It seems the answer to the question, what does a financial advisor do, depends on who you ask. When I entered the blogosphere about this time last year, I never realized the hostility many in the blogging community have toward financial advisors, I've written about it in past articles.
The press has not been kind to the industry. I've also written that I agreed with much of the criticism. What I haven't seen from the media or parts of the blogging community is an effort to show those seeking help how to find a good advisor.
I've had several intense conversations online and at the recent FinCon conference in Orlando. What I’ve come to realize is the limitation in the understanding of what a financial advisor does for their clients. Most people I talked to think all we do is manage investments. As I've tried to explain, it's much more than that. Some listened. Others did not.
In today's post, I'll share two stories, case studies if you will, of a couple of my clients. I manage people investments and so much more. These clients pay me under the hated assets under management (AUM) fee arrangement with these clients. I also offer a choice in how people work with me.
Like anything dealing with money, the value one receives for the services provided is what matters. If you ask any of my clients if they think the value of my work is worth the price, I'm confident you'd get a yes answer.
After hearing the following stories, I'll let you decide for yourself.
Case study #1
I work with an attorney in one of the top law firms in the northeast. He's married with two kids, both of whom are out of college. John (not his real name) is a transactions lawyer who helps companies merge, acquire, issue stock, etc. He works incredibly hard and keeps long hours.
He was doing his own investing at the time. In the 2000 – 2003 bear market, his funds dropped over 50%. The portfolio was not invested 100% in stocks. He decided to seek help, realizing with the schedule he kept, he was not giving the investments the attention they deserved. We met in 2003, began working together, and have worked together ever since.
I managed his investments and encouraged him to work with me on a financial plan. In my experience, there is way too much focus placed on returns relative to the market. Or a comparison of returns from a coworker, neighbor, or friend. The problem when focusing on returns is there will always be someone who has better returns than you. Also, when you hear someone say they had a return of X and your return is, say, 20% less than X, it raises flags.
The problem with comparisons is you have no idea how the person to whom you’re comparing invests relatively to how you invest. Most of the time, it's an apple to oranges comparison. If you're 50% in stocks and they are 80%, of course, they're going to perform better. In most cases, the conversation never goes past comparing these arbitrary return numbers.
Investing through planning
When investing is based on planning, the return that matters isn't what the market or your neighbors are achieving. It’s the goals laid out in the plan. The plan that matters must be based on your “why.” When I meet with someone for the first time in preparing a financial plan, we spend the first sixty to ninety minutes of that meeting focusing on the “why”; on the values that matter to the client. If we don't establish the purpose, the plan will likely not be successful.
During the planning process, I’m able to understand, manage, and even reduce the risk in a client’s portfolio. We found my client could accomplish his goal of retirement at his chosen age with around a third less risk. Now when we discuss returns, it's about the progress toward their goals.
A second opinion
Because my client is a highly successful attorney in a prestigious firm, he has advisors knocking on his door all of the time wanting to work with him. He screens out most of those calls. When he takes them, that's usually the end of it. A few times over the years, he's allowed advisors to present whatever they were selling at the time. One of those times, it was a “financial plan” from one of the big national brokerage firms.
He sent the plan to me for review. It was a massive binder of boilerplate economic, product-oriented firm speak that had little to do with his goals. It was a very fancy, professional presentation. After a couple of reviews, I finally found some semblance of a financial plan. The solutions, however, were proprietary products (primarily alternative investments) that the firm either managed or comanaged. The recommendation had close to 30% in those products. Commissions were 2% annually and 20% of profits.
On two other occasions, the last of which was a few weeks back, advisors pitched high premium, overfunded life insurance products as a supplementary retirement income vehicle. The first one, which was several years ago, had him paying $50,000 a year in premium. The last one was $100,000. Once again, my client sent those to me for review. These products have some merit in certain, limited circumstances. In my client's case, they do not. He's in great shape for retirement on his terms without these insurance products.
In both cases, I analyzed the programs, sent to him, and we discussed. I never bash a competitor. It's my job to present the facts and let the client decide. When he asked, I explained why I didn't think it was necessary, the high costs, and the risks involved.
The bottom line for John and his wife is this – he knows he has someone he trusts looking out for his family's best interest. We have regular online video meetings. We update their plan annually. His wife knows that if something happens to John, I will be there to take care of her.
During the planning process, we discovered they had too much life insurance. Their agent tried to tell them to convert some of the policies into expensive whole life insurance. After looking at the big picture, we agreed that didn't make sense. We kept the term insurance he had. One of them will be ending in the next few years, and we will not renew it. He doesn't need it.
