Your 6-Step Checklist: How to Evaluate a Financial Planner
- With so many people offering financial advice, how can you know who to trust?
- A six-step checklist to help evaluate a financial planner.
- Gain insight into whether your planner’s priorities mirror your own.
There is no shortage of people willing to give advice on almost any financial topic. Investment managers, brokers, bankers, insurance agents, accountants, mutual fund companies and financial planners fill the online and printed listings. It seems like everyone is a financial adviser! Where should one start when there is so much information and so many people willing to give advice?
Following is a six-step checklist to help university professionals evaluate potential financial planners.
Step 1: Is your financial planning comprehensive?
Many individuals feel they have a comprehensive financial plan because an adviser is managing their assets. But we believe a comprehensive financial planning approach for university professionals should address four core aspects: investment planning, retirement planning, income distribution, and estate planning. A coordinated financial plan will also evaluate the relationship between the four areas and how decisions in each facet will potentially affect the others. Your financial needs are complex, and we think considering having an adviser can be a great start. But make sure they have resources to assist with asset management, retirement planning, and estate planning. If not, that could be the equivalent of a blind spot in your future plan, and you may want to research alternatives.
Step 2: Is the adviser a fiduciary?
Why all the fuss over commissions paid to brokers and the high cost of some investments? Most people want objective advice; they don’t want to be sold a product. In order to find this advice, it’s important to evaluate the source of the information itself. If a salesperson is paid by commission, then it stands to reason he or she may be motivated to sell investment products. Why not remove this obstacle at the beginning of the process?
Simply ask the adviser: “Are you a fiduciary? Do you represent me first as your client? Do you have the legal duty and responsibility to represent my interests above all others?” We believe there is no middle ground to this answer; there’s no riding the fence. This is an important question to ask to gain a better understanding of your advisor’s obligations to you as a client.
Step 3: Does the adviser work for a vendor or custodian?
One of the many advantages of being a university employee is the access to great vendors that administer university retirement plans like TIAA, Fidelity, and Vanguard. These custodians can help offer a great low-cost investment platform and also offer investment opportunities you cannot get outside of these plans. Many of these custodians will also have individuals who can give you advice on investment selection and retirement planning.
As good as these vendors are, we think there are several questions to consider. These vendors are motivated to custody assets the same way investment brokers are outside of the university. For example, if you have an adviser who works for vendor A, but you also have assets located with vendor B, the adviser cannot advise you on managing those assets. In order to incorporate all of your assets in their planning, they will encourage you to consolidate all assets with them. This may not be in your best interest, as each custodian has unique strengths and opportunities. It is important to understand what those are.
Step 4: Wholesale or retail rates on mutual funds?
With literally thousands of mutual funds in the marketplace, how should one evaluate them from a cost standpoint? Although this can appear to be a very daunting task, here is how to help cut through it with ease.
Most of the investments available in university retirement plans have low expenses, especially when compared to investments sold by brokers. This is true for both the initial acquisition costs and the ongoing expenses. These low costs can potentially be a great benefit to participants, particularly when the market is going sideways. Low market returns while paying high expenses is not a winning combination.
The easiest way to help potentially increase returns without increasing risk is to lower expenses. Investments purchased through university plans are getting the advantage of wholesale rates. When purchasing investments as an individual, higher retail rates are the norm.
Consider the purchasing power of a large university compared to the average small investment purchase of an individual. The difference is really that of buying investments at wholesale vs. retail prices. How big is the difference between wholesale and retail rates? They can be significant!
Investment brokers may recommend mutual funds as a possible investment alternative. But these may bring higher-cost, commission-based funds that could increase your expenses. Mutual funds carry labels that indicate if commissions are paid on that particular fund.
Class A funds require commission out of the initial investment, typically 3 to 6 percent. Class B funds have a back-end surrender charge at the time of liquidation. Don’t settle for Class A or Class B funds, which are retail purchases.
Consider no-load funds which have low administrative fees and do not have front-end or back-end commissions. Better yet, consider investing in institutional funds that can potentially have extremely low costs.
Step 5: Is the planner pushing IRA rollovers?
An IRA rollover is the transfer of investments from a retirement plan to an individual account without income tax liability.
In general, an IRA rollover is not bad, but before you implement one, the reasons for doing it should be completely clear.
Never complete an IRA rollover for someone else’s reasons. A broker who’s paid on sales commission is transaction motivated. They get paid when you transfer investments from the university plan into the investment products they are selling.
In other words, be aware that you are moving money from a low-cost investment into products that may have high sales fees and other expenses attached to them.
One major reason why a retirement plan participant would choose to do an IRA rollover is to have access to investment choices that are NOT available under the university retirement plan.
Step 6: Be wary of annuities.
Investment brokers often sell fixed and variable annuities. Annuities are insurance products manufactured by life insurance companies. Fixed and variable annuities can potentially be excellent financial investments and do have their place in an investment portfolio. Be aware, however, that when annuities are sold, they have front-end commissions of 2 to 9 percent or more, and even with large purchases by the investor, these commission rates are not reduced.
Investors get price breaks on mutual funds. This is not the case with annuities. A $1 million transfer from a university retirement account into an annuity with a commission of 5 percent will bring the broker $50,000 in commissions. In addition, an annuity has substantially higher internal expenses than a mutual fund. You can expect these annual expenses to be 1.5 to 2.5 percent. That means $15,000 to $25,000 per year is siphoned off a $1 million annuity investment before the balance is invested.
In addition to the huge front-end commission and high internal expenses, most annuities have back-end surrender charges. The annuity investment could lose as much as 9 percent or more of its value if the money is distributed in the early years. High front-end charges, high internal charges and early surrender charges make for a very high-cost investment choice.
This is intended for informational purposes only and should not be construed as personalized financial or investment advice. Please consult your financial and investment professional(s) regarding your unique situation.
Filbrandt, the University Division of Savant Wealth Management, is an SEC registered investment advisor serving clients in academia nationally. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. Our advisers have specific and in-depth knowledge about university employee benefit programs and retirement plans. We work with university faculty, physicians, and other professionals. We are not associated with any university or any retirement vendor, and we have no access to your private retirement or personnel information.
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