Finding The Right Financial Advisor For Retirement
As you prepare for retirement, the decision to hire a financial advisor is an important one. After all, the financial advisor you choose will be tasked with advising you on many complex financial decisions throughout your retirement years.
The good news is that there are many talented financial advisors capable of exceeding even the highest of expectations. The challenge is finding those exceptional advisors amongst the nearly 330,000 fully licensed advisors here in the United States.
In this article, we will focus on certain considerations to evaluate in your search for the right financial advisor. It is our hope that our industry insight will help you feel more confident and comfortable with the advisor you ultimately decide to hire.
With that key objective noted, let’s get started by discussing how the role of a “financial advisor” has changed over time.
A Brief History of “Financial Advice”
The Stockbroker
For much of the 20th century, the concept of a “financial advisor” would be rather foreign to most Americans. Of course, this makes sense when you consider that the average American was not particularly wealthy; most did not live long lives; and those who retired often did so on Social Security and a company pension alone.
What did exist for most of the 20th century were “stockbrokers” who pitched stock ideas to wealthy Americans in hopes of earning a sizable commission on the resulting stock trade. As you might imagine, a stockbroker tended to earn a nice living due largely to an agreement amongst every Wall Street firm to trade only amongst themselves and to charge the same commission rate - an agreement that dated back to 1792!
However, in 1975 this convenient arrangement amongst Wall Street firms was upended when the U.S. enacted new regulations which mandated that firms must set commission rates based on a competitive bidding process. Now with greater flexibility on what a firm could charge, a new era of “discount” brokerage firms such as Charles Schwab began executing trades for much lower commissions – a major step toward democratizing investment markets.
In the decades that followed, improvements in computer technology, increased competition amongst firms, and the advent of online stock trading not only eliminated high commissions but also an investor’s need for a stockbroker’s services - an unfortunate series of events for the stockbroker.
But all was not lost. You see, during this same period of time, major change was underway that would transform how every American managed their personal finances. A change that would save the stockbroker’s livelihood in the process.
The Rise of the Financial Advisor
After World War II, it was quite common for companies to offer generous defined-benefit pension plans to provide for their workers as they aged. However, starting in the 1980s, Corporate America began to rethink these policies which resulted in the elimination of many pension plans in favor of new lower-cost 401K plans.
While shedding these costly pension plans helped companies improve their profits, it also shifted the responsibility to save and invest for retirement to each employee, irrespective of that employee’s level of financial knowledge or access to quality financial advice.
Of course, the emergence of the 401K plan in the 1980s could not have come at a better time for stockbrokers who quickly re-branded themselves as “financial advisors”.
Now, instead of pitching stock ideas to the wealthy, these newly minted financial advisors could earn commissions on the sale of investment and insurance products to the increasing number of Americans tasked with managing their own retirement finances.
The Modern Financial Advisor Is Born
For much of the 1980s and 1990s, the periodic sale of insurance and investment products to clients was a very common business model for financial advisors; however, the dawn of the 21st century would bring yet another round of change.
This time the change would center around a meaningful shift in client preferences as many clients had become both older and wealthier. Now clients wanted more than periodic insurance or investment ideas, they wanted ongoing assistance with their investments, tax planning services, retirement income strategies, and estate planning advice.
As a result, many financial advisors began shifting away from simply selling products and embraced new service models where clients would be provided year-round advice and service in exchange for an annual advisory fee.
It was during this most recent period of change when the modern Financial Advisor was born. A positive development for many clients who would now receive a far greater suite of services for a lower level of fees than ever before.
Narrowing Down the Choices
Over the last 50 years, the evolution of the financial advisor has been a positive one. However, the world of financial advice is not without its problems. Sadly, these problems often center around some advisors who provide bad advice or inappropriate recommendations to their clients.
Ultimately, the root cause of these problems is rather simple - it isn’t very hard to become a fully licensed financial advisor. In fact, many clients are often surprised to learn that no formal financial education or on-the-job training is required to become licensed as a financial advisor. This low bar is why there are nearly 330,000 fully licensed financial advisors nationwide who may or may not possess the education and experience to properly advise clients on complex financial decisions.
Further compounding this divide amongst advisors is a complex web of federal and state regulations that results in some advisors having a legal obligation to act in a client’s best interest at all times while other advisors have no legal requirement to do so.
What this means for anyone searching for an advisor is that the marketplace of financial advisors includes advisors with elite levels of financial expertise and an legal obligation to act in your best interests as well as other advisors who have little meaningful financial expertise and no legal obligation to act in your best interest.
