Financial products and services can be complicated, which is one of the reasons some people choose to hire a financial advisor. But these complexities are also sometimes at the root of why people fire their advisors. Poor communication from the advisor to the client can prolong the client’s misunderstanding and lead to poor results.
Before an investor considers working with a financial adviser, it’s important to vet the adviser and make sure they will communicate consistently and take the time to explain the many details that go into the overall planning, says Andy Moore (https://thequantum.com/), vice president of advanced planning and portfolio solutions at The Quantum Group, LLC, a national distribution company that works with advisors.
“Too often, customers don’t understand the financial advice they’re being given – they don’t understand what they’re buying,” says Moore. “They choose a counselor they feel they can trust through a recommendation from a family member or friend, and they just hope and pray that the counselor does a good job for them.”
Moore says consumers should consider these fundamental factors when looking for a financial advisor who can help them understand their products and advice clearly:
- The priorities of a true fiduciary. A fiduciary financial advisor has a legal obligation to act in the best interest of the client. Moore says the definition should mean that an advisor looks at a person’s entire financial picture and explores all possible solutions to address weak points in the financial plan. “But in reality,” he says, “many advisers only focus on stocks, bonds, and similar stock market investments. These advisers are not true fiduciaries, and most ignore other asset classes because they don’t may not charge their customers a fee for certain products.
Specifically, Moore says advisors should prioritize explaining concepts in the financial plan, such as mitigating sequence-of-returns risk, planning for longevity, various sources of income, and adjusting to case of possible tax increases in the future. “These are concepts that consumers may not understand, but are worth learning about,” Moore says. “If advisors focus only on portfolio management and not on the holistic financial plan, the client is harmed in terms of their overall financial health.”
- Life insurance. Moore notes that while most consumers already have insurance like home or auto insurance, nearly 50% are uninsured or underinsured when it comes to life insurance. “Yet many advisors don’t even mention the importance of protecting your family’s finances against a potential death or disability that can completely derail a financial plan,” he says. “It’s a simple and important concept for everyone. Financial advisors owe it to their clients to talk about insurance-based solutions as an essential part of the overall financial plan.
- Risk management in retirement planning. “In my experience, over 90% of advisors focus on accumulation only,” Moore says. “They know very little about protecting and allocating assets during a client’s investment lifecycle, especially during retirement. Clients expect more, especially high net worth clients. With income and estate taxes likely to rise, insurance and annuities add significant protection and beneficial tax benefits to the conversation about risk management, retirement planning and estate planning that is too often detention.
- Stock market concerns and diversification. “Many advisors have never experienced a bear market before,” Moore says. “They didn’t have to help customers through the Internet crash of 2000-2002 or the global financial crisis of 2007-2008. The correction during the pandemic – essentially four weeks in March 2020 – was followed by one of the fastest stock market increases in history. Since 2009, investing has been easy as stocks have continually hit new all-time highs. Common sense and history tell us this won’t last forever, and advisors need to prepare their clients.
Therefore, Moore says advisers need to communicate with their clients about diversification. They must consider asset classes that are not correlated with the stock and bond market. “And as they approach and reach retirement age,” he adds, “advisors need to be able to create income streams for their clients that won’t be wiped out by market losses.”
“Financial advisors are important in helping people develop and navigate a plan,” Moore says. “Knowing what to look for in an advisor can save time, headaches and money.”
Andy Moore (https://thequantum.com/) is Vice President of Advanced Planning and Portfolio Solutions at The Quantum Group, LLC. He is a former advisor and portfolio manager for one of the largest fulfillment centers in the country.