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Personal Finance For Women

When It’s Time to Work with a Financial Professional

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December 20, 2023

Investing & Taxes, Spending & Saving

Listen & follow The Money with Katie Show: Apple Podcasts | Spotify

In the online personal finance hobbyist world, the suggestion that you should employ a financial professional is borderline heresy. But anytime something gets categorically ruled out, that’s usually the sign that it’s time to take a closer look. This week’s episode breaks it down so you can make sense of the decision—featuring not one, but two financial pros who hold the esteemed CFP® certification: Shelby Ferstl and Eric Jones.

We’ll walk through: When is it time to start working with a financial professional? Do you ever need to hire one? And, maybe more importantly, what are telltale signs of a good (or bad) one?

Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

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*The information presented is solely for informational purposes. The information, statements, comments, views, and opinions expressed in this podcast do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. The views or opinions expressed in the podcast are my views, or Shelby’s personal views, and do not reflect the opinions and beliefs of the podcast, its affiliates, my employer, or Shelby’s employer, or any other person. The podcast does not undertake any duty to publicly or otherwise update or revise any disseminated information.

Transcript

Katie:

At any given time in the Money with Katie inbox or in our Rich Girl Roundup submissions, there are at least two or three people asking the same question, should I be working with a financial advisor? In fact, here’s just a smattering of questions that we received in the last week: Is a financial advisor a good choice? If not, how do I break up with mine? When’s the right time to bring in a financial advisor and how do I find a financial advisor that I can trust?

These are natural questions. Of course, financial professionals can be invaluable resources at the same time. Some will poke your assets bi-annually with a stick and charge you 1% of the total balance to do so. It can be a confusing world because the way you engage with and compensate financial professionals varies, and it’s not always intuitive compensation methods that may sound more expensive at the outset, like paying a flat fee for guidance that can be thousands of dollars can actually be more affordable in the long run than compensation methods that sound on the surface less expensive, like paying 1% of your total assets every year.

And in the DIY personal finance hobbyist world, working with a financial advisor is heresy the thought goes. You can spend a weekend learning what you need to know, you should never pay someone else to do it for you, but sometimes you really do need professional guidance and the stakes for your financial future as we know it are high. So what’s a Rich Girl to do?

We’ve decided to do the ultimate deep dive on this very topic featuring none other than my friend Shelby, a member of Rich Girl Nation and a talented Certified Financial Planner professional herself. Shelby, welcome to the show. Now, before I go any further, the information presented is solely for informational purposes. The information statements, comments, views, opinions expressed in this podcast do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. The views or opinions expressed in the podcast are my views or Shelby’s personal views. They do not reflect the opinions and beliefs of the podcast. Its affiliates, my employer, Shelby’s employer, or any other person, and finally, in the most legally fancy sentence ever uttered on the show, the podcast does not undertake any duty to publicly or otherwise update or revise any disseminated information. So take that listener, no duty. Okay, back to the good stuff.

Welcome back to The Money with Katie Show, Rich People. As always, I’m your host, Katie Gatti Tassin, and for the format of today’s show, I’m basically going to ask Shelby to just assumption check me throughout. I’ll tell you what I think and then she’ll weigh in and to be really sure be rounded out today’s conversation. I also sent this material to our dear friend Eric Jones, the CFP professional who joined us for our Traditional versus Roth debate to ask for his take too. So I wanted to get a couple of different professional POVs to round out my hot takes.

Given that there are a few callouts we should start out with first, you might think that only rich people need financial advisors like those with more than a million dollars in assets, and I don’t necessarily think that that’s true. A financial professional can help you avoid the missteps that can make your journey to the million dollar mark take longer and can help you navigate your money situation more broadly. So here’s what Shelby shared. Do you think everyone needs to work with a financial professional?

Shelby:

No, I don’t think everyone needs to work with a financial professional. Most individuals are far more capable of managing their own finances than they would ever give themselves credit for with the amount of information at our fingertips and readily available. Again, I want to asterisk that from trusted sources. Everyone could pretty much do it, but like anything else, it does boil down to your time available to do this and the time and energy that you want to put into learning and studying up on these topics or the convenience cost of paying someone else to manage it for you.

Katie:

To put a finer point on that, establishing a relationship with a professional before your financial life gets really complicated might be a little bit like buying an umbrella before it starts raining here. Eric told me he thinks that everyone can benefit from working with a professional. He likened it to an athletic trainer. Could everyone benefit from being healthier fitter? Of course, some might just benefit more from a coach than others.

That said, there are a lot of professional services that include financial advising, but they can run the gamut in terms of accreditations experience and crucially fees. So we’re going to walk through ’em, but bear in mind that you might hear terms thrown around in real life like money managers, stockbrokers, financial planners and so on. They’re not interchangeable. For example, financial planners are a type of financial advisor, but not all financial advisors are financial planners. Then there’s the kind you really want to look out for, which are those who masquerade as financial advisors, but who really make their money by selling you complicated insurance products, not a comprehensive financial strategy. So Shelby boiled it down pretty succinctly.