As a result of this unfortunate reality, it is critically important to spend time researching the background and business practices of any financial advisor you are thinking about hiring. By doing so, you can ensure that you are hiring one of the many talented financial advisors that do exist throughout the country.
Let’s now discuss some important considerations to weigh as you evaluate one advisor versus the next.
Professional Credentials to Look For
In most professional fields, government regulators require licensees to hold educational degrees and acquire on-the-job training before they are licensed to work with the public. For instance, doctors, plumbers, CPAs, nurses, and electricians must all complete lengthy academic programs, acquire on-the-job training, and pass rigorous exams before they are afforded the privilege of becoming licensed.
Unfortunately, this same education and experience requirement does not apply to financial advisors.
With such stark differences amongst advisors, a great way to start your search is to focus on advisors who are not just licensed but also credentialed. While many different professional credentials exist, here are a few worth mentioning due to the years of testing, education, and experience required to earn each credential:
Certified Financial Planner™ (CFP®). This planning focused credential is issued by the Certified Financial Planner Board of Standards, Inc. A CFP® is generally required to hold a bachelor’s degree from an accredited college or university, acquire 3 years of financial planning experience, complete a CFP®-board registered study program, and pass the CFP® Certification Exam.
Chartered Financial Analyst (CFA): This investment focused credential is issued by CFA Institute. A CFA is generally required to earn an undergraduate degree, acquire 4 years of professional investment experience, complete a 750-hour self-study program, and pass all 3 levels of the CFA exam.
Certified Public Accountant (CPA): This tax focused credential is issued by the Board of Accountancy in each state. A CPA is generally required to complete 150 credit hours with an accounting concentration (equivalent to 5 years of college), acquire at least 1 year of accounting experience under the supervision of a licensed CPA, and pass all 4 parts of the CPA Exam.
By narrowing your search down to advisors with credentials, you increase your odds of hiring not just a knowledgeable advisor but also an advisor who is required to act your best interest at all times.
While federal or state law may not require every advisor to act in a client’s best interest, any advisor who holds a CFP® certificate, a CFA charter, or a CPA license is required to do so as a condition of holding each credential. In our opinion, this is a good place to start.
Experience and Specialization Matters
In the modern economy, most professionals tend to focus on highly specialized work. For instance, a neurosurgeon and a cardiologist are both skilled doctors, but you wouldn’t want to hire a neurosurgeon to treat a serious heart condition.
While most professionals tend to specialize, it is common for financial advisors to forgo specialization. Instead, many advisors choose to work with a very diverse group of clients that might include young families, business owners, pre-retirees, and the elderly. This, of course, is a mix of clients who clearly have very different advice and service needs.
The problem with this common “jack of all trades” approach is that it is hard to be an expert in everything which is why experts in any professional field or skilled trade tend to be highly specialized.
Building and managing your retirement plan is one area where expert advice matters. The reason it matters is that a modern day retirement plan involves much more than investment advice alone. It involves retirement income planning, Social Security strategies, Medicare planning, and tax planning strategies which all require highly specialized knowledge.
We all seek out doctors and lawyers with specialized knowledge when we need important medical and legal advice. It is important to apply the same thought process when hiring an advisor to assist you with your retirement finances.
Age and Succession Considerations
Many important professions from Lawyers and CPAs to Plumbers and Electricians are experiencing a major shortage of younger professionals entering those fields.
While this “graying of the profession” presents a problem for many industries, it presents a unique challenge for today’s pre-retirees who will need their advisor not just today, but throughout the next 20 or 30 years. Currently, the average age of a Financial Advisor is 56 years old according to a 2023 J.D. Power survey!
The reality of hiring a financial advisor in their late 50s or 60s is that many of these advisors will likely want to retire in the near future while others may be forced into retirement by health considerations. Should that retirement occur, the clients of that now retired advisor will have to scramble to find a new advisor just a few years into their own retirement.
For this reason, it is important to ask an advisor whether they have a clearly defined succession plan so that you can better understand who might be advising you in the future.
Understand Your Advisor’s Risk Tolerance
One overlooked consideration when hiring an advisor involves your advisor’s personal risk tolerance. Yes, that’s right, not your risk tolerance, but your advisor’s.
This is an important consideration because your advisor will be advising you throughout many periods of economic and market uncertainty. Therefore, you should ensure that you and your advisor perceive “risk” in a similar manner.
For instance, if you are a more aggressive investor who hires a more conservative advisor, you may never agree on the right course of action in a major market downturn.
