’t get commission, so that we fall in the fiduciary category. Every advice we give has to be in the best interest and our conflict though is the more we manage, the more we get in fees. And so a conflict would be basically come up that says, “Hey, I have this 401(k), should I leave it there? Or should I give it to you?” Well, if they give it to us, that’s more money we’re going to manage. That’s more fees we’re going to collect.
Austin Wilson:
But if it’s not in their best interest, then you would be obligated to tell them to leave it where it is or do something else with it.
Josh Robb:
But you always need to know your conflicts.
Austin Wilson:
Absolutely.
Josh Robb:
Now we’ll go to the other side. If someone is not a fiduciary, they may have a conflict when it comes to choosing investments. They may receive a commission. Again, not a bad thing but you need to understand if they say, “Well, here’s two choices. One pays me 3% commission, one pays me 4%.” I’m going to have a conflict where I want to get that 4%. They need to disclose that to you and say, “Okay, one of my conflicts would be on choosing those options.” Again, not bad but just need to know it. You always need to know your conflicts.
Austin Wilson:
It would at least be a hard yellow flag, maybe leaning orange, red if an advisor you would talk to would not disclose any conflicts.
Josh Robb:
Yes. They say, “I have no conflicts.” Everybody has a conflict. Like I said the highest standard.
Austin Wilson:
You at least have the ask the question.
Josh Robb:
If the highest standard has a conflict, then that means everybody’s going to have some form of conflict.
Austin Wilson:
Exactly. Big, big yellow flag to start looking for.
Josh Robb:
They say I had nothing.
Austin Wilson:
Exactly.
Josh Robb:
They probably do.
[5:56] – How Do They Get Paid?
Austin Wilson:
Another question that would be really good to ask an advisor is easy, how is the advisor going to get paid? And how much is it that you’re going to be paying them? You kind of gave it.
Josh Robb:
Why you asking that way?
Austin Wilson:
You gave an example on how our firm is structured in the terms of how we are paid. But other firms do it differently. Talk about that a little bit.
Josh Robb:
How do they get paid is where does the money come from? And so is it coming from their clients in the form of an asset management fee or a set retainer fee or a monthly subscription fee? There’s all different ways of doing that but they’re collecting it on a schedule based off of some sort of fee schedule. Or the other way they get paid is through transactions. Like I mentioned, commissions. Again, there’s not one that’s better than the other, just from that straight standpoint. You just have to understand what you’re getting. A good example of a commission one, is if you’re buy and hold type of thing where you’re saying, “You know what? I don’t want a lot of turnover.” Maybe there’s certain stocks you just want to hold. You may say, “A commission is a better, I’m going to pay it once and then I’m done and I’m not paying anything else anymore.” If you want ongoing management, usually you fall into the other side where a fee is a better structure because you don’t have to pay for the rebalancing and the transactions within the account. Again, it’s not like one’s good, one’s bad. It’s what is my situation? What am I looking for? How do they get paid as important? Then how much is it that person is going to be paying? Is the factor two? Like I said, if you’re paying a percent of your assets, whatever that is, understand what that amount will be. If you’re paying a subscription or a monthly retainer fee, understand what that is. Or paying commissions, what do I expect that to be based on how many transactions I anticipate?
Austin Wilson:
Absolutely.
Josh Robb:
Most of the time, if you’re on a commission based structure with your broker or advisor, they need your permission before placing those trades. It’s not really going to be a surprise because you’re going to be approving those. They can’t make that trade really without your approval, since it’s going to cost you each time. There’s majority of the time, that’s the way it lays out. Understand how they get paid, then how much it is going to cost you. And then that follows with, well, if that’s how much it’s costing me.
Austin Wilson:
What am I getting?
Josh Robb:
What am I getting?
Austin Wilson:
It’s like going to a restaurant.
Josh Robb:
Oh, and I should say, when I say costing me, there’s other expenses involved. That’s what you’re paying the advisor. There’s a few hold mutual funds. There is the cost for those mutual funds. There’s an expense ratio. Not only do I know, what am I paying them, but what is the full cost for me? That’s important. Because there’s different levels of expense ratios and is this advisor going to be tempted to put me in one that pays in more or a higher fee for me, is there, that again goes back to that conflict. Where am I at? Paying attention to that piece too. Your overall cost.
Austin Wilson:
And regardless of what you’re paying or how you’re paying it, it’s going to impact your net return. And that is really what you’re living on.
Josh Robb:
That’s what you care about.
[9:10] – What Services Are You Getting?