Shelby:

The financial advising industry gets a bad rap due to the lack of requirements it takes to use the title Financial advisor. As absurd as it seems, there isn’t a black and white template of prerequisites and therefore it does clutter Google or LinkedIn type searches for advisors or financial advisors when almost anyone can use that title.

Katie:

So it’s important to know that the standards of care that a financial advisor is legally bound to can vary. It used to be that there were two major standards, the suitability standard and the fiduciary standard— suitability was the slipperier of the two. As it said, advisors only had to do what was suitable. Yeah, suitable for you. Though in 2019, the SEC approved a new standard called regulation best interest. Eric told me about this one when we chatted about this episode. Basically, it takes the suitability standard a little further and says advisors cannot put their own financial interests ahead of yours. Still, the fiduciary status is considered to be the highest standard. Now, this can be a hard pill to swallow if you’ve invested with someone who is not a fiduciary and later realized that you were getting less than ideal advice while they took home a sizable commission.

For that reason, I would never work with a financial professional who is not bound by fiduciary standards. Fiduciaries are legally required to work in your best interest. It’s a little like the Hippocratic oath for doctors except usually less life and death. Your favorite question on this journey is going to become, are you a fiduciary? Though, Shelby is going to give us some advice in a little bit about how to ask that question in a way that’s going to give you even more insight. Some people want to work with a professional because they feel like they’d be more comfortable with their plan if they had someone to talk to about their money. On that note, it’s important before you begin this hunt to figure out what it is you actually want. We’ll get into it after a quick break.

So rather than making the call based on how much money you have, the more important question to ask is, what do I need a financial professional for? Because different types consult on different topics. There’s not a one size fits all education or approach. Some financial advisors can help you work on a debt pay down plan, whether it’s for credit cards, student loans or mortgages. Others might help you set up a budget, though I’d argue you’ll probably have better outcomes if you make one yourself. Other financial professionals offer investment advice. This is the most popular question we get. Should I work with an advisor who can help me beat the market or get better returns in the S&P 500? Now, I’m not in omniscient being, but I would say unless your guy is Warren Buffett, you probably have not found the advisor who’s going to consistently beat the market.

Estimates from the American Enterprise Institute peg the number of financial professionals who beat the market at fewer than 5% over 15 year periods. That said, financial professionals can help you understand your risk tolerance and determine an appropriate asset allocation for your age. Then there’s insurance. Now this is the double-edged sword of financial pros. You might need an advisor to tell you that it’s time to get a disability policy or an umbrella policy, but be wary of being upsold into high commission insurance products that are positioned as investments themselves.

Everything I just mentioned, these are areas that might sound like they lend themselves more to DIY and Eric reminded me it is important not to trivialize these decisions when some people would prefer to get professional help with them. Then there are a few areas of financial advice where a professional’s input might go a long way.

The first is tax planning. Keep in mind that tax planning is different from filing your taxes. No tax planning tries to strategically reduce your tax burden. So depending on the complexity of your situation, like whether you own a lot of real estate, a business, something else, a tax professional can provide shortcuts when you are navigating the tax code. Retirement planning is another area, not necessarily when you’re opening up your first Roth IRA, but rather when you’re looking at the finish line of your career, having a professional help structure your drawdown strategy with you or for you can provide valuable peace of mind, or on the flip side, urge you to pump the brakes if their Monte Carlo simulations for your future start flashing red. Finally, you might need help with estate planning. So some types of financial pros can support with transferring your wealth, setting up charitable trusts and figuring out inheritances.

And as you’ll hear from Shelby, her firm acts as the quarterback for things like this. So they devise and they call out the plays that are then going to be passed on to an estate lawyer to execute. So as we’ve said now a few times, financial advisors kind of a catchall term. It doesn’t really mean anything. Technically speaking, the SEC tries to regulate investment advisors, but if you’re looking into a specific advisor to manage your money, the first thing you want to do is ask about their accreditation status. What licenses do they carry? What certifications do they have?

And you probably hear us talk about CFPs a lot. People like Shelby. The CFP is a certain type of certification. It stands for Certified Financial Planner and it basically adds a level of competence and ethical standards to the equation. CFP professionals have to undergo a very rigorous curriculum covering all areas of financial planning. They have to accrue thousands of hours of experience, and they have to maintain ongoing educational and ethics requirements. In the world that you just described wherein anyone can call themselves an advisor, it’s very hard to discern the people that actually know what they’re talking about from the ones that maybe don’t. So when you became a CFP or got your CFP designation, what did you have to do? What did that take?

