Whether you handle your own financial advice, or you think you aren’t paying for financial advice (hint: you are), or you’re working with an advisor…the question remains: Is Your Financial Advisor Worth The Cost?
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Private Client Capital Group.
Click below to read the full transcript…
Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest eggs secure, with your host Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Welcome back, everybody, to Make It Last. I am happy that you can join us. We are back this Saturday morning at 7:30 in morning. Hopefully, you are awake with your cup of coffee and ready to learn. I’m excited to teach you. Actually, we’re going to be covering a subject that I think is going to be super interesting, which is, “Is your financial advisor worth the cost?”
Much of the discussion these days is whether or not you should have a financial advisor. As you hear more and more news about these tools that are available for you to do your own investing or your own planning and software, the question comes out, “Should you be paying a financial advisor, and what is the value of that? How do you test it?”
I’m going to cover that in today’s show. Before I get to that, I’m actually going to cover some news that had come about some interesting developments in the world of millennials, and their saving rates. We’re going to get into that shortly.
Before I do that, I want to remind everybody that if you are interested in watching this show, we’re actually simulcasting this as a video broadcast that you can go and look at. After the show airs, you can go to our YouTube channel.
If you go to YouTube and search for Make It Last with Victor Medina, you’ll come up on a playlist and a channel that will have ‑‑ I think beginning a couple of weeks ago ‑‑ the video broadcast or the feed that was recorded as we recorded the show.
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There’s a whole library of stuff that we essentially have been putting together over the course of this show, 40‑some odd episodes, and it’ll continue to grow. You might want to go back and listen to that, as well.
Getting on to the news for millennials, before we get on to the topic of financial advisers and their value, I wanted to touch upon a new survey that was released by Bank of America. Bank of America did a survey in 2018. Is Bank of America interested in talking about saving rates? They’re a bank, so yes. The answer is yes. What I want to make sure is that we understand the source on this.
They’re doing a survey and they’re letting people know some interesting things coming up about millennials. I cover this topic, in large part, because, while the greatest number of people that we have as our listeners are the folks that are in retirement, trying to focus on retirement planning, and how to make it last, you all have kids and grandkids. It’s important to think about their future.
We want to know, are they being well positioned to succeed later in life? I’ll tell you, we meet with a lot of clients. They will let me know that, as part of their estate and financial planning, as part as this retirement plan that we’re doing, that there’s a portion of what they have which they know they’re not going to spend or use.
That, when they leave it behind, it’s probably going to become the largest part of the savings in retirement that their children are going to be able to accumulate. They’re convinced ‑‑ and I think with good reason ‑‑ that this might be the first generation not to out‑earn, not to do better than the one before it. It’s for a number of reasons.
We are taxing the limits of how we can generate additional income beyond what was happening generations ago. We have used a dual income. We have used going from one‑income families to two‑income families. We’ve used maxing out our real estate value.
There’s a lot of things that have happened which makes it less likely that people in this generation are going to be able to out‑earn what the generation before has done. Not only just out‑earn for the sake of doing better, but out‑earning for purposes of keeping pace with inflation.
In any event, the clients that come in to see us are thinking about their estate and their assets in a way that is unlike generations before. They’re thinking about what they’re leaving behind and whether or not what they’re leaving behind is going to become their kids’ retirement. Not just an inheritance to be spent, whatever, but is this going to be the basis of their retirement?
Anyway, back to the Bank of America survey. They found out a couple of interesting things. One of them is that one out of every six millennials…Now, we got to make sure we’re speaking the same language here. Millennials is not just anybody with [laughs] a haircut longer than yours.
It’s people who are between age 23 and 37. That’s not me and it’s likely not you. Thankfully, it’s not my kids yet. They’re a whole other generation that’s going to be coming up. Millennials are between age 23 and 37 right now. They found out that one in six of them have $100,000 or more in savings.
I think that is impressive, especially considering, if you do any other research, how few Americans can cover a $1,000 emergency. While that number is nice, one out of six is not a majority. If you look at the rest of the findings in the survey, what you figure out is many, many young people are not making progress at holding onto their cash at all. It comes in, it goes right back out.
