What to Look for in a Financial Advisor?

We’re going to discuss what some elements are when selecting a financial advisor. What should you look for? What qualifications should you look for an advisor? Are there fees? What are the goals for my money and what am I looking to do when I invest with that cash?

Summary – Cents of Security Podcasts Ep. 35

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement

Welcome back to the sense of Security podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers. Today, I’m your host for our podcast and our guest is Steve McNamara, CFA at IBKR Institutional Sales. We’re going to discuss what some elements are when selecting a financial advisor. What should you look for? What qualifications should you look for an advisor? Are there fees? What are the goals for my money and what am I looking to do when I invest with that cash? So, we’re going to explore that. Welcome to the program, Steve.

Steve MacNamara

Thank you, Cassidy. Thank you for having me.

Cassidy Clement

Sure. So, to start out as this is your first podcast as being a guest on this channel, what is your industry background?

Steve MacNamara

Well, it’s pretty extensive. I started in the late 80s as an equity research analyst and very quickly went over to the institutional investment management side. Did that for about 15 years, decided to start my own RIA back in 2008 and ran that for seven years, started some RIA consulting and joined Interactive Brokers back in the late 2020.

Cassidy Clement

Nice. So, to go right into our topic today. Our audience usually tends to be a little bit more of the beginning investor. We’re trying to lay the groundwork so that you get the little light bulb and move on to your next step for your circumstance and your investment practice. But what exactly is a financial advisor?

Steve MacNamara

Sure. Great question. So, I like to think of financial advisors almost like a financial physician or a financial coach. They’ll work with you as a client to assess and diagnose your current financial situation. They’ll work with you to develop your long-term goals and then develop a strategic plan to help you reach those goals and then they’ll give you investment advice or advisories advice on products and service to help you execute on your plan, and then of course, they would adjust their strategy, working with you and their tactics over time to factor in changes in the market and changes in your situation.

Cassidy Clement

So, are there any type of licenses that kind of come with being a financial advisor? I’m sure you have to have some certifications and things like that.

Steve MacNamara

You actually don’t have to have a certification, but you have to be registered. In most cases they’re designations above and beyond the basic like a CFA like a CFP, like a Charter Financial Consultant. All these are educational programs which take years and they just really show that the advisor is very serious about his or her learning. And that’s really something given that these programs have been involved for like, 20-30-40 years that you really should look for in an advisor that has a separate designation above and beyond of just being registered.

Cassidy Clement

So, I guess that kind of goes into my other question which is, you know, what qualifies someone to be an advisor? I know there’s a lot of, I guess you could say like specialization, somebody might be estate planning or asset allocation or something with accounting. What exactly would qualify someone? If there’s any examples you can give, maybe for certain scenarios?

Steve MacNamara

Sure. You know, financial planning is broken up in a lot of different categories, whether it’s tax planning or retirement planning, say educational or estate planning. Sometimes they’ll even go down and to help you with your budgets, your bill paying and your debt management. Other advisors focus specifically on investment management. Clearly some of these can be very, very complicated and complex needs. So, you would look for an advisor that has experience, that has successful track record and hopefully has another designation which is an educational complement in any one of these sub-areas.

Cassidy Clement

So, when you’re looking for a financial advisor, put yourself, I guess, in the shoes of somebody saying, hey, I have won the lottery, or I have this little lump of money here. What are some items to look at, credentials fees, types of advisors, things like that?

Steve MacNamara

Very good questions. So, there’s really two types of advisor’s kind of oversimplification. There are advisors that have fiduciary responsibilities to the client, and then there’s advisors that do not. That’s actually a legal definition, and fiduciary means that the advisor has to work in your best interest 100% of the time.  They have to be essentially on the same side of the table as you. Other advisors who are not fiduciaries, they can still be very important. They can still factor in all your needs, but they don’t have the legal definition of being a fiduciary. Sometimes that can come into run into some problems later on.

There are really 4 buckets of advisors. We’ll focus on the kind of the, the ones more to this audience. There are super high in advisors. really complex work and with clients with really complex needs. You need $5 or $10 million to get in.  The more traditional financial advisory practice is sort of with the high net worth. They want financial planning involved. They want lots of contact, lots of interactions. Typically, you need $500,000 and above to access that kind of advisor. But now given technology, you’ve got advisors that can service clients with $50,000 or less with just investment assets. They don’t really do a lot of financial planning. They don’t really have a lot of contact or meetings with you. And then toward the bottom, which is one of the faster growing categories is the so-called the robo advisory. It’s more of a digital platform. It’s strictly investment management only. You do not have contact the individuals, it’s all a digital platform. You can get involved with these for $100 or less and that’s one of the faster growing categories of financial advisory space.