Austin Wilson:
Or planning on or whatever. At the end of the day, plan for the net, which is going to include after all of your fees or commissions or expense ratios or everything, net. We’re looking at there. Yes, we kind of talked about a little bit but talk about the services they offer and why that is something every investor should know when they’re talking to their advisor.
Josh Robb:
Because if you’re evaluating, let’s say you’re interviewing a handful of advisors to find out the best fit and you say, “Okay, what’s your fee?” And one says, “Well, I charge 2%.” And another says, “I charge 1%.” And then another one says, “I don’t charge any percent. You just pay commissions.” How do I evaluate those three? And so you say, “Well, I’m just going to go with the cheapest one.” And that may be fine but you understand what each one is offering for what you’re getting. And so the commission one will say, “All right, you’re not going to pay any ongoing cost but when I make a transaction, it’s going to be X amount.” And maybe they don’t include retirement planning services. Maybe they’re a broker, which means they’re just a transactional. They don’t do planning. Then you may look at one that’s at 1%. And they say, “Here’s the things I do, A, B and C.” And then you go to the 2% one and they say, “Here’s everything I do, A through Z.” And you say, “oh, I’m getting a little more.”
Austin Wilson:
That makes a lot of sense.
Josh Robb:
And so you need to look at not just what it costs but what you’re getting for that cost.
Austin Wilson:
Value. It’s all about value.
Josh Robb:
And do I need them? Because maybe that 2% advisor isn’t what I need. Maybe the 1% is what I need because I’m not going to utilizing all those services.
Austin Wilson:
And your service needs change at different points in time too. Because if you’re earlier in your investing career lifetime or whatever, your needs for estate planning or tax loss harvesting or all kinds of certain different things, RMDs, whatever, those are very not important early on. They become very important and your needs for your advisor become a lot more as you get closer to and into retirement.
Josh Robb:
And then, I talk about fees, how much am I paying now versus how much will I pay in the future? Maybe some have scales where it gets less, the more money I manage. That’s a time where maybe it’s, I hear some people say, “Well, I’ll just hire two advisors and split that difference.” That might be fine. But if they are on a tiered fee schedule, you just split the asset they’re each going to manage in half, so you’re going to take longer.
Austin Wilson:
Your effective retire.
Josh Robb:
To get to that lower tier for both of them. You got to be careful with that as well.
[11:20] – What is Their Investment Philosophy?
Austin Wilson:
Absolutely. And last but not least, Josh, a good question would be regarding something that I’m passionate about. Investments. Talk to your advisor about their investment philosophy, what they buy, why they buy it, how it fits your risk tolerance and your needs. Talk about that a little bit.
Josh Robb:
You want to make sure you understand how they’re going to manage your money and not only understand but agree with it. There’s all different ways of approaching investing. And again, there’s no clear, this is the only way to do it. An advisor may say, “I like to use low cost, passive funds. I just like to own what the index is and this is how I’m going to lay you out, diversify it, blah, blah, blah.” You say, “That sounds like a good plan that I could get behind.” And you may talk to another advisor who says, “You know what? I like active funds. I like active managers. I like to try to outperform and so I’m going to make adjustments to this portfolio.” Great. I like that. I’m going to get behind it. What works for you? And so know and understand their philosophy. If they say that, “I am one who likes to rebalance once a year.” Does that make sense to me? Am I comfortable letting it fluctuate throughout the year? If they say, “We do quarterly rebalances here.” Okay, does that make sense to me? Just understand what they do, their approach and say, “Does that make sense for me? Can I see them managing my money and have comfort in what they’re doing?”
Austin Wilson:
Absolutely.
Josh Robb:
And then philosophy for investments too, is what type? Some people may like mutual funds. Some people might like ETFs. Some people might like individual stocks and bonds. It’s all out there and it’s just a matter of preference. There may be some that say, “I’m an advisor and I work for X company, so I’m going to use these mutual funds or ETFs.” Okay, am I comfortable with that? Or another advisor says, “I’m independent. I can own anything.” Does that comfort me? Or does that worry me that there’s too much there for them to manage and watch? I don’t know. That’s the questions you got to ask.
Austin Wilson:
Absolutely.
Josh Robb:
From a philosophy standpoint, there’s not a one you’re looking for, it’s do I agree with their approach?
Austin Wilson:
Get behind it.
Josh Robb:
Maybe they say, “You know what? I believe that you should be as aggressive as possible and I always put all of our clients in X percent in the stock market.” If you’re freaking out about that, maybe that’s not a good mix. You got to agree with what they’re doing, their approach.
[13:32] – Dad Joke of the Week
Austin Wilson:
All right, Josh, let’s take a break. I think you are due for your weekly dose of a dad joke.
Josh Robb:
I need a dad joke.