If you look at the survey, you have nearly half of the millennials cannot cover $1,000 in their savings. They have $1,000 or less and maybe nothing at all. The share of millennials with zero in savings is on the rise. In 2016 it was only 31 percent, but, in this survey, it increased by 15 percent to 46 percent. That’s nearly half of the millennials have zero in savings. Zero in savings.
There are other numbers in here talking about how much they’ve been able to save, Bank of America going on there, older millennials, the younger millennials. Generally speaking, the findings are that things are looking worse over time.
I think what we have to focus on is how to fix the problem because I don’t know where it came. I don’t know if it’s in part because parents have provided too much and not stressing the need to have a rainy day. I don’t know it’s because this generation has not had to live through rainy days and real heartache around money issues.
You look at the generations before. If they weren’t directly involved in The Great Depression because they were the earners at that time, they were impacted by that, between that and World War Two, they were impacted in a way that said, “We really do have to think about rainy days.”
Chris Hogan, which is an individual that runs a separate radio show broadcast, has a saying that, “If you live today fake rich, you will be real broke in the future.” I think there’s a lot of wisdom in that because this generation of millennials really is living fake rich today.
This is the generation that has to have the newest iPad, an iPhone when it comes out, has all of the bells and whistles to their plan. There’s almost no tampering of satisfying a direct need. We have no delayed gratification that we’re teaching as a function of it.
Look, I’m as guilty as the next person, as I try to figure out how to provide for my kids, who are not in the millennial stage, but they are at the beginning of their lives, trying to think about money, material items, saving for a rainy day. I do my very best even though I’m dealing with teenagers [laughs] sometimes. You know how that can go.
I do my very best to try to teach that to them in a way that would help them not be one of the statistics that is there in this Bank of America survey ‑‑ how to save, forced savings, a lot of the behavioral things that I think impact that which is forcing people to save and having it not be something that they have to think about, that it’s automatic. All of those, I think, are tools and techniques.
Victor: Maybe we’ll cover than in a future show, but interesting to know where we stand that from last year to this year, we’re seeing an increase in the number of people with zero in savings, notwithstanding the fact that we are in one of the greatest economic expansions in history, even when the market crashed over the last couple of weeks or so.
Anyway, when we come back, we’re going to cover the main topic for today, which is, Is Your Financial Adviser Worth the Cost? Stick with us, we’ll be right back on Make It Last.
Victor: Welcome back to Make It Last. We’re talking today about whether or not your financial advisor is worth the cost. It’s interesting to me because we have to make these decisions all the time when we bring in professional services.
Most of the time, the cost is not something that we have to bear if we go to see a doctor. Most of us have health insurance. We go in, we pay a co‑pay, and we don’t have to try to figure out whether or not our professional giving us medical advice is worth the cost. It happens to be just rolled in. We don’t think about the cost too much.
When we visit with a lawyer, there really isn’t an ongoing cost for most of those transactions. Whether you’re doing estate planning or helping yourself get out of a traffic ticket, there’s a one‑time cost. You can make an evaluation on whether or not that is worth the value because it’s a one‑time thing, but in the area of financial advisement, that can be something that’s ongoing.
Because people’s relationship to money is such an emotionally charged area, having people review or determine whether there is value in paying for financial advice and what that could be sometimes is a tainted exercise because the emotional impact of that gets people to under‑ or overvalue what’s going on in either direction.
I’ll give you a couple examples. Because people might think about their money as a limited resource, every dollar spent is not a dollar saved. They’ll look at it, a very straightforward decision, and say, “Well, it’s never worth paying anything for financial advice because that’s money that I could keep and I will do it on my own.”
On the other end of the spectrum, people can say, “I know nothing about my financial life. I know nothing about financial advisement. I’m willing to pay whatever it takes. In fact, I’m not even looking at the cost.” Therefore, they’re on the other side of that spectrum, not really realizing what the costs are.
I think that the right answer is somewhere in between. You need to know about what the costs are for retirement, specifically the financial advising, and you need to understand whether or not that’s valuable. You can make your own determination for that.
This is an area, I think, that has become more charged because of all of the advances in software and solutions that are out there that are sort of do‑it‑yourself. Probably, the closest analogy for this is in tax preparation.
