Episode 15 – How to choose a financial advisor

Episode transcript:

[musical intro]


Welcome back to Fund Your Future with DRS. And today we have a great guest in our podcast studio to talk about how to choose a financial advisor. And before we get started, we just want to remind listeners that this podcast is provided as a public service, but it is not legal interpretation, nor does it constitute as an endorsement or recommendation.


Thanks, Jenny. Super excited to have Bruce from our contact center here. Bruce has a background previously working as a financial advisor and so we thought it’d be great to just pick his brain a little bit about how people might go about choosing a financial advisor. So. Bruce, welcome to the podcast. Could you just introduce yourself to our listeners?


Yeah, good morning. Thanks for having me, Seth. So interestingly, I was licensed in this business. I became a registered representative on September 5th of 2001, and about a week later the world changed, which despite being, you know, a national tragedy and a pivotal event in history, was also a really bad time to be a stock market investor.

So since then, I’ve experienced, you know, some good years and four really bad down stretches of time. I’ve worked at some of the largest firms and some of the smallest. In general, I can tell you that working in a community environment for, you know, like a credit union, something like that was the best part of my job.


Awesome. Jenny and I are just going to ask you a few questions and hopefully pick your brain a little bit about what a public employee might be thinking about if they’re looking for a financial advisor or why they might not need one or why they might need one. So could you just tell us a little bit about like what are some situations where a person might want to hire a financial advisor?


So, I think I kind of look at it in three different stages of life. The first one is when you’re brand new, there’s a lot of good information on our website about life events and being newly hired into the system, but it’s quite confusing when you’re brand new and it’s hard to know the difference between Plan 3 and DCP and who does what and what does it produce.

And it’s very confusing. So perhaps you can do that on the website. Perhaps you talk to somebody who specializes in folks who work in the public pension system or who are going to receive a pension in retirement. A financial advisor early in life helps kind of set the framework. It kind of gives you a roadmap. And there’s a lot of financial advisors who take those appointments all day long with 20, 22, 25 year olds, simply to share what they know.

Second stage of life, I’d say, is mid-career. When you’re a little more focused about what you can afford to save, you’re certainly starting to hope that you can retire someday. But it has not been a priority, right? You haven’t really been looking at it. And generally, people under 50 are not looking at retirement. They’re not they’re not real focused.

They may or may not remember what they signed up for. They call in a lot of times and say, hey, what’s my contribution rate? And if they’re 50 or 55 years old, they’re like, Well, can I increase that? You know? And in some cases you can’t. Right. We have to refer them to Deferred Compensation, something like that. But generally speaking, there’s beginning of career, mid-career.

And then it’s those folks who are hyper focused. “I’m two years, I’m three years from retirement. I really want to retire. How much money am I going to get?” And at that point, we can answer a small piece of that retirement puzzle. We can tell them this is what your pension is. But there’s two other really big pieces of the puzzle.

It’s what’s their Social Security benefit going to be and what can they safely draw on from their investments in their savings without running out of money? And that’s the goal. When you meet with a financial advisor and you’re looking at that trajectory of life, the goal is to make it to your end days and not run out of money.

Nobody wants to outlive their money. So beginning of career and mid-career and then those folks who are either just about to retire or even retired and they really want to get their ducks in a row and understand, “Hey, how’s my future looking?”


So, if I was meeting with a financial advisor, what would be some of the questions that I should ask them to understand one financial advisor from another?


Sure. So I think when you sit down, you want to understand how is their business structured? Are they a fiduciary? Fiduciary is a word that’s tossed around a lot in the business. Most people, even some advisors, don’t really know what it means. Fiduciary is the highest level of, I’d call it ‘client obligation’, which is that you have a legal obligation to always put their interests ahead of your own.

You would think that’s a given, right? Your financial advisor giving advice, your clients interests should always be in front of your own. But in this case it’s a legal standard and it’s codified by certain actions that the advisor has to take. If they’re not a fiduciary and you can ask if their a fiduciary. Typically they’re either a registered representative or a financial consultant.

