The Financial Advisor Feud – Episode 007

This transcript was auto-generated and may contain errors.

[00:00] how to maintain it and how to help others with it as well. Super. Well, that leads us right into today’s show and that, you know, finding in a financial advisor or seeking out financial advice and certainly having someone who facilitates that role in your life of helping to keep you in that prosperity mindset, remind you when you’re not or provide you with tools and resources to help yourself. All of that is part of the financial advising process. So that’s what we really want to talk about today is in the marketplace today, there’s a great deal of confusion on what is a financial advisor, how are they compensated and what is it that is best to serve me as an investor or a potential investor?

[00:46] So, Kim, I know you’ve written books on this and you’re an expert on this subject. So why don’t you start us off down that path? Well, let’s begin with your first question, though. What is a financial advisor? And that term is very loosely defined because you also throw in on top of it financial planner and you can even get financial analyst, et cetera. I believe that the typical use of the financial advisor word is split into two camps. And one is your stockbroker that’s at a large wirehouse, the well-known names that practices financial advice and financial advising. You could even say financial planning from what’s legally called a suitability standard. And I’ll come back to that. And then the second one is the financial advisor slash financial planner person

[01:43] that practices and provides advice from what’s legally called a fiduciary standard. And then, of course, there is a third camp, and that are all the insurance agents and the other people out there that call themselves financial advisors. Some would say not properly, not legally. And yet, obviously, it’s common and it’s out there all over the place. So I guess we’ve got three camps here. So let’s go back to the first one. The suitability standard is simply where the advisor and I’m going to just use that term loosely, determines that a particular investment is suitable for you. In other words, as an investor, you have a particular fact pattern of income and estate and your desires for your money.

[02:31] And they, the brokerage houses, the lawyers have determined that certain investments are suitable for that particular fact pattern. And as long as that advisor is providing investments for that fact pattern and they are suitable, they’re off the hook, so to speak, for any kind of liability. Then, and I’m given a real broad brush overview of this. You have the second camp, which is the fiduciary. And that is typically on the legal side, it’s an independent, not always, but it’s often an independent financial advisor. And you’ll hear the terms a registered investment advisor and their fiduciary responsibility, their legal responsibility. Is to provide for you advice that is best for you, completely disconnected

[03:19] and irrelevant Lee related to what product you’re selling. In other words, as the advisor, you could be selling product a, but the best thing for the client is product B. And so you have to tell them that by law, that’s your responsibility as a fiduciary advisor and for what it’s worth, that’s how partners for prosperity operates and it’s known as the series 65 in the license category. And I should have indicated earlier, the series seven is the typical stockbroker license. And then as indicated, you’ve got this third camp of insurance agents. Now, some of them are, and again, this is typically life insurance agents. Some of them are also series 65 registered investment advisors that are operating from the fiduciary standpoint.

[04:04] Some of them are more what we would call operating from the suitability standpoint. Some of them don’t deal with investments at all. But here is what I think is the most interesting thing. And that is that notice in my entire conversation, I’ve just dealt with investments because all the world thinks that that is what financial planning is about. And yet investments, quote unquote, are in reality, maybe 60 percent of your entire financial life. You absolutely with your finances have to look at insurance. You have to look at wills and trusts. You have to look at all the other types of insurance and protection components like LLCs and car insurance, home insurance, liability umbrella insurance, et cetera, et cetera, et cetera.

[04:51] You have to look at the variety of plans that you have at your workplace, the benefit plans, the various disability insurances, the 401Ks. Then you have the whole health care insurance arena. And so to me, financial advice should incorporate all of those other things also. So just at that level and knowing that we’re wanting to keep our conversation short today, have we covered the landscape clear enough or do you have any clarifying questions on that? Well, I think the biggest clarifying question that most people are asking is which one of those do I need? And I think possibly the case could be made that maybe you need all of them. Very well said. And I think a lot of times, because as a society,

[05:43] we’re very, we’re very price driven. Often the which one I need is superseded by which one do I want to pay for. And as you so rightly asked at the beginning of the conversation, what is the best way to pay for the advice and can advice be given for free? And is it good advice if it’s for free? So let’s get clear on that. The typical financial advisor charges a fee for what’s known as assets under management, AUM. And it has been the measuring stick very, very prevalently used for the last 10 or 15 years. Prior to that, not so much. But today, the typical financial advisor, whether they’re fiduciary based or suitability based is focused on assets under management. You’ll hear that term potentially.