There was a point in time where either people prepared their own taxes because they felt comfortable enough to do that or they visited with an accountant or a tax preparer, but, over time, TurboTax has come out and they made it a computer driven system. Then TurboTax went to zero dollars to prepare your federal return, or state. I can’t even follow the deals these days.
People started to make the decision around the software area. They say, “Well, it may not be worth paying for the professional advice that I’m receiving. Maybe I ought to take a look at not doing that any longer.”
Same thing happening in the financial sector. You get to the software programs, betterment and wealth fund. All these people paying tons of money in advertising costs to be on shows, to pay for commercials. Basically, I think you know that you don’t need to pay for financial advice and the question becomes, “Are they right?”
Are they right? Let’s think about the types of financial advisors that exist out there before we try to paint them all with the same brush, whether or not it’s worth paying for. The first financial advisor that you ever encountered in your life was you. One of the types of financial advisor is you, trying to figure out whether or not you are the best financial advisor in your life.
I would probably urge you to listen to the rest of the show, and to think about the value of financial advice, and see whether or not you’re bringing this in your life. Are you providing the values that we’re talking about?
If the answer is yes, that you’re providing all of the values that we’ve discussed, then probably, since the cost for that is zero or nearly zero, it might be worthwhile for you to continue; but, remember that there is a cost associated with you being this person.
The cost can be time ‑‑ the opportunity cost that comes from what you could be doing otherwise ‑‑ and certainly not understanding where your limitations are, how far you can go. You say, “I’m bringing value to this in the way that I can do asset allocation, investment advice, decumulation, anything along those areas.”
You answer the questions, “Yes,” but you don’t actually know what a great answer to that question looks like. You are half‑answering the question, why I’m doing these things, but are you doing them well, and are you capable of understanding what doing them well looks like. First advisor is you.
The other advisors that are types that are out there that fall into categories of, “Eh, I’m not really sure that they are great,” are going to be people that are one‑trick ponies. We would look at somebody who is just purely an insurance agent.
Somebody that works for an insurance company like one of the big companies, MetLife or Northwestern Mutual, or something like that, and those people that are independent, but they’re really insurance only.
We can spot these people coming down the pike because these are the individuals for whom every answer for any financial question is, essentially, the purchase of another insurance product.
Whether that’s, “You need a whole‑life policy,” or, “You need to buy more term life,” or, “You can save for your retirement and tax rebates with an indexed and universal life insurance policy or an annuity.” Basically, everything looks like a nail to them because all they’re carrying around is a hammer.
Those people, in terms of their financial advice, once we start to talk about how they get paid and why they recommend what they do, probably fall into the category of people not being worth working with in terms of putting your financial life together.
Another area has to do with a broker. I want to distinguish broker from an investment advisor because a broker is essentially somebody that works for a broker dealer, where their loyalty is to their employer. They’re driven by recommending the stuff that the dealer’s holding. You see a lot of the advice that comes out being based on what they’re trying to move at that time.
Because you don’t know what their sales goals are for any given month, and you don’t know why they’re recommending what they do or, at least, you can’t trust from some level of independence that what they’re doing is purely in your best interest, it’s hard to justify the cost of somebody that’s purely a broker.
There are some people that straddle both worlds. They’re insurance agents and they’re brokers, and it’s like being doubly wrong on life. You probably want to step away from those folks as well. In the last category of financial advisor that we would warn you against is somebody that doesn’t focus in your area, or a non‑specialist.
Listen, I spent part of my life as a lawyer and part of my life as a financial advisor. In the world of being a lawyer, I focus exclusively on the area of estate planning and elder law asset protection planning. Here’s what I don’t do. I don’t fight traffic tickets. I don’t go to court. I don’t handle divorces, landlord‑tenant matters, real estate transactions. I don’t do any of that.
The reason why I don’t do any of that is because it’s not my focus. I don’t serve my clients by doing work in that area. They’re done a disservice if I try to focus in that area. I just stay in my lane, doing the thing that I do really, really super well.
