You may be working with a financial advisor and wonder what you should expect from your financial advisor. You may be someone who is thinking of hiring a financial advisor as your financial picture becomes more complex and you really want to have an expert in your corner to help you better plan for your financial future. I’ve put together a list of expectations that I believe are important to consider when choosing or evaluating a financial advisor.
- To Act as a Fiduciary
The definition of a fiduciary is a person to whom property or power is entrusted for the benefit of another. Essentially, a fiduciary is a person or organization that owes to another the duties of good faith and trust. I believe this is the most important expectation to have of your financial advisor. If you’ve done some research into finding an ideal advisor, you may have stumbled upon two words that sound like they might mean the same thing, but in actuality have very different definitions. These two words are fiduciary and suitability. The Fiduciary Standard was created in 1940 as part of the Investment Advisors Act. This standard, regulated by the SEC or state securities regulators, maintains that investment advisors are bound to a standard that requires them to put their clients’ interests above their own. The suitability standard only requires that the advisor has to reasonably believe that any recommendations made are suitable for the client, in terms of the client’s financial needs, objectives and unique circumstances. The need to disclose potential conflict of interest is not as strict a requirement as it is with a fiduciary. An investment for a client only has to be suitable at the time of sale. The Fiduciary Standard is the higher standard, as an advisor must do his or her best to make sure the investment advice they are providing is made using accurate and complete information. The analysis must be as thorough as possible.
Echo Wealth Management, LLC has adopted the CFP® Board Code of Ethics. Each member of our firm must follow the fiduciary standard.
- To Help You Set Realistic Financial Goals
Every person is at a different place in life with different wants and needs. Every single person has a different amount they need to save for retirement, or a different level of life insurance needs. You may know what you want to have, but not know how to set realistic goals without professional help as there are so many variables, such as market returns, inflation, taxes, current life style expenses, and projected income and expenses.
As you work with your financial advisor, you should expect this advisor will work with you to set realistic and achievable goals. If you expect your portfolio to grow 10% per year and you are only three years from retirement, your advisor should discuss alternative actions to give you the highest probability of achieving your retirement goal, such as setting proper future return expectations, increasing savings, cutting spending or some combination of those factors. You should expect your advisor to point out a more realistic expectation of returns in synchronization with market volatility to help you set short-term and long-term goals. When your time frame is short and your need to withdraw from your portfolio is high, you should not expect too much to be invested in stock markets. Your advisor should have the knowledge and experience to create a plan that is just right for you.
A good advisor will listen and give the advice that you need to hear, but not always what you want to hear, especially when you become emotional about your money during sharp market downturns, and make sure you clearly understand that the implication of attempting to sell stocks at their low point may result in an emotional mistake.
- To Offer Customized Services Based on Your Goals and Preferences
You should know how they work for you. To promote a healthy and productive relationship, your advisor should clearly explain their value proposition, investment process and how they get paid. Based on your goals and preferences, your advisor should tell you what types of services should be offered to you. Managing investments in your accounts is only part of what many advisors do, as personal financial planning needs to be holistic so as to integrate cash flow, investment management, retirement planning, college savings, insurance needs, tax planning, charitable giving, and estate planning.
For example, if you are a corporate executive who needs to follow the requirements of owning a minimum number of shares of company stock and cannot trade the stock during blackout periods, then you may want someone who is familiar with those requirements and whose service includes helping you monitor the requirements, while giving you proactive advice on how and when to reduce concentration in your company stock in order to reduce the overall risks of your entire portfolio.
Paying for professional advice can be especially helpful as you begin to move down the backstretch toward retirement. While you may have amassed an impressive portfolio, you need an entirely different set of skills to strategically spend down that nest egg so that it lasts at least as long as you do. According to the Society of Actuaries, a 55-year-old couple today, if both are in excellent health, faces a 52% probability that at least one spouse will still be alive at 95.
Some advisors do not offer financial planning services as they focus on managing investments. At Echo Wealth Management, we offer financial planning services together with investment management services, and your personalized financial plan (Echo Dashboard) shows your detailed cash flow and balance sheet projections each year to age 95, creating more clarity and confidence in your financial future. Our plan shows your capacity for taking risks while risk assessment tools such as Riskalyze shows your willingness for taking risks. We can design personalized portfolios for each household, knowing their target risk number, time horizon and withdrawal needs.
Vanguard estimates that certain advisory services, including portfolio rebalancing and tax-advantaged allocation and withdrawal strategies, could add about three percentage points to a client’s annual returns. That just assumes the advisor uses cheap ETFs and mutual funds and expertly executes. By whipping the rest of your financial plan into shape – insurance, taxes, will, trusts – a holistic advisor can improve your situation even further.
For everyone who lacks the time, expertise, or inclination to be the de facto financial advisor, hiring a trusted professional to create and maintain a comprehensive plan can be a solid investment.
- To Provide You with Enough Education to Understand
If your advisor’s explanations of what is going on in your portfolio are too far over your head, you may not feel confident about the decisions you make. You should expect your advisor to have the capability to explain complex information simply and clearly.
Most people don’t want to learn deep stock analysis methods from their advisors or read the fund annual reports, but the best advisors provide explanations at a client’s level so that client truly learns from the advisor. Advisors can’t guarantee to beat the markets, but they can provide holistic guidance to build confidence, understanding, and loyalty.
- To Communicate Regularly
At the beginning of your business relationship with your advisor, you both should determine how frequently you will communicate. There are many factors to consider: How often should you meet in the first year to get to know each other and create your financial plan? After the first year, how often does it make sense to meet? Should you meet in the office or by using screen share and conference calls? How frequently and by what method will you receive investment performance reports?
A good financial advisor will always make sure that you know the next time you should be in communication. If there are several events (retirement, business sale, or divorce), you may want to meet more frequently. However, if you don’t have major events and are comfortable communicating using email or phone calls with simple questions, it may make sense to meet twice a year or once a year as a check up.
I personally prefer to meet with new clients four times a year in the first year to finalize their Echo Dashboard, then change to twice a year as they can see their financial pictures and investment performance online using the Echo Dashboard and Echo Performance client portals. Email communications are preferred as we can track them and keep both husband and wife on the same page.
If your advisor provides an overview of your investment allocation and performance during review meetings but you expect to see more detailed data, you should voice your preferences for receiving more detailed reports and spending extra time on certain topics in advance.
Investors tend to obsess on short-term results as markets zig and zag. “What have you done for me this quarter?” can be answered simply by stating the fact and then more importantly your advisor provides you the information of investment management process and how to avoid making emotional mistakes by keeping you focused on the long-term goal. Frequent trading does not improve your portfolio returns, but regular review of your portfolio while making timely and appropriate adjustments, to align with the desired target risk level, are important tasks you should expect your advisor to do.
- To Be Proactive, Not Reactive