And what that means is they operate under something called best interest standard. It’s not really a bad thing. It’s just a difference in qualifications, in some cases how they’re going to charge you a fee that can have something to do with it. I think it’s important you ask the advisor: How do you get paid? What is your fee structure?

Most typically those fiduciaries will charge an annual fee or charge a fee that’s based on the percentage of assets that they’re going to manage. Some of them don’t require that you invest money with them at all. Some of them are simply going to give you a consultation, maybe $250 bucks. They answer your questions, they may or may not provide a written financial plan.

I’m a big believer in a written financial plan, particularly as you get close to retirement. So you can ask them, Will I get a written plan? What does it look like? Can I see a sample of your plan?


Yeah, and maybe can you kind of tell us a little bit. What does a written financial plan kind of look like or cover?


So it has a beginning, a middle and an end. It says, you know, this is an accumulation period of life. Hopefully, as you’re accumulating, you get some growth along the way, right? If you’re a patient investor, you typically do. Then there’s that period of time pre-retirement where you’re going to have your maximum savings, your opportunity to really sock a lot of money away.

And then there’s the retirement period. When you begin drawing on those assets, at the same time you’re spending your income, right, your Social Security and your pension. So it gives you a trajectory of spending throughout your lifetime. And as you’re coming up short later in life, because inflation, you know, life changes, things become more expensive. You know, you’re going to be drawing down your assets at a higher rate as you get older where there’s things that we’re going to have to buy when we’re 70 or 80 or 90 years old that we didn’t have to buy when we were 45.

So, the goal really in that financial plan is you don’t want to see zero, you want to see a trajectory and a chart, and it goes to 99 and a half years old and there’s still $50,000 in the bank. That’s really what the goal of the plan should be.


We had talked a little bit before we started recording about different scenarios, like you have one financial plan, but that it might be important to take into consideration other parts of your life. You’re married, you have a spouse or you have a child with a disability. Or like… Could you talk a little bit about variations on that plan or how that might look?


You’ll probably remember Seth, who was the boxer that says everybody has a plan until they get punched in the face?


Mike Tyson.


Mike Tyson. Yeah. So the best the best laid plans, right? You can have a really good written plan. There’s almost immediately divergence in retirement. And one of the big changes I think that people don’t anticipate is that we’re not going to live forever. And it’s very infrequent that a spouse, you know, died lovingly in each other’s arms. Right?

We typically are not going to pass at the same time. That has a financial consequence. When one person dies, the certainty is that one Social Security check goes away. Two people, there’s two Social Security checks. One person, there’s only one Social Security check. Fortunately, you get to keep the higher two and depending on the pension benefit that they chose, they might also lose a pension benefit.

So imagine if your spouse is collecting $3,000 in pension and $2,000 in Social Security and they die. Well, that’s $5,000 a month of income that’s gone away. That has a dramatic impact on a financial plan. So you really need three plans. It’s “what if we both live a long time,” which is great. We’re very fortunate to live, hopefully you have a healthy, long life, but it gets more expensive.

Life gets more expensive. And then the other two plans is “what if spouse dies first?” And “what if spouse B dies first?” And the longer that period of time that there’s just one spouse, the greater the potential deficit. And the fact is that, you know, two people cost X number of dollars and one person costs cost X -20%.

Right. Life doesn’t just chop in half. Your expenses, don’t get chopped in half just because there’s one person. So to have a big hit in income early in retirement and have to live with that deficit for a long period of time, that’s where I really see people get hurt and frankly, you know, we get phone calls from people who call our death and disability team and they are very surprised to learn that the pension benefit ends.

Yeah, they thought that their spouse had picked an option that would provide that continuation. And unfortunately, that’s not always the case.


