Having a financial professional can be helpful, but the process of finding one can be daunting. How do you find someone to manage your money and what should you expect to pay? What services will you get?
In its Ask the Expert series, Cashay reporters connect with experts on intimidating personal finance topics dealing with life's milestones, common money mistakes, and more.
Janna Herron talked with Charles Failla, a certified financial planner and principal of Sovereign Financial Group LLC. He's a New York-based advisor who specializes in all aspects of a person's financial life: goals, investments, taxes, liabilities, and, estate/legacy planning. Here’s his advice on how to choose a financial advisor.
What are some of the factors people should consider when choosing a financial advisor?
It really comes down to a few things. Number one [is] bias. Are you giving me recommendations that's going to benefit you or is it going to benefit me? So bias is number one. (See Failla’s earlier discussion about fiduciary for more detail on this).
The second one is competence. Do you know what you're talking about? And that's a combination of experience. Everyone, myself included — there was a day when I only had one day of experience as an advisor. That was 27 years ago. If you're dealing with a younger advisor, that's not necessarily bad, but I would perhaps suggest maybe a younger advisor that's part of a team that has more experience.
Then [there’s] the designation and there's a ton of designations out there. It's kind of like an alphabet soup and some are kind of like you mail away a coupon and a check and all of a sudden you're getting a designation. There's some pretty light ones out there [and] some more substantial ones.
Let me disclose some bias here because I happen to be a certified financial planner myself. The CFP designation, I would argue, that's one of the best and most serious ones in the industry. And I think there's a lot of people that would say that as well. It's certainly the most comprehensive. It's probably the largest course of study and ongoing requirements and so on and so forth. And also the CFP board has its own standard of ethics.
I [also] think it's really important for clients to ask their advisors: What is your process? And if the answer is homina, homina, homina, you know that's the first time they ever thought about a process. That may not be the right advisor for you.
But if the advisor has a real process in place and there's a lot of different processes, that could be good. But I think it's important to have a process in place. That's going to guide the client through the financial planning process, dovetail that with the money management process, and show how that circles around to some sort of ongoing monitoring.
How do financial advisors generally get paid?
So there's a lot of different ways and some are transparent and some are opaque. So as you might imagine, we're big fans of the transparent ones. So let's start with those. So transparent would be more in the fiduciary world, [like] charging a fee that's definable, quantifiable, measurable.
So how do you charge that fee? There's a lot of different ways to do this too. A very common model is a fee for assets under management. [For example], the whole 1% of the assets. Usually, it's some percentage and that percentage goes down. So for me to manage $1 million or for me to manage $5 million, well it doesn't really take five times the amount of time for me, it takes more time, but not really five times.
Another way would be an hourly charge. Let's say you said X dollars per hour kind of like the way a lawyer would do on a retainer system [if] you don't want or need ongoing management. Another way to do it is a standalone [service]. Let's say you want to sit down and create a financial plan for someone. Let's sit down and determine how complex your situation is and then give like a hard quote. It's going to cost $2,500 to fill in the blank.
So those are some pretty standard ways of doing it and what I would consider to be best practices, meaning very transparent.
What are some opaque ways to do it? I do a lot of workshops and one of my favorite questions to ask, and this is: How many people here have a financial advisor? And usually, over 50% of the room has one. How many people here know how much they're getting charged? Pretty much all those hands go down. And then I always love to ask how many people here think they're not getting charged anything, and you would be surprised, there's always one or two on average.
And then I like to focus on those people [and ask] them what do you think is happening here? You go into this big bank office with all these people and no one's making any money? That certainly doesn't make any sense. And so what is more likely the case is the fees are buried deep within the product itself. Is it disclosed somewhere? Absolutely. Did you not read page two 37 of your perspective? It was right there in tiny [font]. It's not really transparent. It's not clear. And that's important. People should know what they're getting charged.
What services do financial planners provide?
I would say they really boil down to two macro-categories. One would be asset management and the other would be financial planning.
So asset management is what most people will think about when they think about hiring an advisor. Asset management is the process of figuring out what to buy, what to sell, what to sell, what to buy and so on and so forth — putting together a portfolio, managing the portfolio.
Now financial planning, people tend to not really have a clear understanding of what that is a lot of times. So here's how I like to define it. Financial planning is the process to determine how much money a family needs and when do they need it. For example, financial planning will tell us for a hypothetical family, how much money they need for the down payment on the house they want to buy in two years. Then how much money do they need to put their son through college in five years, Then how much do they need to put their daughter through college in seven years. Then how much money do they need to start that business? Then how much money do they need to retire in 25 years? So that's the idea of financial planning. It's a process of figuring out how much money is needed.
When it's done best, it's done altogether. So you do the financial planning first, which defines how much money is needed and when is it needed. And then you use that information to construct portfolios. That goes back to asset management.
So for example, the portfolio that I would construct for the down payment that's needed in two years will be very conservative. The portfolio I would construct for retirement, that's going to happen in 25 years would be a very aggressive portfolio.
More the portfolio I would construct for the sun. That's got to go to college in five years would be pretty conservative, but you know, more aggressive, slightly than the two-year portfolio and so on and so forth. So by doing the financial planning first, what you're able to do is figure out how much money is needed and when, and the benefit of doing that as it relates to money management, is that it then allows you to put together a portfolio that's not too risky and not too conservative.
Read more information and tips in our Planning section