"Dear Ami" is Steward’s money advice column. Submit questions here.
I know I should be doing more on personal finance...so I'm exploring to see if working with a wealth advisor makes sense for me. I'm looking for help thinking through: tax efficiency, investing, and general planning around life events. How do I find an advisor whom I can trust more implicitly, so that I don't feel the need to second-guess, double-check, or silo them to get my needs met? And what level of support do I actually need? How do I figure out who is a "good guy"?
- Holding Out For a Hero
In this week's advice column, we give "Holding Out For a Hero" a list of 3 bright lines in the sand to use in selecting a financial advisor. Along the way, we'll translate confusing finance industry jargon into plain-English, explaining what is a fiduciary, what's the difference between a wealth advisor vs. financial planner, and how to think about what level of support you need.
Table of contents
Dear "Holding Out for A Hero"
First off, great question. This is a "buyer beware" type of space so your caution around finding trustworthy financial advice is wise. I'll start by saying Steward provides financial advice - but we are NOT for everyone. This is a spot where finding the right fit for you, and who really is an ethical professional can help.
Let's start with weeding out who is an ethical and trustworthy professional, and then move on to talking fit. There are 200 designations around "financial advisors" now available to consumers. Everyone under the sun is calling themselves one, including folks who are actually salespeople for products (e.g., pushing particular insurance products or investment vehicles – beware of the word “proprietary”…that generally means high fees). The good news is...
There are 3 bright lines in the sand to figure out who’s a good actor
1) Fee-Only: Only takes payment from you = the client
I'm a strong believer in "follow the money" and this is the practical application of that in finding an advisor. You're looking for an advisor who only takes payment from you, charging you based on the actual advice they give you as either:
(a) an AUM fee = a % of your assets under management (aka. how much money you have in the bank or your investment accounts). You're shooting for a cost of 1% (finance-talk: 100 basis points or bps) or less here.
(b) hourly or as a subscription fee = a flat-fee so you're not forced into a bundling with investment management that you can do at a lower cost DIY. This latter model is offered by very few players today, but is a growing movement, that Steward is excited to be part of.
They will not:
- charge you per trade, which automatically is a bad incentive that sets them up to try to sell you as much as possible.
- have extra hidden fees that appear as you progress your conversations with them
- get bonuses or commissions for pushing their own proprietary products or other investment companies products. Super confusingly, some advisors call themselves “fee-based” but that means they take fees from you...but then also put their hat out to take commissions from other financial institutions to push product on you! You're looking for "fee-only" exclusively and want to see that in writing. "Fee-based" should raise your antennae up.
2) Educated: Finding an adviser who is a Certified Financial Planner (CFP).
Only 1 in 5 (shockingly) people who call themselves "advisors" actually have this designation. It’s the gold-standard (think of it like the CPA for accountants or MCAT for doctors) in the field.
It requires (a) completing 12-18 months of coursework in an accredited program on financial planning (b) passing a 6 hour exam across the major areas of financial planning and (c) completing 6,000 hours of professional experience related to the financial planning process.
You're a highly educated hard-worker with deep expertise in your field of work, and you should have an advisor who passes the same bar assisting you on your finances.
3) Fiduciary: Finding someone who specifically states in writing that they'll put your interests first
What does fiduciary mean? Fiduciary means the advisor has legally committed to putting your interests first, vs. the interests of their firm. Yes, CRAZILY, there are many players out there who are financial advisors who are not fiduciaries. That would be like going to a pharmaceutical company for medical advice vs. a doctor.
The fact that a list like this even needs to exist to help sift out the snake-oil salesman....makes me sad / angry about the current financial services industry. In fact, it's what fired us up to start Steward! If you're in the same boat, take a pause to watch a laugh-out-loud-funny clip on this topic from John Oliver, who spells out many of these same criteria in jokes!
Non-fiduciaries to keep your antennae up around
1) Big insurance companies offering investment advice - the answer to every question with an insurance company is going to be insurance. Insurance and investing often marry up into a “worst of both worlds” combo.
2) Big Banks (Goldman, Merrill, Morgan Stanley etc.) offering advice – often means you’ll get traded off amongst junior analysts often, pushed proprietary products or insurance products, charged 150 or even 250 vs. 100 bps. Bluntly, some folks feel fancy they're being served by a VP of a fancy investment bank, and if feeling fancy is on your list...they can deliver! But looking out for you and your family exclusively, big banks may not be able to deliver the best on the 3 criteria laid out above.
I say the above, with respect to anyone working at these other types of firms since:
1) There are always terrific exceptions!
2) This is quite close to home for me. My father spent his whole career at Goldman Sachs, leaving as a partner. It just always struck me that so few of his colleagues were using Goldman Sachs wealth advisors as the primary advisors for their own families. They knew the rub!
Okay, so now we've cleared the "good actor" test...let's talk about finding a good fit for you.
Where to find a fee-only, fiduciary, CFP wealth advisor that's a good fit for you
- Search on napfa , the trade association of specifically fee-only fiduciary planners
- Check out the website XY Planning Network. This has “next-gen” younger planners focused on Generation X and Y. You can use that site to search for specialized planners in your location (like planners that specialize in millennials, entrepreneurs, freelancers etc.)