That reminds me as well of another conversation that I think we often hear from people, this idea that their financial plan is just to keep working. Right. And that isn’t always a plan that can be executed on depending on the person’s physical condition, their mental condition. You know, at some point we’re all going to have to stop working and thinking about what that plan could look like.

Talking to somebody who’s a professional might help put some realistic parameters on what that looks like. I had one follow up question I wanted to make sure we touched on was – I think sometimes people get worried about meeting with a financial planner because it’s going to cost them money. You mentioned $250 and other people are worried about having the fees that are associated with that.

Could you just talk a little bit more about the different ways you might pay for a financial planner?


You bet. Yeah. And I don’t think it’s something you have to be embarrassed about. I think you walk into the meeting and say, I’d like to understand how are you compensated? You know, how does your firm get paid? Typically if they’re a CPA firm or if they exist only to give you advice upfront. Right? They don’t want to manage your assets.

Typically that’s an hourly rate or a flat fee. A lot of people prefer that because what they want is a consultation. A lot of people are pretty much self-directed. They’ve looked at the benefit calculator online. They might have a spreadsheet at home. They feel pretty good. What they’re looking for is confirmation. They want to be told that, “yeah, you’re going to be in good shape.”

And I think that’s…


Did I make the right choice?




Am I going in the right direction with my current plan?


Yeah. And we have people ask us that on the phone all the time, but we can’t tell them that. We can’t, as you know, as contact center reps. I can’t tell you. “Yeah, you’re great.” Right? I can’t offer that opinion. That’s advice. So you really need to talk to a financial advisor that can help create that comfort level or help you understand that it’s not time to retire.

You know, “I’m sorry. You wanted to retire now. You need to work another four or five years.” We’ve seen people make that mistake of retiring too soon, and they find out three years later and they need to go back to work and they don’t always go back to work at the same rate of pay they did when they left service.

So that’s one combination is the fee for advice or just consultative fee. Another one, and this is an older model is commissions where you sit down, you talk, you get the advice, the financial advisor might give you a recommendation, it might include a list of mutual funds. More typical today, they actually have what’s called a money manager, which means there’s somebody who’s going to be buying individual stocks for you.


Okay, That was my guess is that with paying a percentage of a fee, typically comes more with someone who’s said, like you said, a money manager for you, someone who’s buying and selling stocks for you and they’re going to take a percentage.


That’s exactly right. And those folks don’t want to just have a conversation. They don’t want to sit down. They think of that first meeting as an opportunity to get hired. And they should tell you right up front, you know, in order to have this, you know, this ongoing relationship, you would have to transfer some assets into our firm because that’s how we get paid.

The old models, you get paid a commission. You trade a stock, you make $50 bucks, you buy a mutual fund, the advisor gets paid two or three or 4%. That model has basically gone away because people don’t want to think, well, why is he recommending this? You know, he told me to buy Bank of America two years ago.

Now, is he telling me to sell Bank of America and buy Wells Fargo? People have a little discomfort with that. And frankly, just seeing an invoice, you know, you get an invoice whether it’s, you know, on a on a trade confirmation or whatever. You see: “I paid X number of dollars.” That’s not a real comforting fee, especially when the market’s going down.

Right. People are less sensitive to this recurring fee that’s embedded in that investment. So I guess really I distinguish it between people who are just planners and they really want to give you an outline, answer your questions and investment managers where they expect to manage your money. It might be that that financial planning component is integral to their process, but they’re not charging you specifically for that planning.

They’re managing the money and that’s where they get paid. So I think that’s important to ask. Yeah, I think it’s also important to remember that when you do hire those asset managers and frankly, this is much more common with people who have more money, right? It’s not unusual for one of those money managers to have a minimum investment, $250,000 $500,000.

It’s pretty common. I just saw one on the on the web, which popped up like an ad for million dollars and above. Well, that’s not a lot of people. Right? And they charge sliding fee scale. So it might be if you’ve got a $25,000 account, they might charge you 2% a year, which is a lot. Or, if you’ve got a million bucks, they might charge you, you know, half a percent a year.

