Insights from a Former Financial Adviser

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It’s been more than a year since I’ve moved on from being a financial adviser to providing financial education. This transition has given me the benefit of both time and perspective, enabling me to take a fresh look at the financial advisory business.

3 Mistakes to Avoid When Working with a Financial Adviser

There were a number of things that surprised me about the business that may also surprise investors.

1. It can be a challenge to provide financial planning services as a financial adviser.

This may seem hard to fathom. Yet many financial advisers are paid for investment advice or products. Choosing investments is certainly important, but it’s only part of a financial plan.

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With Finances, Keep It Simple, Stupid (Even If You’re Rich)

I found (and many of my peers agree) that planning advice and behavioral coaching are usually more valuable than traditional investment advice, such as asset allocation or security selection. However, many firms offer no framework for advisers to deliver a full financial plan, even for those with Certified Financial Planner (CFP®) or other certifications.

Despite the challenges, many of my proudest accomplishments as an adviser involved financial planning strategies, such as:

Saving a client money by implementing a Roth conversion in a year when he had virtually no taxable income;
Helping a couple fund their kids’ college education without short-changing their retirement savings, by using a plan involving investments, loans and financial aid;
Successfully encouraging a couple to protect their legacy by developing a long-overdue estate plan; and
Guiding clients to prioritize their goals and giving them tools for staying on track.

Key Takeaway for Investors:

If you’re considering working with an adviser, you don’t necessarily need to insist on a formal financial plan. However, you should look for someone whose strengths align with your needs and who is adept at financial planning topics.

2. Most new clients need significant help with asset allocation.

You would think with the wealth of online tools and target date investments available that many people wouldn’t need much help here. That was not my experience. I found that, in most cases, people struggled with one or more of these common problems:

They had assets across multiple accounts — and sometimes multiple advisers — but didn’t look at the big picture to establish a strategy.
They were overly invested in U.S. companies, perhaps falling victim to “home country bias.”
They didn’t have a good understanding of time horizons and risks — for example, overly conservative young people and people approaching retirement with very aggressive portfolios.

Key Takeaway for Investors:

An adviser can work with you to avoid these pitfalls, as we all have limitations and biases that can lead to poor decisions. If you’re paying for advice, you should be forthcoming to the adviser about your full financial picture. While it can take time to build that level of trust, talking freely with your adviser will help you get the results you expect from the relationship.

3. Ensuring that the adviser provides value for the fee is a two-way street.

There’s a lot of debate about whether advisers are worth the percentage of assets they charge (or their commissions, their fixed fee, their hourly rate, etc.). Ultimately, it’s up to advisers to demonstrate that they are promoting good behaviors and decisions that justify their compensation.

That said, the client has a key role in this, too. Putting adviser competency and diligence aside, I observed two main reasons people don’t get enough value from an advisory relationship:

The client’s financial circumstances aren’t a good match for the adviser’s services. For example, someone who doesn’t have a complex financial situation may want foundational guidance but not need an ongoing full-service arrangement. Or a person may hire a great stock picker when financial planning is the real need.
Surprisingly, some clients don’t seem interested in getting what they’re paying for. Clients who put off review meetings indefinitely, ignore their adviser’s calls and fail to execute action items are not likely to reap the benefits of the relationship.

Key Takeaway for Investors:

First, both the adviser and client need to make sure the relationship is a good fit. And second, advisers and clients should work together to find the right level of engagement. Increasingly, advisers try to run their business with a well-defined “service model.” That model includes how they’re compensated, the services they provide and how often the client should be contacted. As a current or prospective client, you should take advantage of this transparency to understand the arrangement — and hold your adviser to it.

10 Questions to Fire at Financial Advisers

Read more from Roger Young at T. Rowe Price and on Twitter @Roger_A_Young.

The views are those of the author and do not necessarily reflect the views of other T. Rowe Price investment professionals.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Roger Young is Vice President and senior financial planner with T. Rowe Price Associates in Owings Mills, Md. Roger draws upon his previous experience as a financial adviser to share practical insights on retirement and personal finance topics of interest to individuals and advisers. He has master's degrees from Carnegie Mellon University and the University of Maryland, as well as a BBA in accounting from Loyola College (Md.).