Why we chose to have an investment advisor. The great debate among investors.

I want to share why we chose to have hire an investment advisor. The choice to use or not use an investment advisor is a personal one. There is no right or wrong answer, however, there are choices to be made, which have impact.

When Mrs. r2e and I made the choice to use an investment advisor we followed a very deliberate process. We discussed the why’s and why nots. We read up on the topic. We interviewed multiple individuals/firms. We had a very deep conversation about life and death.

Time Machine

First let’s get into a time machine and go back to around 2005. Up to that point I managed our own investments in our taxable and tax deferred accounts. Around this time I also found an AM radio channel that had a show on during my evening commute. The show was a recap of the daily market activity with color commentary about investing.

The thing that peaked my interest is that the commentary was contrary to what most shows presented. They would dig into underlying data that was presented by the mainstream. Things like the inflation rate and the data that the government included – or more importantly excluded. Or the unemployment rate and how the participation rate impacts it. The list goes on.

Anyway, on one show they had a contest with the prize being a ‘free’ financial review. Alright, I know, start laughing. I knew that the caliber of a ‘free’ review would be suspect but I entered anyway. What could it hurt? Well the guy that never wins anything won this contest.

We ended up with a financial planner that, shall we say, had a lot of experience – I think he was like 70 years old. We did meet with him and went through the process of a financial plan. At the end, all we really came out with was a to do list and not much of a real financial plan. We thanked the gentlemen and went on our way.

The big thing we came out of this with was a realization we needed to do something more. We realized we had some things covered but many that were not. We had wills but not really well done wills. While we had saved and invested, and had done well, we did not have a real financial plan. We had very little life insurance coverage at the time.

We connected with a lawyer and got our wills updated. We also got multiple quotes on term life insurance and bought policies (topic for a future blog). I kept managing our own money and investments. Then 2008 hit. The Great Recession. While we took a big hit on our investments we were still in decent shape financially. However, we did start looking into an investment advisor.

Couple Talking

The first thing we did as we looked was to sit down together to talk about the whys and why nots. We had three main drivers that really outweighed everything else.

First, Mrs. r2e had little interest in investments. Her focus was being CEO (Chief Education Officer) for two boys (three including me!). This led to what if discussions around my untimely demise and where that would leave her and the kids financially.

Second, I had a job that had a long commute and was also stressful. I really did not have the time or energy to really do what was needed to manage our investments. I could easily invest in index funds and try to rebalance yearly. However, there is more to a financial plan than this.

Third, we both realized that the complexities of the markets now a days was overwhelming. I read my fair share of material and books about the 2008 Great Recession. Whether or not you agree with one or any, my conclusion was that the market influences were way outside the control of an average Joe like you and me.

We also discussed why we would not hire an advisor. The cost of the advisor being a concern. Advisors are not cheap. Also, establishing the trust and connection with an individual that we were handing our investments to would be a key. I remember my dad always telling the story about his first investment advisor and what a bad outcome there was.

There are a variety of sources you can check out that cover the pros and cons of using an advisor. At The Balance there is a short blog about a Vanguard study that concludes returns are higher when using a good advisor. Now Vanguard is famous for low cost index funds so their own study suggests using an advisor works out better.

So you and your significant other need to sit down and have a good conversation about this. This is a very important step to take. Don’t “Pass Go” if you have not had this conversation and both agree. If you are single, find a trusted confidant that you can talk with.

After we agreed we wanted to find an advisor I set out to find more information. The first thing to understand is how an advisor charges for their services. Below are a few ways advisors might charge for service.

  • Percent of assets. This is where an advisor will charge you a percentage of assets they are managing for you. The advisor will typically charge quarterly.
  • Commissions and Fees. This is where an advisor will charge you fees per transaction or charge a commission on products sold.
  • Hourly rate. This is where an advisor charges an hourly rate. Typically this is for doing financial plan versus managing your money.
  • Flat Fee. This is where an advisor would charge a flat fee for services. Typically this is for doing financial plan versus managing your money.
  • Retainer fee. This is where an advisor charges a pre-determined fee to ‘retain’ services. Sort of like a percent of assets fee but set in advance.
Before you meet any advisors you need to know what to ask them.  Do not be shy about asking very direct questions – they are managing your money!  We compiled a list of questions based on research.
 