Austin Wilson:
I think you probably have a tolerance level to have more than one dad joke in a week. I think you’re probably up to there but I’m going to give you our dose of a dad joke of the week right here.
Josh Robb:
I’m ready.
Austin Wilson:
And I think this one’s going to make you laugh. It from r/DadJokes on Reddit. And the question is Josh, what did the molecule say when he went on vacation?
Josh Robb:
Molecule, I don’t know. What would he have to say about it?
Austin Wilson:
Gone fission.
Josh Robb:
Fission. I like it. I like it.
Austin Wilson:
There’s a chemistry joke for you. All right, so that was the dad joke of the week, Josh. Here is where we kind of talked about some really easy questions to ask.
Josh Robb:
Good questions.
[14:23] – Your Relationship with Your Advisor
Austin Wilson:
Kind of the hard numbers side of things, the things that you should just talk about. Let’s talk about the soft side of things. How should you feel about your relationship with your advisor? And you can use us, an example if you want.
Josh Robb:
And that relationship is important thing. You’re entering into a relationship with someone who you are going to trust with your money, with your assets. That takes a lot of trust level and that’s very important. You need to have mutual respect and trust between you and your advisor. And they as well need to respect and trust you. And that’s very important because if your advisor is one who tends to just talk to you, instead of listening to you, that may not be an ideal relationship. Money is a very touchy subject and if you’re going to be opening up and sharing that piece, you want to feel comfortable with that. Sometimes it’s a matter of making sure that you check references and know about that side of things. Talk to some clients and ask them, “What are the meetings like? Have you had a situation where you felt like they didn’t listen to you?” Those type of things is always important. And in general, do I like this person? Can I tolerate them? Those are important questions because if I’m going to enter and I always view this as a long-term relationship. I would like our clients to be with us for the rest of their life because I would like to build that trust and respect so that when there is a question, they don’t hesitate to come and ask me. And that’s the goal.
Austin Wilson:
And the plan that you’re putting together for these people is a very specific plan and if they’re jumping around every handful of years to someone else, that plan could radically change and really throw them off course. That’s a really good thing. It is a long-term relationship, a committed relationship. Now you can, not work with an advisor anymore but if you work with someone you trust, that is a long-term, fruitful relationship for both parties. It’s good.
[16:20] – How Do You Know If You Need an Advisor?
Josh Robb:
And then the other one is, and this is the question I kind of started with is, well how do I know if I should even start this process? How do I know if I need an advisor? And I always look at it from this standpoint, is ask yourself, do I like managing my money?
Austin Wilson:
That’s a great question.
Josh Robb:
Do I like it?
Austin Wilson:
Some people do.
Josh Robb:
Because if you don’t enjoy it, that’s usually a good opportunity to then delegate that to somebody else. If I can get away with not doing something I don’t like, that would be great.
Austin Wilson:
Well, I just, I think of it sometimes like plumbing or electrical on your house, do you enjoy it? And are you good at it? Okay, that’s one thing. If you are, great, do it yourself, save the money, whatever. And if it stresses you out and you’re not very good at it or not very trained at it or whatever, it’s usually just best to hire a professional.
Josh Robb:
And that’s the second piece is, do I actually understand what I’m doing? Do I understand my goals? And do I understand what I’m doing to meet those goals?
Austin Wilson:
Absolutely.
Josh Robb:
It comes to the expertise piece. Do I like doing it? Am I comfortable doing it? Do I understand it? And that may change over time. Let’s say when you first start out and you’re adding a little bit into your Roth IRA, when you first get a job and you’re saying, “You know what? It’s a couple thousand dollars. I feel okay about managing this.” And then as time goes, it gets a little bit bigger and those dollars get bigger. You get a little more stressed about the decision you’re making and thinking, boy, I don’t know if I want to be the one solely responsible for making those investment decisions. It may change over time. And then the last one is time. Do I actually have the time to do this and do it right?
Austin Wilson:
It takes time.
Josh Robb:
It does, to research, to find. Let’s again, let’s say you’re starting from scratch. You’re new to this and you’re debating whether you want an advisor. Do you want to go and find the right funds to hold in your accounts? Do you want to make sure you’re doing your due diligence on whoever the managers are of whatever those things you’re holding? Sure, maybe some people. That’s again, there’s no right or wrong answers. Where are you at in your life to say, “Do I have the time? Do I have the desire? And do I have the expertise to do this well?” Because if my goals are based on this meeting those objectives, then do I feel comfortable doing this? There’s some that do.
Austin Wilson:
Oh, for sure.