Cassidy Clement

So actually, I was going to bring up the robo advisory, which is kind of, I guess kind of the talk of the town in a way because AI, tech, everything like that is just absorbing all different categories of business, but when it comes to some of these, are there things like account minimums and like meeting minimums or maximums that come with some of these financial advisors, regardless of if they’re digital or not?

Steve MacNamara

So, with digital advisory, the robo advisory? No, it’s strictly investment management, at least at this point. You can start with as little as $10. They’re just managing the money, whether it’s according to a model portfolio, whether it’s AI driven, whether it’s tech driven, you’re just giving them money to manage and whatever the results are, they are.  Typically, you start out that way, at least in the last couple of years than when your needs become more complex, you’re looking for more financial planning. You would probably move on to an individual advisor who you would actually meet with. Typically, the standard, the standard service of an advisor for a client, between, say, $100,000 – $250,000, you might meet a couple times a year. They’ll work on a plan. It’s not a lot of interaction, but they will manage the money. Typically, fees are anywhere from 50 basis points on up to 100 basis points, plus they might even layer on a financial planning fee above that. Once you go higher up the curve, when you’re talking $500,000 and above, typically you have quarterly meetings with the advisor. They typically charge a fee to incorporate all the financial advisory, but sometimes they actually tack that fee on as well. But it’s really according to your needs and the intensity of contact that you want as a client that helps to choose which particular type of advisor would make the most sense for you.

Cassidy Clement

Are there certain things that the investor or I guess in this way kind of the client should establish ahead of time before shopping around for an advisor?

Steve MacNamara

Absolutely. The first step would be to actually figure out what kind of services that you really need. What do you really require for your financial situation? You never want to pay for a service that you don’t need, so maybe it’s only investment management. Maybe it’s only financial planning. Maybe it’s only a subset of the financial planning like tax management. So, it’s really important to understand what you want before you go searching for an advisor. The next step is, more or less, what kind of a relationship do you want? What kind of level of intensity of contact do you want? Do you want to farm out the money and be left alone? Or do you want you to actually have regular contact with the advisor?

Now on the other side, the advisor may require a particular level of contact for him or her to get involved with you as the client. Some advisors don’t want to talk to their clients, they just want to manage the money. So, it’s really important to get that in-sync with your advisor. It’s important to understand whether you have a fiduciary relationship with your advisor and the recommendation would be to ask and ask them to put that in writing. And if they don’t or won’t, it’s probably a good idea to look for a different type of advisor, and then the next step would probably be to focus on what am I willing to pay? Am I OK with just paying an asset management fee? Am I OK with limiting the fees that they’re going to charge me? Do I only want to write a check for a hard dollar fee? So, it’s really important to establish that up in advance. And lastly again, one of the more the more critical things is, what is the advisors background? There are ways to check the advisors background, whether it’s a FINRA Broker Check or the SEC Advisor Search. If that advisor has any kind of regulatory issue in the past that’s listed. And if you see an advisor that has a kind of a checkered regulatory past, it’s almost always a good idea to move on.

Cassidy Clement

So, some of those financial advisors, as you said there, there’s going to be ways to check it out. But some of them could be kind of independent, right? They don’t all have to be aligned with some larger institution or name, correct?

Steve MacNamara

Correct. There are different types of the firms that advisors affiliate with. There are the traditional larger brokerage firms, remember those from the 70s, 80s and 90s, the firms with 15,000 brokers, most of those do not have fiduciary duties to clients. That’s something to consider. They’re more representatives of the firm. It’s a different legal definition with the advent of the RIA practice coming into place, starting really in the 80s and growing. Those are independent firms that are owned by individuals, but they also do have to register with the SEC. So, if they do have a regulatory hiccup, that will be listed on the SEC website. So, we have a very unique industry where anything that sort of goes wrong for us, it has to be reported by the by the individual and/or the firm. So, there is a record historical record of that. So even if you’re independent and you run a foul, the regulatory officials that will show up in the in the SEC database.

Cassidy Clement

If you’re an investor, let’s say who has a few different ideas of what they want to do with their money, or maybe different goals, could you have more than one financial advisor, or is that not as common?

Steve MacNamara

It’s less common than it used to be because most financial advisors are full service now. They do offer financial planning; they do offer different styles of investment management. We still see a number of really high-level clients that actually work with multiple advisors in multiple areas of expertise. Some folks may want to work with an advisor but have a special tax specialist or particular legal specialist, or say an estate planning specialist, because they are kind of unique categories. But typically to make it easier on you, the client, if you want to have one relationship with the financial advisor to handle all your financial needs, it just makes life a lot easier if you can put it all in one bucket.