I helped them start their estate plan, and provided names of a couple of attorneys I'd used with other clients. He had a couple of his own. I told him what I thought he needed. The attorney he hired agreed. The attorney completed the documents, and the plan was in place.
When they moved a few years ago to another state, we made sure to update the plan with an attorney from their new resident state.
We are currently working together on a Roth conversion strategy as part of this year's plan update. He has a significant amount of money in retirement accounts that are fully taxable upon withdrawal. Our goal is to reduce those amounts over the next few years to reduce his taxable income when he reaches age 70 1/2. At that time, the required minimum distributions (RMDs) begin. RMDs take away the choice in how you withdraw money from those accounts.
Reducing the amount in these accounts reduces the income taxes his children pay on amounts they inherit.
Case study #2
The next story is about my client Shelley. I met Shelley and her husband in 2003. Lloyd, her husband, was the second marriage for Shelley. Lloyd handled all of the finances and investments for them. When I first reviewed their situation, they had accounts spread all over the place. Most were in retirement accounts. Though he thought he was diversified, the vast majority of the funds they owned were similar.
We consolidated the accounts into one IRA. Lloyd had two children from his first marriage. Shelley did not have children. She came from a large family from a southern state. She was one of twelve children. Like many families, relationships with siblings can get complicated. Many had already died. There were two brothers and Shelley remaining. She had a good relationship with one brother, and no connection with the other.
When we met to discuss their investments and planning, Shelley attended the meetings but showed no interest in participating. She left all of that to Lloyd and me. That's never an answer I want to hear from a client. It's my preference (and advice) that both get involved and know what's up with the money.
What happens when the spouse who handled the money dies? If the surviving spouse were not involved, it would be difficult for her to manage the finances on her own. Guess what?
Lloyd found out he had esophageal cancer, a tough one to treat. He went to Duke University for surgery and treatment. They specialize in this type of cancer. Lloyd had surgery and treatments, both of which were successful. However, a few short years later, Lloyd died.
Lloyd and Shelley had a will completed with a local attorney. This attorney wasn't my first choice (or even the top ten). But at least they had a will in place. Shelley was, of course, devastated by the loss. She was grieving and now had to take care of everything on her own. She was ill prepared to do so.
Shelley and I met much more frequently after Lloyd's death. She needed help in almost every area of their finances. We got the IRAs changed, and a couple of annuities Lloyd purchased. I assured her I'd be there to help take care of her finances. As much as I tried to encourage her to get involved with the investments, she wanted no part of it. We set up a very conservative portfolio designed with minimal risk.
Shelley had a beloved English lab retriever that made Lloyd's passing a little easier. They walked every day. The dog followed Shelley everywhere she went (typical lab). A year or so after losing Lloyd, she lost her lab. It was a hard one-two punch in the gut. I was seeing signs of her doing better after losing her husband. Now she had to deal with this setback. She fell into a state of depression that I hadn't seen in the past.
Ex-husband and business partner
Shelley and her first husband, George, had a photography business together before they divorced. The two of them remained close friends. She told me the business and friendship were great. Being married? Not so much.
Shelley owned the house where George lived. George was in his early nineties and began to have significant health problems. He had a young artist living in the house who helped care for him. He and Shelley became friends during the process. It lifted her spirits and helped ease her depression.
George's health began deteriorating rapidly. He passed away at age 96 (I may be off, but that's close). A neighbor told Shelley that if she wanted to sell the house, he would buy it at the current market price. And he kept his promise. The additional money from the sale of the home took away any financial pressure Shelly felt. I showed her that with the assets she had, her Social Security income, and RMDs, she would never have to worry about running out of money.
Though dealing with yet another loss in her life, there was a sense of relief knowing she didn't have to worry about money. The fact is, she didn't have to either way. The sale of the house took away any remaining concern she had.
I'm grateful I was Shelley's advisor during these times. Widows like Shelley are targets for unscrupulous advisors. She had lots of them call her after Lloyd died. I told her when they did, to give them my phone number to discuss any offers they had with me. Of course, I never got a call. It did, however, relieve Shelley of having to listen to sales pitches from people she didn't know.
As Shelley aged, I could see some signs of dementia. My mother died of Alzheimer's in 2007, so I was familiar with the symptoms. She was forgetting to pay bills, missed scheduled appointments, and showed other signs that come with dementia. I noticed she was losing a lot of weight. Shelley was a petite woman who at her full weight was maybe 110 pounds. I asked her about what she was eating. The answer – mostly P B & J.
On one occasion when Shelley tried to drive herself to the doctor's office. She ended up in the hospital rather than the doctor's office wondering aimlessly in the parking lot. A hospital employee saw her, talked to her and realize she needed help. The hospital ended up admitting her. That was the beginning of her battle with dementia and other health issues.
