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Use These Questions to Help Prevent Bad Financial Advice

April 19, 2024 | General Financial Planning


I recently came across a news article that horrified me. I couldn’t believe what I was reading.

A financial counselor—one who had been trusted to help Gold Star families with their financial futures—abused their trust and defrauded them for personal enrichment.

The families of those who paid the ultimate price protecting and upholding our nation’s freedoms thought they could trust this advisor to have their best interest in mind. Unfortunately, there are many cases in which these professionals put themselves before those they serve.

The challenge is that the financial industry is complex and there are countless ways that firms can operate. There is so much information to sort through and research, and federal employees often feel overwhelmed about what they don’t know.

There are several key qualifying questions that you should be asking an advisory firm before deciding to work with them. This is one of the most important financial decisions you’ll make, and you should be guarded about who you allow to serve your family.

At the end, you’ll find the three P’s test that a firm you’re considering should be able to pass.

Are you a fiduciary?
A fiduciary is one who acts on behalf of someone else and is legally bound to act in their best interest. I believe that it’s not only our legal obligation; it’s an ethical one too.

Many financial professionals are not fiduciaries, and regulation often requires that recommendations be only suitable for you. This is vastly different than what’s in your best interest, and you should know what kind of firm you’re working with.

What kind of families do you do your best work for?
You wouldn’t go to a general doctor for specialized topics like chronic headaches or back issues; you’d go see a neurologist or specialist that is best suited to provide what you need.

Retirement planning is a specific kind of financial planning in the first place, and then combine the complexities of your federal benefits to interweave as well. There’s just too much to get wrong about your financial plan if your professionals aren’t specialized in serving someone like you.

Are you able to help us on matters that don’t involve our portfolio?
The firm should be offering advice on more than just your portfolio. Yes, most of what advisory firms do surrounds your assets because that’s how you tactically implement many planning strategies.

But if there’s no talk of tax planning, incoming planning, healthcare, Social Security, retirement benefits, insurance, etc. then that could be telling.

What will you be doing to help me make sure I’m not overpaying in taxes? How will you help me reduce taxes?
Tax planning is one of the most valuable services an advisory firm can do for its clients. Many financial plans are lacking in this area because it is complex and not a service that is given well.

A simple but common example is excessive capital gains. There are investments that are just not tax-efficient, and we often see people overpaying in taxes. Tax-aware withdrawals, accelerated distributions, bracket management, conversions, asset location, and tax-efficient investments are just some examples of how you can keep more of your wealth in the family.

How can you help increase efficiency in my investments and reduce costs?
Technology has allowed the investment business to reduce expenses substantially. The TSP’s five core funds have been very cost efficient for a while, but the same cannot be said for the Mutual Fund Window (MFW) options.

The core funds are all great funds, but retirees often need more than what’s offered by the core funds, and it’s easy to overpay in expenses if you’re not careful. I’ve seen advisory firms become wedded to a particular manager or certain mutual funds because they’re used to them, and often ignore the expenses. This can create a drag on your performance. I believe in utilizing low-cost investments when possible so that you can keep more of the growth that you earn.

What portion of your clients are federal employees? How well do you know FERS and how it impacts the rest of my financial picture?
Your federal benefits package is full of complexities, and I’ve seen all sorts of issues over the years from a lack of knowledge. Making the wrong choices could cost you greatly, from losing FEHB, losing pension benefits, overpaying for insurance, losing money in the markets, and so forth.

Who will I work with? How many people are on your team?
Well established firms will often have a team. My time is best spent meeting with clients and providing them with guidance, but I have a whole team that helps me serve our clients.

Why is this important? You should consider how much time your advisor will be able to give with you. Sometimes advisors might be a bit behind on answering emails or being able to have appointments.Sometimes the person holding the introduction conversation with you may not be the one who is your advisor. We believe that you should like your advisor, be comfortable talking about personal financial topics with them, and have confidence in their advice. That might not be the case for you if you get passed on to another person.

How can you help me make sure that I’m creating my retirement paychecks sustainably?
Generating sustainable income in retirement is a specialized skill. Ensuring that you have sustainable and inflation-adjusted income during your entire retirement is a critical component of your plan.

Your FERS pension and Social Security won’t keep up with real inflation over time, so your portfolio will need to become a bigger portion of your retirement paychecks as time goes on. The strategies that accomplish this are very specific and require much more finesse than simply investing for growth over 20-30 years.

