Believe it or not, financial advisors are not all the same. In the past, when someone said they were a financial advisor, people trusted them and figured they all offered the same thing. Many people have made the decision to work with an advisor they like and trust. While those are essential, the truth is, there’s more to it than that. As long as you know what to look for and to avoid, you can make better choices.
Not All Financial Advisors Offer the Same Investments
Two advisors may take into account your situation and goals and put together two entirely different plans even when both operate under the same standard.
Why is this? It typically boils down to a few different reasons.
- They’re not licensed to offer certain investments or insurance products.
- They are strongly encouraged by their firm to offer certain investments.
- They hold an investment philosophy that lends itself towards certain investments.
So what can you do? Don’t invest in anything you don’t understand. Ultimately as a consumer you must learn the ins and outs of any investment you’re being offered.
You Should Be able to answer the following questions about every investment in your portfolio:
- Why do you have each investment?
- How do they work?
- What are the risks associated with each investment?
- What are the fees associated with each investment? What are the ongoing fees? Are there fees when you purchase? Are there fees when you sell?
- What are the tax advantages or disadvantages to each investment?
- What income can you expect from each investment either now or in the future?
- What is the liquidity of each investment?
- What is your exit strategy?
Not All Advisors Specialize in Income Planning
When you’re close to or already in retirement income should be goal #1. Income can be produced by many different methods. The various methods include the bucketing strategy, bond laddering strategy, dividend and interest strategy, systematic withdrawal approach and the endowment strategy.
Many advisors might not have the expertise nor experience to craft a portfolio and income plan in the most strategic way possible. Anyone can sell you something, however it takes someone with true expertise to craft an income plan specifically tailored to meet your needs.
Make sure your income plan:
- Provides steady income, if that’s what you want. Ask an advisor, “How much of this income is at risk, what would cause this income to be inconsistent and is that likely?” Furthermore ask them, “What would happen to my income if interest rates increased or 2008 happened again? What would that do to my portfolio value and long term income plan?”
- Has contingencies for inflation. Ask an advisor, “What happens if inflation happens in the future? Will I have to decrease my standard of living?”
- Provides for the possibility of higher taxes in the future. Ask an advisor, “What happens if my tax rate is increased by 2, 3, 4, or 5%? How will that affect my income?”
- Provides for an unexpected expense such as a health event. Ask an advisor, “What happens if we unexpectedly need $50,000 or $100,000? How will that affect my long term income plan and standard of living?”
Finally, if you’re married, make sure you have three financial plans.
Plan A– What if you both live to be 100 years old. Will you have enough money to last until the day you both die?
Plan B– What happens to MRS. if MR. dies first? How will she fair with only one of the two Social Security checks, and will she get to keep his pension?
Plan C– What happens to MR. if MRS. dies first? What will happen to his income source at the death of his wife?
As the consumer, you have the freedom to choose an advisor who can both get you to and through retirement. The decision on who you will work with is one of the most important financial judgements you will ever make in your life. Educate and empower yourself with information so you can make the most informed choices possible.