Shelby:

Yeah, so the CFP standard is and remains the gold standard for financial advisors, and the word fiduciary gets thrown around quite often. So again, I think asking anyone that you’re interviewing, what does fiduciary mean to them, even though you’d think that there’s one definition, of course there’s not. But to get my CFP, the firm that I work for actually requires all of our advisors to have it. So we either have to have our CFP or what we consider A CFP equivalent. So that would be a CFA or a chartered financial analyst, A CPA, so certified public accountant or a JD or a legal, a law degree of sorts. But as far as getting or going through the CFP credential process, there’s four main requirements. So there’s a curriculum at the end of the curriculum, there’s a capstone project, there’s a lengthy exam. I want to say it’s like 170 questions, multiple choice based on case studies, but not necessarily open-ended. And then there’s industry experience, which is one of the key factors here. So even after you go through all of that, you pass the exam. If you don’t have the industry experience, you are not able to use those credentials according to the CFP standards. So the full-time experience is 6,000 hours of professional experience related to the financial planning process or 4,000 hours of apprenticeship experience, which requires meeting additional requirements.

Katie:

So I’m definitely getting the impression from this description that this is a very rigorous process and you have to learn a lot in order to receive this designation and be able to call yourself this or put these letters after your name.

Shelby:

So the curriculum is a big piece of that and where younger professionals or young adults have this in their favor, specifically if they’re still a college student who knows that financial advising is what they want to go into. There are so many programs out there that do offer CFP parallel, I guess we’ll call it CFP parallel curriculum, where you can knock out this curriculum piece as part of your college education before you get your degree, and if you get it all taken care of, you can sit for the exam as soon as you graduate. You’ll dig into the statistics on how many CFPs and stuff there are out there, but it’s a shockingly low number. But yeah, it’s an undertaking.

Katie:

I actually bought all of the CFP books I was going to read them. I thought it would be interesting, and by the third one I was like, I’m tapping out. This is way too in the weeds for me. So beyond your pros certifications in education, the other thing you’ll want to know is how they are paid. Are they going to charge you by the hour? Are they going to charge you a project fee or are they going to charge you an ongoing percentage of your assets? That last one can be the most expensive. It can be the hardest to wrap your head around. So you want to make sure that you know what you are paying and that you are getting your money’s worth, but we’re getting ahead of ourselves.

All of these compensation models are what’s known as being fee only. Now, a fee only financial advisor is the most popular model, and the first type that we’ll talk about is AUM because that fee may be a percentage of the assets they’re managing on your behalf or your total net worth.

Also known as Assets Under Management. Forbes advisor reports that the average AUM fee is 1% of your assets each year. Here’s the problem with that model to be aware of. 1% doesn’t sound like much does it, but it compounds much like your returns will compound. Think about it this way, if you invest in a broad-based index fund over 40 years, you’ll probably get returns somewhere in the 7% range based on historical averages. Now, of course, that assumes you avoid the temptation to try to time the market, which might be a big assumption, but let’s say you do and you achieve those magical average market returns, 7% per year on average over 40 years turns an initial investment of a hundred thousand dollars into about 1.5 million. Now, let’s pretend that you were paying an advisor 1% each year. Now your return is only a million.

Your opportunity cost was half a million dollars. This example is obviously drastic and it assumes that your outcomes on your own and working with an advisor would have otherwise been the exact same. So to fairly demonstrate the opposite side of the coin, consider this if ongoing advice or professional pushback meant that you spent roughly $30,000 less on a bad investment. So think a too nice car that you couldn’t afford, a house that was bigger than you needed a tax deferral that you did not know existed or dogecoin, that also adds up to a $500,000 impact in 40 years. So yes, while paying a sizable amount in annual fees is not ideal, making constant missteps can have a similar if not more dramatic effect. So that’s a good segue to the broader argument for paying an AUM fee to maintain the ongoing consistent relationship. And I would say that the primary reasons you’re going to hear to justify those fees are threefold.

The first is that they may protect you from yourself during downturns. So an example of the aforementioned expensive misstep, a casual investor might panic and pull out at the wrong time and a professional will theoretically ensure that you stay invested. Arguably, this is the most valuable component. So as Eric put it, when there’s a market disaster, you might make a critical decision that causes you to get out and miss the recovery, which has the potential to do far more damage to long-term returns than an annual fee would, right? So that’s the line I’m thinking that they’re going to protect you from yourself.

The second reason is that they might be providing full service planning for you, helping you with your estate planning, tax planning, and more per Eric. These services could potentially offset some of their ongoing fees if they’re helping you take advantage of tax loss harvesting every year that you might otherwise overlook. Now, I’ll add here that many Robo-advisors also perform tax loss harvesting on your behalf, and they tend to operate under AUM models too, but at a lower fee since real humans are not involved.