- Check out Garrett Planning Network - which focuses on fee-only hourly planners, who charge on a subscription basis. This can be helpful if you're not looking for someone to manage investments for you (i.e., you're all set up on Vanguard or Betterment etc.) but just want the financial planning advice part.
- Steward is also privileged to serve families as a fee-only, fiduciary, CFP-led firm. But we'll be the first to say that we're not for everyone. We only serve mid-career professionals in their 20s-40s with $150K-$3M in assets. The most important thing here is finding a fit for YOUR personal circumstances.
Your Interview Guide
Use this guide from the Wall Street Journal’s Jason Zweig (one of my favorite writers in this space - as your cheat sheet interview list . By the way, his book “The Devil’s Financial Dictionary” is a rare combo of wicked dry humor and super useful financial advice (one favorite excerpt tweeted here).
I'd add to his list, asking them to share with you a sample plan so you can see if they're "walking the talk" on providing truly holistic advice that ensures the left-hand is talking to the right-hand on integrating your unique life circumstances, with the investment and tax strategies they're recommending.
The Catch (which in this case, is also “the cost!) of a fee-only wealth advisor
This more white-glove service and dedicated attention, and deeper expertise, will come with fees. You should aim to pay no more than 1% for an advisor. Given that most fee-only wealth advisors worth their salt only accept clients with over $1M in assets (and the best, often with over $3M+ in assets), you’re paying $10,000-$30,000 minimum per year to work with them.
This hefty price tag, and the service gap for folks with less than $3M in assets (so far!) - is what got us fired up to start Steward.
This fee will step down as you increase how many assets you hold with them. Paying an advisor, as with so many things in life, is a trade-off. The cost benefit is that you’ll get more hands-on help reaching your goals and managing your investment returns. Vanguard – the kings of DIY, themselves have published a study called ‘Advisor Alpha’ showing that good wealth advisors deliver about 3% in extra return per year. Note, Vanguard found that ½ of that extra return (1.5%) comes from behavioral coaching...so if that’s something you don’t think you need as much of, definitely something to factor into your cost-benefit trade-off.
It seems like there are a thousand titles in this space…what’s a wealth advisor vs. a financial advisor vs. a financial planner vs. a tax advisor vs. a stock broker?
Great question since these terms get tossed around willy-nilly!
Financial planners: the ones serving the 95%+ of households under the estate tax limit
Wealth advisors: the ones serving <5% households over the estate tax limit. Why the differentiation vs. financial planners? After the estate tax gets triggered, a whole new set of tax strategies come into play, where a wealth advisor can help navigate the complexity to optimize taxes. Today that gets triggered at $11.7M, but legislation proposed in 2021 could reduce that down to ~$6M, which is why we suggest moving from financial planning to wealth advisory at the ~$6M mark.
A note of caution - lots of folks are rebranding as a wealth advisor (80% of financial advisors from the latest data!), even if their sweet spot is for folks with under $6M in AUM or worse still, they are non-fiduciaries who sell products and receive commissions. Best to double check with your advisor on what their “sweet spot” is in terms of average client size and if they’re a fiduciary to ensure it’s a good match with your situation. Financial planners and wealth advisors services include: asset management, financial planning, education planning, retirement planning, charitable gifting strategies, wealth transfer strategies to future generations, tax mitigation strategies, and wealth protection services.
Financial advisors: A bit of a catch all term, but it usually refers to non-fiduciaries who sell products, and receive commissions…typically from insurance companies that are paying outside parties to promote their products! Misleading title.
Tax Advisor: Another term for an accountant. Note - CPAs and accountants will help you prepare and file the taxes, but generally that work is so time-intensive they have little time left over to develop proactive strategies to minimize tax. Wealth advisors help you with what numbers flow onto the return, and accountants file the return.
Stockbrokers: Typically these advisors are non-fiduciaries who sell products and work for large organizations. They are almost always commission based. That means they’re getting paid to push product. Online brokerages are cutting these folks out as middle-men.
What type of financial support makes sense for me?
It depends on where you are and where you’re going in your wealth journey. The complexity of your financial position will likely increase as you move through the phases of your wealth journey. In turn, you may want to consider greater levels of support. Your investable assets - investment accounts + saving accounts - are the simplest proxy for complexity.
I put together this chart, to help friends and family answer this question. I'll be the fist to say that Steward is not the right fit for everyone, we're the grey box of "tech-forward financial planning"!
Note, there are a few other factors that increase financial complexity:
- business ownership
- complex compensation (e.g., stock options)
- involvement in inheritances / trusts
- approaching divorce
If you have some of these, you may want to consider “leveling up” on your support even sooner. The benefits will make up for the added cost. And if you’re coming-up on a major life event (e.g., divorce, receiving an inheritance, selling your business), you also may want to bring-in greater wealth advice in advance. Implementing the foundation for critical estate planning and tax strategies prior to event itself, will help avoid “missing the boat”. Extra support does come with costs, but the most expensive cost in financial planning is the opportunity cost of doing nothing or missed opportunities.