And there’s robo advisors out there, too, that are charging you 1/10 of a percent. But it’s a robot. You know, you’re getting effectively FAQ’s or pop-up messages. They don’t really know about your specifics. And frankly, part of this has nothing to do with numbers. Part of this has nothing to do with dollars. It has to do with setting a framework, with a philosophy, and understanding that a particularly in middle career, if you do have a plan, it’s important to stick with that plan.

If you understand that you have this investment philosophy, you understand that there is a plan in place. It’s a lot easier to ride out the ups and downs of the market as opposed to what a lot of people do when they’re self-directed is they’re just reactive. They’re constant reactive. And when the market’s going up, they wish they had all their money in the stock market.

And when the market’s going down, “why did I ever invest in the stock market?” You’ve seen that, right?


Yeah. Well, I also think the fee question is important to keep in mind that all investments have some cost associated with doing business, of getting that money invested even in our DCP, our 457 plan. There is some cost associated with doing that because you have to pay the people who are taking the money in, pay the people who are investing the money, people who are managing and watching those investments.

So it is reasonable to understand that there is some cost associated with it, but it’s also important to be able to compare costs. If for most things, we do some shopping around, we do some comparing of costs. And that’s something to probably keep in mind when you’re taking that into consideration.


Yeah, and kind of going back to if people are looking for a money manager – What is sort of a good percentage to look for?


It ranges anywhere from half a percent, on up to maybe one and a half percent. And you want to make sure that that’s all inclusive, right? It’s not a secret. It used to be kind of a hidden mystery. And there was layers of fees. Today based on the industry regulations, it does have to all be disclosed. It might be buried in a 42-page financial plan.

You know, it might be one disclosure that relates to fees. It shouldn’t be a secret. Everybody should know what they’re getting paid. And I think the best financial advisors, they’re not embarrassed to tell you. It’s like we don’t work for free. We have a cost structure, we have legal fees, we have advertising, we have to pay the rent on this nice office space. You know, everybody gets paid, right?


And I think it’s probably also important to keep in mind, Bruce, as you were saying, when people have less money in those accounts, those fees might not seem as big. You know, you’re not paying as much money, but if you do have $1,000,000 an account and you’re paying 1%, you know, $10,000 a year, you’re paying to that person.

And as an individual, you have to decide: Is that worth what I’m paying in for? Or is it a half a percent, I’m only paying $5,000. Are you really comparing those overall costs?


Yeah, I think also some of what you’re paying for is really it’s hand-holding. Yeah, the best financial advisors are a little bit like marriage counselors or therapists in that they’re supposed to help you make good decisions and not just be reactive. So, you know, is a fee at 1% or one half percent fee is excessive? I don’t know.

I mean, what do you get really? It’s, you know, what it costs, but what do you get? And the market frequently goes up or down one and a half percent in a day. You know, so relatively speaking, I think some people are just fee-adverse. They’re never going to pay a fee. That’s where a community credit union or a flat fee advisor makes a lot of sense because you can walk in and get that initial consultation.

Certainly in most credit unions for free, they’re not going to charge you for that initial consultation. If you choose not to hire them, you probably don’t get the full financial plan.


And here’s maybe more of a specific question How often are you paying such a fee? If it’s 1%, is that monthly on your balance?


Typically, it’s calculated monthly, so 1% divided by 12. So you’d be paying that fee on a monthly basis. And it’s extremely rare today that if you leave, you take your money away, that you lose any additional fees. They don’t charge you a walk away fee. They don’t penalize you for taking your money out. So typically you only pay for what you use.


And so if if I’m looking for I’m thinking about a financial plan, how often would I think about updating that plan? Because life changes. You know, I might make a plan at 25 when I’m not married and don’t have kids, and then at 35, my life is completely different. What sort of frequency are people thinking about updating their plan?