Now, this third one I find a little dubious given the historical track record, but they might also say that they have access to investments that you could not get otherwise. I don’t really buy it personally. But while that might not be true, they may make sure you’re invested in things that make sense for your age and your risk tolerance. I asked Eric what he makes of this since he is a no bullshit kind of guy, and he told me that for low cost index-based investors, the alternative options that an advisor may access on your behalf might not be all that interesting to you. He categorized the goal of these investments more as reducing the risk of loss as opposed to outperforming equities. However, since many of these investments are more actively managed, they do tend to have higher fees and to be less appealing to the low cost index investors, and not even all firms that charge an AUM fee do so in the same way some firms like Shelby’s assess fees on a sliding scale, so the more money they manage for you, the lower the fee tends to go. And like I said, typically you’re going to pay an AUM fee for a firm that’s offering a lot of ongoing benefits.

Your firm is full service. Yes. What is your AUM fee and what do your clients receive an exchange for it? Do y’all do a sliding scale?

Shelby:

Yeah, so our firm is full service, but I want to decipher between full service and in-house service. The short and quick answer for in-house full service is all of these topics that I’m going to talk about. There are firms out there who have these individuals on staff, so it may be roped into your fee with them. It may be a la carte menu of additional type of expenses depending on what your needs are. But a full service firm in its entirety is going to focus on more than the investment assets. So at my firm, we operate using these core planning modules is what we call them. So first we’ll start out with cashflow, debt and retirement planning. So three key features for daily life and then making sure we’re on the right path to retirement. We’ll take a look at a previous estate planner just ending estate planning documents or estate planning needs for younger clients if they come in with zero estate planning documents.

We’re laying out what the strategy looks like for current net worth, and then we’re reviewing this on an annual semi-annual basis to make sure everyone listed is still appropriate. From there, we kind of talk about tax planning and lay out any sort of tax planning strategies. We’ll kind of lay out the strategy of what we’re thinking, bounce it off as more or less of an idea. But at the end of the day, what we’re trying to do is minimize billable hours for these outside professionals. So we’re trying to lay it all out and save our clients some money versus having these same meetings with every other type of professional out there. And two other areas that we focus on are risk management, so life insurance, disability insurance, property and casualty insurance review. We take a look at all of that and make sure there’s either no gaps in coverage or we’re not missing a financial need there, but we don’t sell any insurance products ourselves.

We connect our clients and kind of quarterback the dealing with all of these other people or the introductions. And then finally, strategic business planning, whether it’s working with doctors with partial ownership, dentists, orthodontists with partial ownership or a family business, we’ll take a look at all of those pieces of the financial picture as well. Okay, so assets under management. Our firm operates a little differently than AUM-based advisors. So in the traditional sense, these fees are in the one to one and a half range, but it can vary depending on the pedigree of the firm, and for all intents and purposes, they can charge for the most part whatever they want. So taking a peek at what those fees are and making sure you have a harsh understanding of what that looks like. Our fees are based on net worth or an individual’s total assets minus their liabilities.

So the way that we’re able to structure that, because we’re taking a look at the full picture, we’re actually able to charge about 50% less than the majority of our competitors out there on a higher number, on a bigger number, not just the investment assets. So it’s not quite a sliding scale, but it is completely transparent scale. So our firm, particularly we post our fees online, which I think is a huge green flag. We don’t see that for many other firms out there in the industry, which to me typically hints at their fee structure, either A being high and they don’t want you to know the full scope of it, or B, having it be negotiable where the bigger the fish you are, the more negotiating power you have versus someone else who’s looking to just kind of dip their toe into the financial advising world.

But for the purpose of this podcast, our fees are listed online. So $0-$7.5m are 40 basis points. $7.5m-$15m of net worth is 20 basis points. Above $15m, we drop down to 10 basis points, and above $30m of net worth, we’re talking ultra high net worth family office type clients, whey’re looking at 20 basis points on our fee structure. The benefit of looking at it from a net worth perspective versus an assets under management perspective, and you all can do the math for yourself, but it allows us to remove many different conflicts of interest or many potential conflicts of interest.

Katie:

So it allows you to remove conflict of interest to do it this way. Why? Can you tell me an example of how this type of structure would tamp down on those types of issues?

Shelby:

Yeah, absolutely. So for example, and we’ll use John and Jane Doe for the sake of the example, but John and Jane Doe work with a AUM based financial advisor. Let’s call him Jimmy. One of their lifetime goals is to pay off their mortgage before they retire and kind of sale into retirement debt-free. But in working with Jimmy, in order to do so, it may require them to withdraw cash or some of their investible assets from their taxable brokerage account that’s managed by Jimmy. If I’m Jimmy and I’m on an assets under management type of a fee schedule, he may or may not advise them to do this even though it’s in their best interest or it’s going to allow them to sleep at night in retirement because it would decrease his bottom line at our firm. This example would be a non-issue, removing assets from one line item of the net worth to cover a liability, which is another line item on the net worth, and they’re netting each other out.