Alternatively, if you are a more cautious investor who hires a more aggressive advisor, you may end up investing in a higher-risk investment portfolio because your advisor doesn’t personally view your portfolio as all that risky.
While having different perspectives is not necessarily bad, the reality is that most clients rely on their advisor to judge the riskiness of their portfolio. By understanding how your advisor thinks about risk, you can ensure that you stay on the same page.
Understanding Services and Fees
If you were to interview 10 financial advisors, you would likely be offered 10 custom service packages, 10 different fee schedules, and 10 unique resumes. Of course, these many differences can present some challenges for anyone who wants to compare different advisors in hopes of hiring the very best option.
Ultimately, the best way to build confidence in any hiring decision is to invest some time into trying to understand the specific services you will receive and the specific fees you will pay. Let’s dive into those areas now.
The Services Offered
While a modern-day Financial Advisor is likely to offer far more services than the advisors of decades past, there can still be significant differences in the services offered by one advisor versus the next.
At a minimum, most advisors are likely to assist you with the management of your investments. However, it is becoming more common for advisors to include detailed financial planning services and even tax services as part of their core service packages.
With that noted, it is important to be aware that some advisors are starting to re-brand themselves as financial planners and tax planners to win more business, but doing so, without extensive knowledge or experience in these areas. This means that you will want to evaluate not only the services being offered, but also the quality of those services and whether the advisor offering these services is qualified to do so. This point is particularly important when it come to advisors who are offering to advise you in areas as complex as income and estate tax planning.
The Advisor’s Fee
The fee charged by any advisor should be in line with the services being offered, the value of the advice received, and industry norms. This means that a good first step in evaluating any advisor’s fee is to develop a solid understanding of the services being offered.
When it comes to an advisor’s fee, the most common fee model is an asset management fee where a client pays an annual fee based on the size of a client’s investment portfolio. Under this type of fee model, the services offered can range from investment advice alone to far more comprehensive relationships where ongoing financial planning services and even tax services are provided.
What is a reasonable fee?
According to the most recent 2020 industry fee survey, 85% of the 1,037 firms surveyed by independent industry consultant, Bob Veres of Inside Information, charged an annual advisory fee of 0.70% to 1.20% on a $1M investment portfolio.
For portfolios larger than $1M, the annual advisory fee charged tends to decline. For instance, 83% of firms surveyed charged an annual fee of 0.40% to 0.80% on a $5M investment portfolio.
Alternative Fee Models
The alternatives to the asset management fee are hourly rate fees and project-based fees which are less commonly used.
Under an hourly rate fee model, an advisor might charge $300 per hour to build your retirement plan with the final cost being driven by the total hours invested.
Under a project-based fee, an advisor might charge a fixed $3,000 fee to build your retirement plan irrespective of the amount of time required.
Generally, hourly rate fees and project-based fees work best for those clients who are interested in self-directing their personal finances but like the idea of periodically checking in with a financial advisor.
The Value of a Quality Advisor
Working with a quality financial advisor can go a long way toward enhancing your confidence and peace of mind. A quality financial advisor does this by providing clients with actionable financial guidance as well as other intangible benefits that aren’t easily quantified. Here are a few of those more intangible benefits.
Personalizing Advice
There is never “one size fits all” financial advice and this is particularly true when it comes to retirement. Identifying the right strategies and the right course of action ultimately involves sorting through a vast universe of financial possibilities.
As the client of a quality financial advisor, you can be confident that your advisor has specialized knowledge across all these important tax, retirement planning, and investment considerations and the experience to apply that knowledge across different client situations. This means that you can then rest assured that no important detail or new opportunity is being overlooked.
Ongoing Task Management
Managing any retirement plan requires you to execute many ongoing tasks that range from preparing tax returns to executing investment trades to following changes in markets and the tax code.
Unfortunately, addressing these ongoing activities takes time and effort that many retirees would ideally like to focus elsewhere. By hiring an advisor, a retiree can delegate many of these important tasks to their advisor which frees up time and energy to focus on more enjoyable activities.
Long-Term Financial Continuity
In the early years of retirement, a quality advisor will help you coordinate your tax, retirement planning, and investment activities. However, as you get older, a quality advisor will continue to provide financial continuity, but in a somewhat different way. This includes helping you coordinate your day-to-day finances to ensure that your personal interests are being looked after as well as the long-term interests of your spouse, your children, and your charitable interests.
In Conclusion
There are many different considerations to weigh when hiring an advisor. However, finding the right advisor can bring many benefits to your life. By investing time and effort into your search, you will put yourself in the best position to identify the exceptional financial advisor that you deserve. Good Luck!