How often will I meet with you?
This is a big one. Many advisory firms have 300—sometimes 400 clients per advisor. I’ve been in that environment, and I can tell you that there is very little time that is dedicated to each individual client. You may get a meeting once a year that lasts about 30 to 45 minutes and your advisor may not be very available until your next annual meeting. Maybe this is just what you’re looking for. In that case, great. Just understand what kind of service you can expect to receive.

Do you accept everyone who wants to work with you?
This goes in tandem with the previous one. How many clients can an advisor serve? Hundreds. But how many can they serve brilliantly, learn about your family dynamics, your preferences and personality…that number is much less. And that’s the key point: there are lots of different ways that advisory firms serve clients. If you get the sense that you’re being rushed into a decision, that should be a considering factor.

How do you get paid? Do you earn commission?
Let me start by saying I don’t have any issues with professionals earning a commission. I paid a commission when I bought my life insurance, my house, my car, etc.

But you should understand if someone has a financial incentive to get you to commit to something. This unfortunately means that an advisor may recommend one product over another. This doesn’t mean they didn’t believe it was the best for you, but rather it is simply a detail of which to be aware.There are firms that are considered “fee-only”.  This means the advisory firm doesn’t have a financial interest in whether you prefer a Fidelity fund over a Vanguard fund, or if you love American Funds and only want to use that—that’s your prerogative. I would hope that they have a professional opinion about that, but your advisory fee to them doesn’t change with one vs the other.

Our clients feel very comfortable with this arrangement because they can be assured that we’re not being influenced with a “higher payout” by recommending one investment over another. The only thing we “sell” is our advice and a relationship with our firm.

The last point I want to make about this is to note that fee-based is not the same as fee-only. Fee-based is when an advisor can do both—collect an advisory fee for their advice and collect a commission for their recommendation. Again, not good or bad, just something that you should be aware of if they’re switching hats.

What’s your investment philosophy? Do you believe you can beat the markets?
There’s a big difference between investment management and investor management. We can’t control the markets, but we can control how we use them. The right asset allocation for your objectives is far more valuable than picking the hottest investments. Different retirements with the same portfolio returns can have completely different end results.

If the firm you’re looking at is predominantly focused on your investment allocation, consider if they may not be able to provide value in all the ways that may be available to you. Your investment allocation is important of course, but it’s not important enough if you get the other key parts of your plan wrong.

Are we stuck in a contract with your firm?
While there may not be many captive advisory contracts out there, there are certainly captive investment products. This goes back to understanding what kind of relationship you are getting into. A lot of investments have lock-up periods that require you to leave your money invested for many years.

This is something you need to know before you work with a firm to help you meet your goals. If you end up needing to change the investment sooner than the period, you might find it comes with costly penalties for doing so. It should be just as simple to get out of a relationship as it was to get into it.

What happens to us if something happens to you?
A good financial planner will always be looking for potholes coming down the road for their clients. This should include making sure that their clients are well taken care of if something ever happens to the advisory firm too.

Is your advisor going to be around for your full retirement? What kind of succession plans are in place? What if something happens to your advisor, what happens to you? In my firm, we’ve built relationships with other trusted advisors who could step in. Our clients can of course go anywhere they want but we know how important it is to have a trusted relationship and we wanted to help give you a head start.

Finally, you should ask yourself: has the firm passed the “3-P’s Test”?

Process – Has the firm demonstrated that they have a process for working with their clients?  

Are they a research-based firm? How did they develop their philosophy and planning tactics? Is there longevity in their firm that supports that their planning is working for their clients? What systems do they have in place that help cut down on things that will interfere with your success? All important questions.

Profitability – Has the firm quantified how they will be adding value to you over time?

The only way this works for you in the long run is if the relationship is wildly profitable for you. Has the firm taken the time to determine whether they can do that for you, and then quantified the value they provide? And I don’t mean “what’s the average performance for your clients”, because if they can answer that question, that means that clients are all in the same investments and you’re not getting customized planning.

Not to mention, investment performance is only one of the variables that influence your success, and good performance cannot prevent failure that comes from bad planning.

Personality – How do you like their personality?

Are they a good fit for you? Are you for them? Do they present information in a way that resonates with you? If married, do both of you feel supported? Do you like each other and enjoy our conversations together? Will you be comfortable discussing personal topics around money? All important questions.