So why not allow John and Jane Doe the peace of mind to pay off their mortgage in retirement if they truly are going to lose sleep? Now, this may not be the best example. If they’ve, as Katie’s always referred to, locked in on a golden handcuffs type mortgage at two or 3%, we will definitely lay out the options on whether we advise doing this or not, but at the end of the day, it’s John and Jane Doe’s money, and if this is what they want to do to sail into retirement, absolutely we’re going to help them take care of it.

Katie:

So that’s AUM based advisors. So moving on, we now have the hourly model where you can pay someone for their time. This is how my lawyer and accountant charge me. I say, Hey, I have a question, or Hey, I have a contract that I need you to revise and they bill me for their time. The average hourly cost of a financial pro is around $250 per hour. This is a fairly straightforward way of paying. Finally, you have a project-based fee. Maybe you want someone to set you up with a comprehensive plan that you want to implement yourself. You might even have an idea of what you should be doing, but you just want someone else to fill in the gaps. Check your work slash make sure you’re not committing tax fraud. The average fee for a plan is around $2,000. Now that sounds like a lot, and it might be depending on what you need, but in the long run, $2,000 one time is a hell of a lot less than half a million.

So remember how at the top of the episode I mentioned, it can be a little counterintuitive how the pricing works. That the option that will almost definitely end up costing more in the long run sounds more affordable at the outset, and the one that sounds more expensive can actually be more cost effective. Yeah, that’s kind of the deal with the project-based. Sometimes firms will combine the project-based model with hourly checkups where you pay by the hour, so you’re just paying for what you need as you go regardless of what you choose. So an AUM, hourly, project-based, you are likely going to be better off than if you go with a commission-based financial advisor, and I’ll tell you why after a quick break.

Now, these are the second most common types of advisors, but for reasons I will explain, they’re also my least favorite. These financial advisors earn their income through sales commissions via third parties. So they’ll advertise themselves as free or at a lower cost for their advice or services, but then they’ll get the majority of their income from selling you stuff. Remember the term fiduciary. Most commission only advisors are not fiduciaries. Some do exist, but most are not. They’re not mandated to work in your best interest. Instead, non-fiduciary advisors are essentially salespeople for investment platforms or life insurance. Sometimes you need to buy that service anyway, so it makes sense, but this is not the individual that you want pouring over your estate plan or determining your asset allocation. Shelby, are these the folks that are giving y’all a bad name?

Shelby:

Yeah, absolutely. Without throwing anyone under the bus, yes, but advisors with compensation linked to their commissions, whether it be insurance or investments or some other purchasable product, there is a growing concern and conflict of interest on almost every occasion. So the fiduciary boundaries, and I may or may not have made up that word, but the fiduciary boundaries there are putting a client’s interest ahead of your own, but that gets really blurred when your best interests may also benefit my pocket or my compensation by being boosted by product sold.

Katie:

Okay, moving on, investment advisor representatives and RIAs, you may have heard the acronym RIA before when talking about financial advising. That stands for Registered Investment Advisors. These are companies that provide financial advice as fiduciaries, and each individual rep is called the investment advisor representative or IAR. Same letters organized two different ways you get the idea. IARs focus specifically on securities, so think stocks, bonds, mutual funds, and so on. And an IAR will offer you advice about different investments, oversee your investment accounts, and advise on investment strategies. So if you have no interest in working with a financial advisor on your investment portfolio, then an RIA is probably not your first pick, but if you are, RIAs are registered with the SEC or state securities administrators, so they’ll act on your behalf with your interests in mind. IARs get paid in two ways. They’re either fee-based or fee only, but most go by the assets under management fee model.

According to a 2019 survey from RIA in a Box that surveyed about 1300 RIAs, the average total advisory fee was 1.17% and the median was 0.98%.

Finally, let’s talk about the robo-advisor. Robo-advisors will give automated investment advice, so think investment platforms like Betterment, WealthSimple, Wealthfront. This week’s Rich Girl Roundup was about robo-advisors and their fees. So if you want to hear a longer conversational deep dive there, we will link that for you in the show notes. But the TLDR is if your financial situation is relatively straightforward, you can sign up through an investment platform like the ones we just named, answer a few questions based on your age, your risk tolerance, your goals, and then the robo-advisor’s algorithm will invest on your behalf. Some offer additional automated benefits like tax loss, harvesting, diversification, even through socially responsible funds, and automatic rebalancing. Depending on your comfort level, these can be an absolute game changer.

The reason we recommend robo-advisors specifically for straightforward investing is that there are often really low cost options, like 25 basis points or 0.25% instead of the 1% numbers that we’ve mentioned previously. And if you’re not sure which robo-advisor might be right for you, we’ll link a little robo-advisor fee calculator in the show notes that’ll run the numbers to compare, so you can see how much you would pay on your account balances, and if you’re simply dollar cost averaging into the market and you have a long time horizon ahead of you, this is an easy way to make sure you’re on the right track without overpaying. So again, a robo-advisor might be all you need. We ask Shelby to gut check us there. Is there anyone that you think should not go out and use a robo-advisor?