You want to import that same concept onto financial advisement. There are people that excel at accumulation of wealth. There are people that excel at planning around debt. Physicians trying to pay down debt, education funding, and how do you do that. Those are specific areas. My focus happens to be in the area of retirement. I would do the show and talk about these topics.
Victor: I don’t really venture into these other areas, in large part because that’s not my focus. You’re going to have to figure out what you need ‑‑ most people listening to the show are going to need retirement planning ‑‑ and then trying to figure out whether or not the person that you’re working with is focusing in this area.
Now, listen. When we come back, I’m going to talk about how people get paid so that when you marry what they’re doing with how they get paid, you can figure out whether or not it’s worth the cost. Stick with us. We’ll be right back on Make It Last.
Victor: Welcome back to Make It Last. We’ve been talking today about whether or not your financial advisor is worth the cost. In the last segment, we talked about different kinds of financial advisors that are out there, talking about you being your own financial advisor, folks that are insurance agents and brokers, people that don’t specialize in the area that you need.
We didn’t really spend a lot of time on the kind of people that you should be working with. I think that those folks are going to meet a four‑part test, which I’m going to share with you in a second. To understand a little bit more about figuring out whether or not it’s worth working with them, we should talk about what their costs are.
One of the things that I encounter ‑‑ less frequently, I think, these days now that I’ve been out there in the community sharing this information, but it’s still the case out there ‑‑ is I encounter people that think that their financial advice costs nothing. It’s zero.
“Well, what do you pay your advisor?” “He doesn’t charge me anything.” “Oh, really? Pray tell. Well, how do they keep the lights on over there? How do they pay for the building? How do they pay for groceries at the end of the day?” They are getting paid somehow.
You don’t happen to have that information directly in front of you, but they are getting paid. We need to figure out what they’re getting paid or how they’re getting paid. Then we can figure out whether or not it’s worth it.
One of the largest ways, I think, historically that people have gotten paid for providing financial advice or what looks like financial advice has been in the area of receiving commissions. That’s really focusing on investment‑related advice.
You buy something, and there’s a commission being paid for what you buy. That commission can be a one‑time thing. It can be an ongoing thing. Commissions are available in insurance products, and they’re available in securities or investments.
I’ve been using this a lot in meetings this week. For some reason it’s come up. You look around at what you’re being told you should invest in, and almost everything is X‑ed out. Don’t buy stocks. Don’t buy bonds. Don’t buy mutual funds. Don’t buy life insurance. Don’t buy annuities. Don’t purchase real estate. Don’t put your money in a bank.
When you get that message from somebody, it’s always because of what they are offering in the alternative and whether or not they get paid on the thing that they say you shouldn’t buy versus getting paid on the thing that they think you should buy.
The commissions can come out in the insurance products as a percentage of what you buy in, and it can continue on as what they call a trail. People can receive commissions on an ongoing basis if they choose to.
That money can come out of your money, which is often the case in securities. It can come out of the insurance company’s money, based on guarantees that you’re not going to move the money with the insurance company for some time.
There’s a basis of having surrender charges in any form of an annuity. By the way, also embedded costs for things like insurance. Very few people are in a position to understand what the cost of insurance is inside of the policy.
There is a cost of insurance. There’s a reason why the amount that you put in as a premium does not accumulate to a full cash value. There’s costs to the insurance that are a part of what you’re doing.
Those costs of insurance are costs to the insurance company to pay their commissions [laughs] to the agent that sold you the policy. That’s part of the cost of insurance, is to pay their agents that are out there. We need to understand what people are getting when they’re paying for something in a commission‑base.
It leads to part one of the test to try to figure out whether or not your advisor’s worth the cost. That is look at whether or not there is transparency in their fees. Transparency goes beyond simply letting you know what a commission might be or what they’re charging you in fees.
Transparency goes to how those fees are being calculated, what money it’s coming from, disclosure affirmatively of whether or not there are any other forms of compensation that they’re getting ‑‑ trips, credit towards something like that. Full transparency puts all the cards on the table.
I got to tell you something. It’s a little ugly. [laughs] You go through and you’re like, “Wow. Really? This is all? That’s what you’re getting?” Transparency, by the way, can be in the cost of the investments that you’re buying.
