Ask Liz Weston

Get smart with your money

Financial Advisors

Q&A: Should you pay for a financial plan before hiring an advisor?

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Dear Liz: My spouse and I are retired. We have substantial investment assets, significant cash reserves and considerable equity in our home. Over nearly 40 years together, we’ve worked with several financial advisors, but every decade or so, we’ve become dissatisfied and moved on. Now, at this stage of life, we want a clearer roadmap for the next five to 10 years and beyond.

We’ve read your columns for years and have taken your advice about fiduciary financial advisors seriously. We’re currently looking for a new independent advisor, but we’re finding that many only offer financial planning if we also hire them under an assets-under-management (AUM) arrangement. Others will provide a standalone financial plan for a flat fee prior to having a client come on board for asset management.

We feel strongly that before committing to a long-term advisor relationship, we should first get an independent, comprehensive financial plan — essentially a snapshot of where we are now and how best to move forward. Does that approach make sense? Should we prioritize paying for a standalone financial plan before deciding whether to hire someone for ongoing investment management?

Answer: As you’ve discovered, many fiduciary fee-only advisors bundle financial planning advice with investment management because AUM fees are more lucrative than charging for plans. But that doesn’t mean it’s the best approach for every client.

Paying for a financial plan means shelling out more money up front, but you’ll get the opportunity to check out the advisor’s approach, communication style and attention to detail before entrusting them with your investments. The plan should include all the usual areas such as insurance, taxes, asset allocation and estate planning, with a special emphasis on the topics that are important at your stage of life, such as sustainable withdrawal rates, paying for long-term care and protecting your assets from fraud and cognitive decline.

Q&A: What should you do if an accountant ignores you?

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Dear Liz: When my sister became somewhat disabled, I started handling her financial affairs. (I have a power of attorney.) She hadn’t paid her taxes for several years, so I worked with her accountant to get them filed and pay the necessary penalties. I thought she was up to date with both her federal and state taxes. With no warning (to my knowledge), the state tax agency suddenly withdrew over $12,000 from her checking account.

After an attempt to contact the agency for an explanation, I decided to ask her accountant if he could help me understand where she stood tax-wise so we would not be hit with any similar financial shock. He had prepared her taxes for her for many years, but has not returned my calls or emails. I am at a loss as to how to obtain more information about her tax liabilities. I believe she had given him the authority to view her tax accounts. What else can I do to feel satisfied that she will not be subject to any further garnishment?

Answer: Many tax pros struggle to keep up with client communications in the weeks before the April 15 deadline. If you were trying to contact him during crunch time, that could explain why you didn’t hear back immediately. If he still hasn’t reached out, however, you should start looking for a new accountant who can help you sort this out.

State tax agencies don’t usually act without warning. Typically, they mail multiple notices about delinquent taxes and give taxpayers time to respond before taking money from a bank account. It’s possible these notices went to an old address, or that your sister received them but didn’t understand their importance.

Since you have the power of attorney, you should be able to get information directly from the state tax agency. They’ll have a form that allows you to establish your right to communicate with the agency on your sister’s behalf. Once filed, you can access her account history. That information can help you and the new accountant piece together what happened, determine if there are any outstanding liabilities and figure out a plan for preventing future collection actions.

You’ll also probably want to pull her credit reports to look for any other tax liens or collection actions. If she’s struggling to manage her money, you may need to take more proactive steps, such as taking over bill payment. Consider working with a fiduciary financial planner or an elder law attorney who can help you create a system to avoid future catastrophes.

Q&A: How do I find out if an advisor is a fiduciary?

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Dear Liz: You often emphasize the importance of using a financial planner or advisor who is a fiduciary. But how does one know whether a given planner or advisor is a fiduciary? Is it just the planner or advisor claiming to be one? Are there any licensing laws or professional organizations that grant such a designation?

Answer: Many people assume financial advisors are required to put their clients’ best interests first, but that’s typically not the case. Most advisors are held to a lower “suitability” standard, which means their recommendations must be suitable for the client’s situation but not necessarily the best choice. The advisor can recommend an investment that is more expensive or that doesn’t perform as well as available alternatives, simply because the recommended investment pays the advisor a higher commission.