Shelby:

So I think robo-advisors are best suited for traditional investing if that’s all you’re looking to get assistance with, whether it’s just the auto investing of your scheduled recurring transfers or things like that. I think a robo-advisor is a great option. What they don’t take into consideration is any sort of emotion or maybe personal goal setting. You’ll sit down, you’ll answer a few questions on a quiz, and then the robo-advisor will spit out a recommended allocation target. Great, that absolutely can work, but I think most people can do it themselves in the same way. Again, if they’re willing to sit down and take 10, 15 minutes to understand, hey, you can take more risks now when you’re younger because you have compounding and time on your side versus, hey, if you’re a little bit older trending closer to retirement, maybe we should take some risk off the table, put it in more income producing assets, whether it’s individual municipal bonds or fixed income mutual funds and just taking some risk off the table. I think with a little bit of additional education or again, from trustworthy resources, people could do that on their own, but again, it’s a good option for traditional investing if you are looking for any additional financial help, whether it be estate planning insurance, anything like that, a robo-advisor is not going to be best suited for that type of investor.

Katie:

When we talk about who should work with a human and when we talk about when the convenience fee is worthwhile, obviously what the fee is makes a big difference, but how do you think about counseling people who are on the fence about working with a human and who are the types of individuals that you would say are maybe more well suited for it?

Shelby:

Yeah, so the answer here is going to vary by situation and advisor, right? So the simplistic answer is when you’re asset based like you Katie Gatti Tassin, your asset base has grown to a place where you no longer feel comfortable managing it yourself or with the help of your robo-advisor or some other type of AUM based advisor, and you’re willing to pay what we’ve been calling the convenience fee for someone to manage the portfolio for you. To your point, paying 1% to have someone tax lost harvest on your behalf may not be the most efficient use of funds from our perspectives, but for this individual, they may be like, oh yeah, easy money. Let’s absolutely do it. I’m seeing the benefit, or I’m seeing the return or the value add from a tax benefit perspective, and that might be enough for them. So again, it’s a very personal decision at the end of the day on what you’re willing to pay for from a service perspective versus what you’re not.

Katie:

Okay, so you’ve got the lay of the land. Maybe you’ve decided you’re going to opt for a fee-only professional in 2024. Now how do you find one you can trust? While you might be tempted to use word of mouth, remember that it’s possible people in your network don’t realize that they’re working with someone of the poke with a stick variety. Most people recommend or don’t recommend professionals based on qualities that have nothing to do with their professional competencies, but are more about how personable and prompt they are. So all that to say, I would ask the smartest or richest person you know who they work with, and then get a recommendation from that person.

According to Forbes, many professional financial planning associations have free databases of financial advisors, including the National Association of Personal Financial Advisors or NAPFA. There’s also the CFP Board atcfp.net, which can search for financial advisors with a CFP designation.

We’ll link all of these in the show notes and between you and me, since this is an area where we get questions a lot and it feels like we are just giving you more homework by saying, I don’t know, go find a professional best of luck to you, we’re considering building out a more robust solution or recommendation engine to help you work with people that you can trust in a fee model that is reasonable and transparent. But before we do that, we want to get a sense for how much of an appetite there is for something like this and what types of financial questions you want professional help with. So if you would be interested in a Money with Katie financial professional offering, please click the link in the show notes to let us know what you’re struggling with and what you want help with. It’ll help us figure out our own next steps on if this is worth pursuing. But in the meantime, if you found an advisor you feel excited about, you should interview them to make sure they’re a good fit. Shelby had an amazing framework for how to do this.

Shelby:

Now, for anyone who’s even thinking about interviewing a financial advisor, I definitely recommend going through the interview process and there’s a handful of questions that I would absolutely recommend sitting down face-to-face with multiple advisors before committing or sending the dotted line with the first advisor who gives you a phone call.

Katie:

Yeah, walk us through the Shelby special for how you would interview a potential financial professional.

Shelby:

Yeah, absolutely, and I’ll be completely transparent in saying clients or prospects, prospective clients who are interviewing me. I give them the same template on my meeting agenda as well because I go into it fully knowing and understanding that they are likely interviewing other people, and I want them to go into those meetings better suited and more comfortable to ask these questions and losing out to a better competitor than them signing a dotted line on an agreement just because a fee structure is less or it’s a different of service than what they would get when they’re working with me. But I try to break it down into five categories of questions. So the first one being is your fee assets under management or net worth based? This follow-up question to whatever their answer is is is it billed quarterly or annually, and does it fluctuate with market returns?