We spend a lot of time talking about expense ratios, and mutual funds, and the cost of the investments themselves, and why high‑expense ratio mutual funds are things that are probably not great for you, but they exist in your portfolio because the person who recommended them to you is getting some money from the mutual fund company in the form of its lovely one charge that they get.
You look at the expense ratios on there and the cost, and people need to be transparent about that. When we do this work, we fully disclose all of the fees that are going to be paid, charged, otherwise involved in your investment so that you know exactly what you’re getting into.
At the end of the day, you got to conclude that those are worth working with us even as we disclose everything. Transparency is a big one.
The next one, which is related to where these people work as independents. If you’re working with somebody that is working with a single insurance company because that’s their employer or a single broker‑dealer, there’s the lack of independence. They have to offer essentially what their boss tells them that they have to offer.
That can become problematic because what you need in your financial advice is Switzerland. You need somebody who is not really picking sides onto what works, which gives them the freedom to pick only the thing that’s best for you. That independence is a major item.
When we added financial services to our existing legal practice, we were compelled to become independent and to stay independent in what we were doing.
In our client’s best interest, which we accepted as their lawyer, we had to ensure that we had the entire universe of things to pick from so that when we concluded that there was something right for that client, it was not because we were unable to offer something else. That independence is a major part.
You want the entire universe of investment options and financial planning skills available to propose for you what is right. If you are somehow limited in that choice because…By the way, you would be if you’re working with somebody that works for a broker‑dealer, one of the big houses with the Ms on them, and the bulls, and all that kind of stuff, UBS, all of these ones, Edward Jones.
If you’re working with somebody that’s in a broker‑dealer relationship as opposed to being purely independent, you’re not going to have the universe of stuff available to you. They’re not going to be able to offer 100 percent of what’s out there, and that’s one of those things that you absolutely, absolutely need. You need that.
Then the other two areas…I didn’t even cover the rest of how people get paid. They get paid on fees ‑‑ fees for assets under management, usually as a percentage of what your investments are. Sometimes, you get a retainer‑based and you’ll get a flat fee for those services and you can certainly judge that.
The two other areas in terms of judging whether or not your financial advisor’s worth the cost is their competency and their focus. Are they somebody with the credentials, like having a CFP and additional designations?
For instance, in my area, which is also related to focus, I have a Retirement Income Certified Professional designation, an RICP, which is basically like a graduate degree in financial planning that focuses just on retirement planning, which is what my clients are needing.
You want that competency in focus to try to figure out whether or not you’re going to get the value that’s associated with working with an advisor, things like investment management, and financial planning advice, asset allocation, rebalancing.
People who specialize in retirement planning tend to focus on decumulation strategies, which are very different from accumulation strategies. Many times, people make a switch in who they are getting financial advice from as they transition in retirement or in retirement because they realize that the horse that brung them there is not necessarily the horse who gets them the rest of the way.
They need to make that switch in order to be able to make it last. We’re not only focusing on those types of things because those are going to be the things that help us out the most when we try to figure out whether or not our financial advisor is worth the cost. Are they independent? Are they transparent with their fees? Do they have the competency to help you?
Are they focused in the area that you need? You make those determinations, and I think that you’re more than half of the way there to figure out whether or not the financial advisor that you’re working with is the right one to continue to work with and worth the cost that you’re paying them. Remember, you always are paying a cost.
Listen, thanks for joining us on Make It Last. I hope that you liked this episode. If you do, go on to iTunes, rate it highly, share it with your friends. Remember, this is available as a podcast afterwards, even as a video broadcast. Go to our YouTube channel, Make It Last with Victor Medina.
Victor: You will be able to see all of these episodes, including all the ones that we’ve recorded in the past and get boned up on retirement planning. This has been Make It Last, where we help you keep your legal ducks in a row and your financial nest eggs secure. Catch you next Saturday. Bye‑bye.
Announcer: The foregoing content reflects the opinions of Medina Law Group, LLC and Private Client Capital Group, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment or legal advice, or a recommendation regarding the purchase or sale of any security, or to follow any legal strategy.
There is no guarantee that the strategies, statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment.
Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. All investing involves risk, including the potential for loss of principal. There’s no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs.
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