Some questions you want to ask prospective advisors specifically about fees:
  1. What services are covered under the fee?  Is it just investment management or does it also include financial planning?
  2. Are there any other costs NOT covered by the fee?  Sometimes brokers have a price list, followed by fine print of additional fees.  This is the time to read the fine print.
  3. If the fee is a percent of assets, do the fee percentages go down as my investment portfolio grows?  The answer should be yes – as your assets grow, the fee percentage should come down.
  4. If the fee is commissions or fees, ask for a detailed list.  Also know going in that this type of advisor has a financial incentive to ‘sell’ you products that grow his fees!
  5. Hourly rate or Flat Fee.  This may be a good way to get familiar with an advisor.  Have them do a financial plan or investment plan.  Negotiate the number of hours or flat fee upfront which will put a cap on the total fee charged.

If the advisor charges a percent of assets, follow up by asking what the percentage rate is. Also, ask if that percentage goes down as asset levels go up. Any decent advisor will have a sliding scale where the percentage drops as assets rise.

After we read up on fee structures we started the search for advisors. We spoke with friends. We googled. We reviewed options with the investment company my 401K was with. Here is the thing – it is not easy to find an investment advisor.

When we spoke with friends we really got nothing. Not surprised after the fact. Many of our friends did not have an advisor. Also, who the hell wants to admit they screwed up and fired their advisor! And when we did get some names of advisors, they never panned out for us.

We changed the approach we took by ruling out firms or advisors to help focus our search.

We knew we did not want a “big box” firm with employed advisors. Think Fidelity, Schwab or Vanguard. I just had this hunch that the needs of the company would come before the needs of the client. The other concern was the potential for a ‘cookie cutter’ approach where a plan was not individualized.

We knew we did not want a commission/fee based advisor. The second guessing of whether a recommended investment was really good for us or good for the advisor. Besides, my eyesight was becoming an issue and I did not want to read all the fine print!

We knew that we did not want someone for a one time project. This ruled out the hourly rate/flat fee types. We wanted to find an advisor that would be with us for the long haul. We also wanted an advisor that would help us develop a financial plan, manage the plan and stay in contact often.

That left us with a group of advisors that charged fees based on a percent of assets. So we continued to research these types of advisors and came up with a list of 3 to start with. Before you go to talk with them you need a list of questions to ask them.

Here is the list of 10 questions we used.  
  1. Are you a fiduciary?  Fiduciaries work in the best interest of a client.  
  2. How are you paid for your services? Are there other fees?  Remember – read the fine print.
  3. What are your credentials?  What are the credentials of others in your firm?  Firms are required by the SEC to provide credentials.
  4. What is your investment philosophy?  Aggressive?  Conservative?  Capital preservation?
  5. What services do you offer?  Investment management?  Financial planning?  Tax planning?  Estate planning?
  6. How will you consider assets not managed by you?  (eg- the big picture).  Ask this to determine if they will do a financial plan that includes all of your net worth.
  7. What is your succession plan?  If you go with a solo advisor and something happens, then what?
  8. How often will we talk or meet?  Look for advisors that want to talk often.
  9. Where will my investments be held?  Make sure you have the ability and right to access your funds directly.  Steer clear of advisors that put up barriers to your own money.  Google Bernie Madoff if you want to see a high profile case.
  10. Does your strategy involve reviewing tax consequences of investments?  If the focus is all investments and not on the taxes then you also need to get a tax advisor.

After we met with three advisors we asked for references also. You need to realize that the advisors are only going to provide you great references – who is willing to provide the name of a disgruntled former client!

What was interesting though was the fact that one of the advisors provided us references that that ranged in their reviews. One of the references was a client that left the advisor but then returned. We received the view of why they left and why they returned – not something you always get a chance to hear.

The advisor we ended up working with was the one who provided the range of references. We did not rely on that alone. We also felt a better connection to the advisor on a personal level. Additionally, we got the chance while interviewing to talk to members of his firm that we would be working with.

Remember that one question about succession planning (number 7 above)? Well, about four years after we started working with our advisor he left for another firm. We stuck with the firm we were at, even though our advisor, who was also the main partner, had left.

There were a couple years of average investment performance. The communication level dropped and we were initiating it when it did happen. Due to this we decided to take our business elsewhere.

I tracked down where our first advisor had gone to and called him. He had gone to a new firm and hired new people. We actually went through another interview process just to be sure his philosophy was the same. We also met with his support team to know who we would be working with.

Goal_Plan_Success

Finding an advisor is not something to talk lightly. Take your time. Discuss things with your significant other or trusted confidant. Know what you want in the way of services. Bring a list of questions to ask. Find a personal connection – use your gut feel about it.

Do you use an investment advisor? What things did you learn when you decided to hire one?  Or why did you choose NOT to use an advisor?

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