Josh Robb:
There’s some that are just great at it. And we’ve run into clients or potential clients who come in and say, we have a meeting with them and we say, “You’re doing great. As long as you’re comfortable, there’s really not much more that you need. You’re in a good spot.” And so there’s times where again, if you have a good fiduciary, they may say, “Here’s a couple tweaks for you but come see me when it gets overwhelming but for right now, you’re doing everything you need to do. Have at it.”
Austin Wilson:
Absolutely.
[18:57] – Closing Thoughts
Josh Robb:
Austin, I talked about from my end, as an advisor seeing things, any thoughts you have on that?
Austin Wilson:
Absolutely. Kind of one closing thought is that if you bought in and agree and you’re on the same page with your advisor on what they’re doing, how they’re investing your money, what the plan is, then notice we didn’t talk about performance. Because if you agree with the process, if you agree with that the investment philosophy behind what they’re going to do and you guys are on the same page, the performance is going to take care of itself because you are going to get the performance that is there to meet the goals from the best of their abilities. I think that this is an opportunity to say, “I am hiring someone to do this for me. They’re hopefully quite qualified and quite good at their job and they are going to do what’s in my best interest. And we’ve agreed to what they’re going to do with that. This is my opportunity to give what I call discretion to my advisor and say.”
Josh Robb:
Have at it.
Austin Wilson:
It’s not a lot of pressure on me. You’re hiring someone to do that for you. Those relationships get a little bit dicey when you’re talking to your advisor about a 10th of a percent over or under performance of an arbitrary benchmark or whatever. As long as your portfolio is designed to meet your goals and is doing what it was designed to do, regardless of market performance, of its actual performance, then you should be quite happy.
[20:25] – Performance Matters
Josh Robb:
Performance matters.
Austin Wilson:
It does matter.
Josh Robb:
But it matters to your goals. And that’s the key is if I agree to these goals with my advisor and I agreed with those asset allocations, then my objective is to make sure I’m meeting that performance metric. Not did I do better than the S&P 500? Did I do better than this advisor across the street? Or anything like that. Or like you always hear about, I’m at the barbecue and my friend is saying how good his portfolio did. Well, who knows how he’s invested. What you’re caring about is here’s my need, I need X percent or I need X dollar amounts at retirement, however, you look at it. Am I meeting those objectives to get there?
Austin Wilson:
Yeah. That’s just it.
Josh Robb:
If so, then you are on track and your advisor is meeting that objective.
Austin Wilson:
If you put together a plan with your advisor that you need a five and a half or a 6% return for the long term and your asset allocation is put together to deliver that and it is delivering that.
Josh Robb:
Over longer time period.
Austin Wilson:
It does not matter if it was 1% less than the S&P 500 last year or 1% more the year before or whatever. As long as it’s delivering what it’s designed to deliver, you’re on track to meet your goals and you should sleep well at night. And that’s a good thing. It’s all about peace.
Josh Robb:
I see a lot of people jumping advisor to advisor, chasing performance and they just never get to and stick to a strategy long enough for anything to play out and that that just is detrimental long term for them.
Austin Wilson:
And a lot of times when you’re chasing performance, suppose an advisor or a strategy or whatever under performs for a year or two, whatever, versus the benchmark that it’s selected to or whatever, those things are often designed that their philosophies are generally static through that time period and then they’re going to have a period of out performance that you might not stuck around for. That’s why stick into a plan is really the key.
Josh Robb:
Plans are great.
Austin Wilson:
That’s really, those are my closing thoughts. It’s really not. Performance matters because it matters to get your returns you need for your plan but performance versus benchmarks, they’re irrelevant.
Josh Robb:
If you’re not an institutional or money manager from the high level standpoint, looking to carve out sleeves of your portfolio, it’s really indifferent. Am I meeting the goals and objectives to get to my financial freedom that I’m trying to get to?
Austin Wilson:
Absolutely.
Josh Robb:
Like Austin said at the beginning of the show, if you know somebody who is looking to start a relationship with an advisor, these are some great things for them to ask, make sure that you plug this podcast and listen to it.
Austin Wilson:
Absolutely. And if you don’t have an advisor and you’d like to have a conversation, check out our website. There is an invest with us tab and you can talk with Josh and he would be happy to discuss what’s going on in your situation as well. As always, we are happy that you were here with us this Thursday and we look forward to chatting next Thursday. Once again, Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.
Josh Robb:
And Josh Robb, Director of Financial Planning, as well at Hixon Zuercher.
Austin Wilson:
Signing off, have a great week.
Josh Robb:
Talk to you later. Bye.
Outro:
Thank you for listening to the Invested Dads Podcast. This episode has ended but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com, to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