So if you’re working with a fiduciary, they’re actually obligated to meet with you once a year. They have to reach out to you. You can decline that request. You can ignore their emails and their four voicemails. You can decline and the fiduciary will mark it in their notes. You know, “customer declined an annual meeting.” But I think, you know, at least every two years you want to look at, you know, Where did we plan to be and where are we actually at?

And I think when life changes, if there’s a birth, if potentially you’re going to have to leave employment sooner, one of you has an illness. We see that a lot. People call up and gosh, they plan on work until they’re 70 and they’re 35 years old and they can’t work anymore due to an illness or some other issue.

So, you know, life happens. I think it’s important when life happens to think about how does this impact my future? Do I need to talk to somebody? And frankly, that’s where there’s other professionals that might come into the mix, too, right? It’s not just a financial advisor. There’s tremendous value in having a meeting with an estate attorney. You can do this online now.

There’s some great services that will conform to your state law and give you a will and if necessary, revocable trust, durable power of attorney, medical direction. There’s people who do this for 250 bucks. Right. But if you want to talk to an attorney, there’s some value in that in understanding exactly what might happen if I die, what happens to all my stuff, having a good CPA in place, or at least a tax preparer, can be incredibly valuable because, frankly, you know what would a mistake cost you on your taxes?

I just saw an ad for TurboTax and it says, Use TurboTax. Don’t do your taxes. You know, this is the whole software was invented to let people do their own taxes. And now they’re saying, well, why? Because people make mistakes and those mistakes can be very costly. The software is cheap. I think sometimes they even give the software away.

Right. But if you make a mistake, it can be a big problem and you may not find out till you get that letter in the mail from the IRS.


Yeah, And I think that’s probably, you know, one of the reasons people think about a financial planner as well as that fear of a mistake. Like, I want to check in with somebody and it’s the same thing. Why people work with a CPA. And I think I was reading a personal finance book a while back and they talked about kind of forming your money team, that the group of people that are helping you with your money.

And I think, you know, if I only have $50 in my bank account, I might not need a money team. You know, I don’t have many players on my team, but it can be helpful to have a coach for your team or a trainer for your team or a nutritionist on your team. Like as your team gets to… I didn’t mean to turn this into a total sports metaphor.

But I think that’s maybe something to consider is different stages of life where, where are you at and what are you thinking about?


It’s nice to know you can just pick up the phone and ask a question, call somebody and have at least some information, maybe not advice provided. If you’re not a client, they’re not going to give you advice, but at least ask the question and maybe be directed someplace to get more information.


Well, I also think that’s a good point about at DRS, we’re here to give you information. Exactly. And we’re not able to give you advice, but there is information that’s going to be relevant for your conversation. What is my pension going to going to be if I quit today or if I work another ten years? That’s totally something that the DRS will be able to provide you or you can provide yourself through the DRS online account, run all the scenarios you want to look at.

But those sorts of pieces of information are maybe different than that actual advice.


Absolutely. Yeah. I think, too, it’s a big part of the plan is that when you meet with a financial advisor, they’re going to ask you, do you know how much your pension is? And we get those conference calls from those advisors. You know, we need to know how much their pension is if they retire next year. If they retire two years later, because that’s a big piece, right?

Social Security and your pension is typically the bulk of people’s monthly income. I think one other thought that comes to mind is that you want to walk out of that first consultation – certainly before you hire an advisor – you want to feel good about it. You want to have established some rapport. You need to be able to answer the question, you know, do I trust this guy or this gal?

You know, do I feel comfortable? Because if there’s not that initial comfort level, it’s just about impossible to take advice. And you can ask them, What’s your investment philosophy? What do you think about stocks? What do you think about pensions? Because you might find out that that person is much more aggressive than you’re comfortable with.


Yeah. Thank you very much, Bruce. We really appreciate it.


Hey, it was my pleasure. My first time in the sound booth. It’s a lot of fun.


Great, Great.


Thanks, Jenny. Thank you.

[music outro]


Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov  that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.

References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.

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