The senior advocate
I had another client who hired a senior advocate to help him pay his bills, make doctors’ appointments, and other tasks. I met Linda when she worked with this client. She was honest, compassionate, and went above and beyond to take care of this client. I talked to her about Shelley and asked if she'd be willing to meet. She agreed she would.
Shelley, on the other hand, was not so open to the idea. The initial meeting did not go well. After quite a few conversations, Shelley agreed to hire Linda on a trial basis. The three of us met again and reviewed the bills, doctors, etc. Linda began taking over these things. Though Shelley fought it initially, she was happy to have Linda help. Not only did she take care of the bills, but she also provided companionships once a week for Shelley.
Shortly after Linda started, Shelley fell down her stairs. Once again, she ended up in the hospital. This time, the hospital would not release her to go home on her own. The only way they would do that was if she agreed to have round the clock care at her house. Shelley wanted nothing to do with having people in her home. I called her brother in North Carolina to fill him in on what was happening. He drove up the next day. He, Linda, and I met over Shelley's hospital bed. We told her she had two choices – stay in the hospital or go home with aids in her house. She chose the latter.
One thing I should add at this point was a conversation Shelley, and I had a couple of years earlier. She told me she never wanted to be institutionalized. She loved her house and said that's where she wanted to die. As her condition worsened, I had conversations about visiting continual care communities as an option. Linda had several where she had clients. We offered to take her for visits. She wouldn't hear of it.
Home health care
Shelley reluctantly agreed after understanding the two choices she would go home with the aids. They started as soon as she got back. During this time, I was in touch with her neighbor across the street. She would check on Shelley periodically to make sure she was OK. A few days after hiring the home health aides, I got a call from the neighbor. She said the worker was sitting on Shelley's front porch. Shortly after, she saw someone come and pick her up. Shelley fired the help. This happened a couple of times.
Once again, we had a meeting with Shelley. Linda had relationships with other private healthcare aids that she'd used for other clients. We convinced Shelley to give them a try. Mind you; it was a long, heated discussion. Eventually, she understood the other option was to go to the hospital.
This time, she liked the aids. They built a relationship with Shelley. Unlike the other aides, who sat on their cell phones in another room from Shelley, these girls developed a relationship with her. There was a mother-daughter team who were the primary caregivers. A third and fourth person filled the gaps. Every one of these girls developed a relationship with Shelley.
Once we got this care in place, she settled into a routine that helped her relax. When one of the girls wasn't there, Shelley asked when she would be back.
Linda also found discrepancies in the medications she took. She convinced Shelley to see another doctor who worked with some of her other clients. Once she did, he found pills that likely caused some of her dementia. He changed them and started her on others that completely changed her personality.
During much of this time, I volunteered every Monday at a nonprofit that served the homeless meals on the streets of DC. I left early to stop by and see Shelley on my way. Linda, she and I spent an hour or so together every week.
Eventually, Shelley's health began to deteriorate. In the latter stages, Linda and Shelley’s brother agreed it was time for hospice. They came to the house to provide the care. I was with Shelley, her brother, Linda and the hospice nurse the day she passed. Her most fervent wish came true. She died in her home in her bed surrounded by people who loved her.
I'm convinced getting all of this in place extended her life at least a year.
Do all financial advisors go to these lengths to take care of their clients? Some do. Some don't. I can tell you I would do this with any client who needed it. Is it part of my financial planning agreement? No. Is it part of my investment management agreement? No.
To me, being an advisor means doing life with my clients. It's about relationships.
I can honestly tell you that I loved Shelley. She loved me as well. I've seen too many advisors take advantage of people like Shelley. I've also seen them take advantage of intelligent, successful people like John.
So, let me ask you. Do you think either Shelley or John feel like the fees they're paying me are too high? Do you think either would complain about the AUM fee vs. something else?
These are just two examples of client stories. There are numerous others I could add.
I tell these stories not to blow my own horn about what a great advisor I am. Most of the time when people ask me what advisors do besides manage money, questioners look for a listicle of items. I can certainly offer the listicle. I'm not sure how to put into short sound bites the stories I told here.
My friend and former colleague, Tim Maurer, has a phrase I love when describing personal finance. Tim says “personal finance is more personal than finance.” That's the message I hope you hear.
We can debate compensation methods and investment strategies all day. Working with an advisor is about relationships. It's about caring. It's about being there when you're needed.
All I'd ask of those who loudly criticize advisors is to consider how you can guide people who want help. How about teaching those seeking help how to find someone committed to acting in their own best interest. Help them find someone who will be with them throughout life's journey.
We'd all be better off if we did that, wouldn't we?
Now it's your turn. Tell me what you think?Follow me on social media