So meaning if Q1 was really great, you’re likely going to see your second quarter fee be inflated versus Q2 wasn’t so great, and your next quarter fee is going to be less expensive. Is it fluctuating over the course of the year or is it set in stone and you know exactly what that fee is going to be as time goes on? I would say the red flag answer here is if you ask what is your fee, and if the advisor is hesitant to answer, does not know what their fee structure is, that’s a red flag to me. That leads me to believe that it’s either higher than they’re willing to admit or it’s baked into your reports in a way that it’s not easy to understand or break down or even notice when it’s either increasing or it’s being automatically deducted from your investment account.

From there, I would go directly to the advisor and ask them how are they compensated? This kind of rolls into the commission-based piece of it all, so do you receive any commission for products sold, whether it’s investments, insurance, otherwise, if they’re hesitant to answer whatsoever on where their paycheck comes from, that’s a red flag to me. If they don’t understand how their compensation is made up, I would honestly walk away or as a fiduciary or as a CFP, if that’s one of the credentials, that is the no-brainer, add it to the list before you even sit down with anyone, have them outline, Hey, okay, if you sell products, is there a conflict of interest when it comes to my best interest and putting those first and see what their answer is. Another good question, asking the advisor how many clients they work with, again, this answer can be interpreted in many different ways, but for example, at my firm, every advisor A required to have their CFP, but B also limit to working with 40 clients.

The reason why we do that is to maintain the highest level of client service. So when you call I or a team member who you are very familiar with answers, the phone emails are not going to go unanswered for days, weeks, months on end, there’s a human on the other end of the line where you’re not calling up and listening to awful elevator music for 30 minutes to get a balance update. We’ve all been there, but again, trying to avoid those frustrations and providing our clients with the white glove service. So again, that’s a personal threshold. So whether it’s, Hey, I’d really like someone to work with 40 clients or less, or I’m totally cool if their answer is 300 clients fully understanding that I’m probably not going to get the same level of service from the individual who has 300 clients versus the advisor who has 40. Once you understand

Katie:

Some of these high level things, how are you going to be paying them? What types of activities are going to compensate them? Are there conflicts of interest really, I think is the undertone of that question. And then how many clients are they working with? What types of questions should we be asking to understand what types of credentials they have and what is the kind of polite or kind or I don’t know, non awkward way to be like, do you actually know what you’re talking about?

Shelby:

You’re going to find these lists all over the internet as well, right? So there’s a handful of credentials that I would consider and the large majority would consider the gold standard across the financial industry. So number one, when it comes to being a financial advisor or financial planner, a CFP is going to be a Certified Financial Planner, is going to be the gold standard. From there, a Certified Financial Analyst is more or less the gold investing standard, so they’re going to be more in tune with financial markets and a higher level investment strategy is what you’re going to get from that individual. Certified Public Accountant. Again, gold standard when it comes to taxes and tax planning, if that’s what you’re interested in, I would lean towards finding a really great accountant who’s going to help you out because they’re going to lean into those types of strategies and help you out more from that perspective.

Finally, and I think these are terms that are thrown around quite a bit, and they are quite common in the industry, but there’s a handful of designations that are called series licensing. So there’s a bunch of numbers. There’s series 6, 7 63, 65, you name it, there’s probably one out there. These are the most common financial securities licensing. So they do require setting. They do require an exam, but my only red flag there is just buyer beware on potential investments being sold. Just to put this into perspective, at my firm, we do require everyone to be a CFP. We do not allow people to carry their licensing because we are not licensed. We are not authorized to sell any products to any of our clients. So just putting that into perspective and giving an example there,

Katie:

That’s an interesting differentiation. I feel like I have used the word licensed before in order to tell people who ask me for advice, Hey, I’m not a licensed financial professional. I can’t give you financial advice personally, or You can’t pay me to give you help. Right? So it’s interesting that is that word licensing, is that specific to those series numbers that you just rattled off? Would someone say they got licensed with a CFP or no?

Shelby:

No. I’m going to say it’s a very, very small percentage. I do think that that word can be used interchangeably across the designations. It’s going to be used most commonly with these series exams.

Katie:

Gotcha. And what about this question around being a fiduciary? You’ve kind of highlighted that it’s not as simple perhaps as we initially thought it were, and that maybe that’s a little more complicated. How do you approach that question?

Shelby:

In essence, what being a fiduciary means at any point in time, I am always putting my client’s interests and needs ahead of my own. How I lay it out for my clients is I will lay out from a strategic perspective, I’ll lay out the good, the bad, the ugly. I’ll make a recommendation on what I think they should do, but at the end of the day, it’s John and Jane Doe’s money, and if I advise, Hey, your mortgage is at two and a half percent, you guys refinanced in 2021, there’s no reason to pay that off. And they’re like, Shelby, we will absolutely lose sleep if we go into retirement with a debt load. Great, I’ve laid out all of the answers for you. I’ve laid out all of the potential solutions. Let’s go with whatever’s going to help you sleep at night, and at the end of the day, that’s what we’re going to execute on. But it’s my job to lay out everything for you and then for you and us to come to a decision and decide what’s best.