[06:35] You’ll see that they have a required minimum like 250,000 or 1 million or whatever their minimum is. And there’s a lot of discussion on the web these days as to whether that assets under management model is really the best. And most people feel that it is. I will tell you that I don’t feel like it is. And that brings us to what you would say might be the second model of paying for services. So just to be clear, assets under management then charge a 1% or 2% fee for the advice. In other words, the 1% or 2% fee gets you the investment, but it also gets you the advice. And I think that is very, very confusing because the client doesn’t really know what they’re paying for and they consequently don’t really

[07:16] know what they’re getting. I believe it’s much more appropriate to separate out the charge for advice versus the charge for investments. And absolutely, people that provide you good investments deserve to get paid. That is often in the form of a commission. And unfortunately, that C word has become sort of a bad word of late, which is crazy because there are commissions paid on all types of transactions. Getting paid a commission does not mean that the person is not behaving in your best interest, but I believe that you deserve to know what that commission is. I had a client just the other day say, okay, I understand that I, as the client, am not paying your commission, but somebody is and I would like

[07:59] to know what it is. And I was very happy to tell him what it was. So there’s the commission environment and then there’s the separate fee for advice environment. And this is typically handled in the fiduciary arena, but not always because, as I said earlier, many times the fiduciary is lumping in the assets under management fee with the fee for advice. What we have chosen to do at Partners for Prosperity, so of course I’m biased, I believe that this is the best way, is to provide a separate process. Ours is called the Prosperity Pathway. You can see information about it on partners4prosperity.com. And our process of the Prosperity Pathway, which is five steps, is the advice part. And what that allows us to do is we can provide the investments on

[08:50] top of the advice in addition to the advice, or frankly, instead of the advice, because to me, the advice is about somebody’s entire financial picture, dealing with the car insurance, the home insurance, the liability, the wills and trusts. Now we’re not the attorneys, we’re not actually doing the document, but getting them to that advisor, that legal advisor, et cetera, et cetera. So the advice provided for a fee, a separate fee that has absolutely nothing to do with whether you invest money or not, but you’re clear that you’re paying, you’re actually writing a check for that advice. That to me enables us to provide you that advice. You know what you’re getting, you know what you’re paying, and there

[09:35] isn’t this muddied water of combining things. Super. In my mind, I’m sort of picturing, you know, sitting at the client, sitting at the head of the table, maybe on their right-hand side, there’s a fee based advisor that’s helping to coordinate, and then a team of specialists, certainly you want to have a tax specialist, you want to have a good lawyer who’s handling your estate, you know, if you get into a subject like long-term care, there needs to be an insurance agent involved that specializes in that long-term care. And if you’re absolutely insistent on being in the market, then maybe make it make sense to have an actively managed portfolio by someone who has the expertise to do that. So maybe even assets under management makes sense.

[10:24] So by combining these teams together, and what’s interesting now is that this team can be a virtual team now, can’t it? It doesn’t mean you have to pile everybody in one single room. Absolutely. The wonders of the internet, the beauties of conference calling, and the ability to connect one another over email are valuable in that regard. And I do agree that a team approach is always going to get you the best results, not easy to coordinate, but totally doable. Got it. So one final question before we finish up, and that’s the new wave that we’re seeing come into the internet of free financial advising sites that provide supposedly partially electronic, partially one-on-one through conference calls or whatever, financial advice at no cost.

[11:11] What’s your opinion on those? Yes. And they’re also known as robo advisors, where you can just pop your information in on the web and supposedly get some answers. The challenge with that is that it’s typical financial planning. So in our second conversation, we need to separate out financial advice from financial planning. Financial planning is just simple math. I may, may not be super simple. You got to have a little program to do it, but there’s a million of free ones out there. And it can have its place, but as a general rule, financial planning is going to be very limited to the information that you pop into the computer and whether you do it or an advisor does it is irrelevant. It’s making a bunch of assumptions on your interest rates and tax rates

[11:53] and future longevity and the kind of income that you want and the interest rates you can earn, et cetera, et cetera, et cetera. And then spitting out some numbers. So while maybe initially beneficial, I think it often drives a very false sense of peace of mind. And at your early stages, you can get away with that. You can just save your couple hundred bucks or a thousand a month or whatever it is that you’re going to do, and you don’t really need all of the other aspects of advice. And so the quote free advice might do just fine, but when it comes time to get real serious about building, protecting, maintaining, and getting income off your wealth, you get what you pay for. Absolutely. And I would challenge somebody that regardless whatever field that

[12:35] you’re in, if you were to go to work every day and work a full day and expected to be an expert in your individual industry and not get paid for it, you wouldn’t be there for very long. So, um, to expect that and to get quality out of somebody who’s expected to do it for free makes absolutely no sense to me. So either the money is being hidden or it’s a temporary situation that you’re going to be upsold into something else. So, uh, keep that in mind again, this is no BS money guy, Todd Strobel for the prosperity podcast. Special thanks to Kim Butler and take care of everybody. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com.

[13:26] If you liked this episode, make sure you subscribe and leave a review.