Cassidy Clement

Now this next question is kind of a “are you ready for a financial advisor type of question”. A lot of my research talked about before investing, making sure that you have enough money in a “emergency fund” because of the potential of not every investment being the greatest investment ever. So, when it comes to that, I’m guessing that refers back to my other question of, you know, what should investors do before they establish the goal of wanting to find a financial advisor. But when it comes to that emergency fund is that something that financial advisors usually recommend, or is there certain number? I know sometimes people say three months’ worth of life expenses, I think it is.

Steve MacNamara

It’s anywhere from 3-6 months of your monthly bills. You should have a cash reserve just in case something goes wrong. People have various views on that, but I think a minimum of 3 months is what most financial advisors…that’s the typical standard approach. Three months of your living expenses held in cash. So, in case there’s a job issue or in case there’s a health issue, you can pay for emergencies.

Once you get beyond that and you have excess cash, that you’re maybe not just earning interest and enough interest on your bank account or your money market account or whatever it is, you want to invest over the long term. Typically, you’ll then look to the markets to do that. The equity markets, the bond markets, you name it. And then typically if you don’t have enough expertise and you’re not comfortable for making those decisions on your own, that’s when you seek out the financial advisor, not just to help manage the money, but also help you plan your financial future.

On the other side of that is just folks who want to do it yourself and they just want to put money into the market, whether it’s in a brokerage account, where they make all the decisions. Whether they put it into a robo account where the system or the AI makes all the decisions, it’s really your choice if you want to manage your money yourself and or pick out a different advisor to help you do it. It’s really the complexity of your needs that will kind of point you in the right direction of which type of financial advisor you should seek out.

Cassidy Clement

When it comes to understanding how the advisor gets paid, and I know you briefly touched on this in some of your answers. What are the general structures of how those advisors or robo advisors get paid when it comes to your portfolio or managing your money?

Steve MacNamara

Sure, there’s several different ways that advisors get paid.  Traditionally in the old days, it was commission based, they were brokers. So, they would sell their clients products and or services and they would get paid in doing so. That can be a potential issue when we talk about the fiduciary aspect of the relationship. Then it moved more in the registered investment advisor world. It was more a fee on assets. So, it could be 50 basis points, 100 basis points on the total number of assets and that’s all negotiable. Advisors typically have the stated fee level, but all fees are negotiable. And then if they do financial planning practice, they’ll they could charge either a sort of a line item per service, they could charge by the hour, or they could just have an annual $2,500, $5,000 annual fee to do the financial planning.

On the lower end, it’s because there’s less intensity of interaction and because it’s a system doing all this, the robo advisors typically charge very, very low fees because the system does all the work. You really want to understand what your advisor is going to charge you and why they’re going to charge you that fee. What are they doing for that fee? Some advisors can, and I see them all the time, they could charge and, you know, on up to 300 basis points a year. That’s a lot of fees. So, what are they doing to justify that? Are they investing for you on a passive basis, meaning they’re just trying to track a market? Or are they actually trying to be active investors to manage your money, so they’re trying to beat the market.  Advisors who practice active management typically get paid more because it’s much, much more difficult to do.  If they’re just doing a passive type of investment management approach, then you shouldn’t pay them as if they’re active managers, that’s the real battle today in the advisor world is:  are they justifying their fees for the performance they generate for their clients?

Cassidy Clement

So, I guess my final question is really when an investor starts to think that they have to structure a financial plan with a financial advisor, are there are certain things that people don’t actually think of out of the gate, maybe some tips and tricks from somebody as seasoned as yourself.

Steve MacNamara

Sure, you want to have one thing you don’t really hear a lot about is the personality match. It really makes sense to interview your advisor directly because not all personalities are suitable to work together. You not only want your advisor on your side as a fiduciary with a spotless historical track record, regulatory track record, but you also want somebody that you think you can work with. This is there’s really serious business and again it’s kind of like the doctor/coach approach. If you’re not comfortable with a particular doctor or a professional or coach, whatever, overtime it’s not going to work. So, you really want to interview the person up front and see if you have a personality match, number 2, you want to make sure 100% of the time that they’re either a fiduciary and they’ll put it in writing, and if not, why not? And number 3, what is their regulatory track record? It’s so easy to search now. And unfortunately, there’s still a lot of folks in the business who have had problems in the past that still get into trouble, and clients of those advisors, if they’ve done their homework in advance, could have avoided that whole thing.

Cassidy Clement

Well, all of these are super great points and I think everybody can kind of listen to this and find something in there that they probably were like, “Oh, I probably should look that up before I bring my money to this one particular person or planner”. Thank you so much for joining us, Steve.

Steve MacNamara

Oh, my pleasure, Cassidy. Thank you for having me.

Cassidy Clement

Yeah, sure. So as always, listeners can learn more about an array of financial topics for free at IBKRCampus.com follow us on your favorite podcast network and feel free to leave us a rating or review. Thanks for listening everyone.