Katie:

What about any other questions around working relationships?

Shelby:

A question that is really easy to answer or should be really easy to answer is, what does an ongoing relationship look like? What can I expect from this partnership? How frequently can I expect to meet with you? That’s a really curious question. There are plenty of clients out there who are like, Hey, Shelby, we want to see twice max in a year. But I would say our status quo is probably three or four times a year in a year that you’re a new client, you’re going to get sick of me with how frequently we’re meeting to make sure everything is up to snuff and up to our standards as far as making sure everything’s in place, at least from a structurally sound standpoint, at the onset of every new relationship. And from there, depending on what their answer is, you can always ask, are you going to remain my main point of contact?

Business development is a large piece in the referral business, whether it’s client referrals or internet search based or I don’t know, phone-based, LinkedIn based these days, is this advisor you and I sitting face-to-face? Am I going to say your financial advisor or am I going to sign you on and pass you along to the next advisor? I think that that’s a very real question to ask someone because the person you’re sitting across the table from you could absolutely build a rapport with, and as soon as you sign the dotted line, they may no longer be your point of contact. Yeah, I think that those kind of round out the questions that I would ask.

Katie:

My goal in life is to become rich enough that Shelby will take me on as a client. I want Shelby to manage my money. That’s where we’re at.

Shelby:

Anything that has to do with money, I mean, do your due diligence. There’s plenty of resources available online. Again, make sure they’re trustworthy. At the end of the day, you want to make sure that your money is with someone who you trust and who you trust is going to work and advise and guide you in the right direction. At the end of the day, we’re all looking to retire early and buy one of Katie’s sweatshirts retired and actually have it be true. So yeah, going into them making educated decisions is incredibly important. But I do think that there is a large subsect of people who can do this on their own, and when they get to a threshold and that’s going to be a personal threshold that they feel like they can no longer manage it, that is a good time to consider beginning the interview process with a financial advisor. If you think you’re already doing the traditional IRA or the Roth IRA or backdoor Roth IRA conversions, you’re already maximizing that 401k, you’ve checked the boxes on the top 10 easy things to do when your income gets to a certain threshold, what’s next? That would be a good time to reevaluate and think about bringing on a financial advisor as a service to your needs.

Katie:

Shelby, thank you so much for joining us today. Really appreciate you laying out some of the red flags. I actually learned a lot, even just from the interview questions that you would recommend asking and the rundown on what designations we should be looking for and where maybe things are sounding fancier than they actually are. One last note I’ll add here. In an earlier episode we did with Chris Hutchins of All the Hacks, we’ll link it in the show notes. He also mentions that you can test the waters by testing financial advisors to see their responses.

Chris:

So you have to really follow these interest tracing rules, but the right accountant will know how this works, which I think is a macro theme. A lot of people are like, Ooh, I want to optimize my finances. Let’s hire an investment advisor. I think the accountant or at certain stages of wealth, the trust and estate planner is infinitely more valuable than the financial advisor. And I say this as someone who previously was a financial advisor. I would say in general, one fun way that I evaluated accountants was, and even if the situation doesn’t apply to you, I would ask them about this particular mortgage interest. I would just interview five accountants and be like, Hey, I have a question. I’m thinking about buying a home and the mortgage balance is going to be over $750,000. Is there any way to optimize this? And two of the five I interviewed said yes, and three of the five said no. And I was like, well, if you don’t, I know the answer. I’m just asking you to see if you know the answer yes.

Katie:

You’re like, if you don’t know about this, then that tells me you’re not as up on this stuff as I would need you to be for what I need you to do.

Chris:

So that is another big area where I just try to find some tax hack optimization that I want someone to be up to snuff on. And if they’re not, then I know it’s probably not the right fit.

Katie:

Depending on how complex your situation is, you could test the waters with questions about being over the income limit to contribute to a Roth IRA and asking how they get around that. You can try asking if they know of any long-term pre-tax accounts they like besides the 401(k) to see if they bring up an HSA plan.

In the beginning stages, you may have to search around for a bit to find the right financial advisor for you. And as exhausting as that can be, it is incredibly important to find someone that you trust, as Shelby said, they are going to be handling your money. After all. This is also why we think it might be valuable for us to help provide that sort of check or network for our community. So like I said, if you would be interested in potential Money with Katie financial services, but from people who are actually credentialed, be sure to fill out the quick form in the show notes and for extra due diligence during your search right now, you can check out their licenses and record on BrokerCheck or the SEC’s Investment Advisor Public Disclosure Databases to ensure you’re not getting scammed.

We’ll link to those in the show notes. We also recommend asking for their form ADV, which will show you any disclosures, like conflicts of interest that they need to make. So we will link more information about form ADV in the show notes too.

And that is all for this week. So I’ll see you next week. Same time, same place on The Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content Officer, and additional fact-checking comes from Kate Brandt.

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