Questions You Should Ask

We are committed to education and information for our clients. Below are common questions regarding financial advisors and investing. As always, we are available to you if you would like to discuss these – or other – questions in more detail.

Do I Need An Advisor?

A solid financial foundation starts with having an understanding of your current financial situation. Three areas you should have a firm grasp on:

  • Understand your cash flow and have a budget that works.
  • Know who you owe and have a plan to pay off your debts.
  • Have an understanding of the assets you have accumulated and a savings plan.

The old saying, the certainty in life is change, could not be accurate. Life transitions are times when we need a second opinion. Retirement, the loss of a spouse, divorce, a career change are all events that create financial uncertainty. Contacting a qualified advisor can bring clarity to your situation.

Absolutely. Stress-testing your current financial plan examining where you are today, where you want to be, and what may prevent you from getting there. If you are wondering if you have done enough or if there are things you could be doing to improve your situation, stress testing your plan will give you the clarity you need and provide the peace of mind you deserve.

A good financial plan will illustrate how good, average or bad market conditions can impact your ability to be successful. This will allow you to remain focused on the parts of your financial plan that you can control.

Types of Advisors

If the changes in your life create more financial complexity, more than likely you will need to move up the pyramid to an advisor that manages more than just investments. By doing so, it will allow you to navigate those areas and ensure that the decisions you make maximize your opportunities and minimizes risks. Working with a Wealth Manager or Virtual Family Office typically will give you peace of mind that each of the areas of your financial life are being addressed in a systematic manner.

If your main concern is help with investments, an Investment Advisor or Financial Advisor is likely appropriate. Typically, families that have concerns with other areas of their lives including minimizing taxes, taking care of their heirs, protecting their assets, and maximizing charitable gifts would be better served moving up to a Wealth Manager or Virtual Family Office. If you are unsure if your current strategies are addressing those other areas, a stress test may be a good tool to determine any shortfalls in your planning.

Many people feel that way as it can be difficult to understand how each financial decision a family makes can affect other areas of their finances.  A simple example of this involves managing your Social Security benefit.  Taking Social Security at the wrong time can have a major negative impact on your long-term financial success.  Understanding how each decision affects other parts of your finances is one of the biggest keys in making better choices.  So, to answer the question, it is likely that you have more complexity in your life than you realize, but with the right type of advisor, you can identify your biggest challenges and opportunities and navigate them successfully.

The short answer is not necessarily.  No matter where an advisor falls on the pyramid, one of their primary responsibilities is to provide you with a successful investing experience.  Think of your investment planning as the foundation for your financial house.  If it fails, the rest of the house will not be far behind.  So, investment performance is generally not tied to where an advisor is on the pyramid.  However, most advisors that have done a reasonable job in this area will have a disciplined process that they can explain to you in everyday understandable terms.  If you are not able to have a general understanding of how your money will be invested, it may be helpful to interview other professionals.

Investments are the foundation of long-term success in reaching your most important goals.  However, as you become more successful in building wealth, various other financial issues arise.  A Wealth Manager or Virtual Family Office will have a systematic process to help you identify these issues which generally fall into four broad categories:  Minimizing taxes, taking care of your heirs, protecting your assets from lawsuits and being unjustly taken, and maximizing charitable gifts.  Other unique issues can fall outside of the big four which can be addressed by a qualified advisor, but consistently addressing these core issues will put you in a great position for maximizing your long term success.

The Cost of Investing

Typically, there are three different ways that an advisor gets paid.

  • Commissions for certain financial transactions, such as the sale of insurance products or the buying and selling of securities. For example, if you invest $100,000 into a security there is a 5% commission fee charged to buy the security. The advisor would get $5,000 commission and $95,000 would be invested.
  • Fees charged as a percentage of your assets the advisor is managing. For example, an advisor is managing $100,000 and they charge a fee of 1% annually of the assets managed, you’d pay $1,000 for the year. Often times those fees are pulled from the account on a quarterly basis.
  • Retainer or monthly subscription charge for services. For example, you pay $150/month for financial advice and investment management.

Advisors who are compensated by commissions, typically will provide investment advice when the securities or products are purchased, but will not provide long term planning.  Conversely, an advisor who charges a percentage of your managed assets will usually provide ongoing financial planning and investment advice.

Not all financial advisors work under the fiduciary standard. Investment advisors are bound by a fiduciary standard that places their clients’ interests ahead of their own. Brokers work for broker-dealers, whose interests they serve. They follow a suitability standard, which means only that transactions must be suitable for clients’ needs.

The way that you pay your advisor can significantly impact how much you will pay for changes to your investments.  If you pay a percentage of assets managed, the fee will be on the cost to trade out of the positions, which is very likely minimal.  If you pay commissions, you will pay the full commission charged which can range.

Commissions are paid upfront based on the initial investment, there is no incentive on future growth of the assets. If you pay your advisors a percentage of assets they manage, as the account values grow, the fee the advisor collects also grows.

The Process of Investing

Like any complex project, having an approach to accomplishing it can reduce errors and greatly increase the odds of success.  Investing and financial planning are no different.  The process of working through an investment plan, tax plan, estate plan, asset protection plan, and charitable giving plan would be very difficult to accomplish if an advisor was not using a proven process.  The other advantage of a systematic process is that it allows you to understand how the pieces fit together and provides peace of mind that everything is being addressed.  With these things in place, implementing the plan becomes easier, as you are confident in what you are doing.

One of the challenges with finances is that as your situation becomes more complex, your professional team tends to grow.  Each professional has specific things in which they are responsible, and individually can do a great job.  However, to maximize your opportunities and avoid unforeseen risks, having a process in place that allows your team of professionals to discuss different planning options, can exponentially increase your odds of success.  Some of the biggest planning blunders can be avoided by some simple team communication before implementation.

First and foremost, your ongoing meetings with your advisor should provide reports that show you how you are doing compared to your overall financial goals.  Other tools that can be helpful is comparing your investment performance to the overall markets to ensure you are getting competitive returns.  Overall, good results are about realizing your long-term financial goals, and consistently managing your investments, taxes, estate planning, asset protection, and charitable giving.  If you feel like something is missing, your gut is usually right, and it may be worth talking with some other professionals and stress testing your plan.

One of the big advantages today is the major advancements that have been made with technology.  When it comes to tracking your financial plan and how you are doing, most qualified advisors will have two main tools available.  First, a comprehensive online portal that gives you a complete picture of your current financial status, and a second tool that analyzes your probability of success in reaching your most important financial goals.  The first tool will often track your long-term financial position over time, so you will be able to see how things have progressed over the years that you have worked with your advisor.  Some of these tools will allow you to track your income and spending and link all of your outside accounts, so that you have an automated platform that relieves you from manual tracking.

Depending on where your advisor sits on the Wealth Management Pyramid, they may or may not deal with these issues.  Generally speaking, as you move up the pyramid to a Wealth Manager or Virtual Family Office, these issues will be regularly discussed and managed.  Investment Advisors and Financial Advisors may work with you intermittently in these areas, but generally do not have a systematic process in place to manage them consistently over time.  As you grow your wealth, these interrelated decisions become more important and managing them can have a substantial impact on your planning and level of success.

The Next Step

As you consider the right next step for you given your unique situation, please feel free to contact us to further explore this and other investing topics. At Avery Wealth we believe education and information is key to reaching your goals.

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