Buckingham Wealth’s Michael Kitces: 5 Financial Advisor Traits to Look For

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What do you want to know

  • Buckingham Wealth Partners’ Michael Kitces took to Twitter to discuss the questions potential clients should and shouldn’t ask a prospective adviser.
  • Kitces offered 5 things investors should look for, noting that they are “what I would tell my mom if she had to find a financial adviser on her own after I left.”

There are several helpful questions potential clients can ask an advisor before choosing a financial expert, but one of them is definitely not the percentage return they should expect, says Michael Kitces, manager planning strategy at Buckingham Wealth Partners.

Kitces pointed out, to the start of a long Twitter thread Sunday, that he was just asked this “infamous question (for advisors) that prospects often ask”. In reaction, Kitces said he “felt compelled to take a few minutes [and] explain why this is NOT what a consumer should ask when trying to vet a financial advisor. »

So why is this such a bad question? “The reality is that returns are determined by the market, not the advisor,” he explained. “At best, an advisor can say they can beat the market by a certain amount (1% or whatever?), but that’s relative to whatever the market turns out to be offering.”

For example, the market may offer 15% and an advisor may get between 6% and 16%. “But if the market returns 5% or 15% or -20%, the truth is that nobody knows for a particular year,” Kitces tweeted.

“At best, certain market fundamentals can give indications over the next 5-10 years that returns will be better (above average) or worse (below average), but even brilliant managers fail to not to beat the market consistently in any particular year (b/c nobody knows from year to year),” he added.

why is it important

Kitces recalled a potential client who asked this question in 2004, “when real estate was booming but rates were really low and valuations were already skyrocketing.” The response from an adviser at his firm was that 6% to 7% was all you could expect over 10 years, he said.

A second advisor, however, told the prospect he would get 8% returns, so the prospect chose that rival company instead because, after all, “8% beats 6%,” he said. note. It really is that simple, right?

Well, no, it’s not. Kitces pointed out that “it was really a low yield environment” that year, “so 8% was only achievable with a concentration in high dividends. #EndServ preferred.” Then, “just 4 years later, came the financial crisis” and about 30% of that investor’s portfolio was in Lehman’s preference, Kitces noted.

The investor “achieved the promised 8% returns for 4 years…until nearly a third of his portfolio lost 99% within weeks when Lehman went bankrupt,” Kitces said. Because the investor “assessed the advisors based on their promised returns, they chose the one with the highest percentage return promises that truly offered the riskiest portfolio,” he added.

The “key point is that, especially in low-return environments, asking advisors what returns they can achieve steers you away from “good” advisors with realistic low-return advice, and skews toward those who over-promise and then increase risk trying to fix,” he tweeted, which he added is “NOT good.”

So what should investors be looking for?

When checking out a financial adviser, there are five specific things Kitces said investors should look for, noting they are “what I would tell my mom if she had to find a financial adviser on her own after I left. “.

1. Incentives are important.

“Most ‘financial advisors’ are legally salespersons, not advisors, paid for the products they sell (commissions) rather than the advice they give (fees). And when you get paid to sell hammers, every problem feels like a nail,” Kitces said. Therefore, he advised: “Look for a ‘pay-only’ advisor.

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