Fiduciary advisors commit to putting their clients’ interests ahead of their own. Certified financial planners (CFPs), certified public accountants (CPAs) and attorneys all have fiduciary duties to their clients, as do registered investment advisors (RIAs).

The gold standard for fiduciary advice is the fee-only model, in which the advisor is compensated only by fees the client pays. Fee-only means the advisor does not accept commissions or other compensation paid by third parties. Fee-only compensation can take a number of forms, including hourly, retainer or flat fees or a percentage of assets the advisor manages for the client.

The first step in determining whether an advisor is a fiduciary is to simply ask. The answer should be yes, full stop, and the advisor should be willing to put that commitment in writing. Next, ask to see the advisor’s Form ADV, which details how the advisor is compensated.

Theoretically, a fiduciary advisor may be able to accept commissions, but they’re obligated to clearly disclose the compensation to clients and maintain the clients’ interests as their top priority.

The phrase “fee-based” is sometimes used by advisors who want to appear to be fiduciaries when they’re not. An ethical advisor is crystal clear about how they’re getting paid.

Before hiring any financial advisor, you should also use BrokerCheck at https://brokercheck.finra.org/ to research their backgrounds and look for any disciplinary history. Also, check with the organization that granted their credentials to verify that those credentials are current.

Q&A: Is it better to have a fee-only financial advisor?

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Dear Liz: As a certified financial planner for the past 31 years who has never run afoul of any regulatory body, I cringe every time I hear you recommend people seek out only fee-only financial planners!

While we certainly do fee-based work where appropriate, sometimes it is simply better for the consumer if their advisor receives a commission not a fee. As an example, assuming all other factors being equal, if a client were to maintain an account for 10 years with a fee-only advisor charging 1% per year, wouldn’t the client pay considerably more in fees than if they placed their portfolio in a commission-based account where the advisor were to receive a one-time 5% fee?

I certainly understand conflicts can arise, but don’t they do so in most aspects in life? And isn’t this really just a matter of ethics? Can’t a fee-only advisor lack ethics just like an advisor who receives commissions?

Answer: The most important differential among advisors is whether they’re fiduciaries and therefore obliged to put their clients’ best interests first. As a certified financial planner, you’re held to a fiduciary standard and must disclose any potential conflicts of interest to your clients.

Most advisors are held to a lower “suitability” standard. That means the advisor can recommend investments that pay higher commissions, even if those investments aren’t the best option for their clients.

Fee-only financial planners typically are fiduciaries and have opted for a compensation arrangement that avoids the conflicts of interest inherent with commission-based recommendations. These planners are paid only by the fees they charge their clients, which can be hourly rates, project fees, retainers or a percentage of assets under management.

Q&A: Beware the Blurred Line Between Fee-Only and Commission-Based Advice

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Dear Liz: I am very overwhelmed with life so I’ll try to stick to where I need your help. My 68-year-old husband has been diagnosed with dementia. I thought we were responsible, having a nice nest egg of over $2 million, a house that is paid off and no debts. However, finding out long-term care costs, I am now terrified that it will all be depleted. Per your advice, I found a fee-only financial planner. I wanted his opinion about long-term care insurance for myself (my husband no longer qualifies). Turns out the planner will be the one to get the policy for me, should I decide to go forward. He’s recommending a hybrid policy with a death benefit, which means if I end up not using the long-term care coverage, the value will go to our children. I’m uncomfortable with the fact that this planner has an obvious stake with this long-term care policy and therefore might be biased with his advice.

Answer: If your advisor has an “obvious stake” in the policy you buy, implying that he will be paid a commission, then by definition he is not a fee-only financial planner. Fee-only financial planners are compensated solely by the fees they charge their clients.

What you may have encountered is a fee-based advisor, who collects fees from clients but also accepts commissions.

You want to be able to trust that the advice you get is in your best interests. That means you need a fiduciary advisor: someone who is obligated to put your interests ahead of their own and who is willing to put that promise in writing. If your advisor isn’t a fiduciary, you can find one who is through one of several organizations that represent true fee-only advisors, such as the National Assn. of Personal Financial Advisors, the Garrett Planning Network, the XY Planning Network or the Alliance of Comprehensive Planners.

The advisor also should be able to refer you to an elder law attorney who can discuss ways to protect your finances from being devastated by long-term care costs, or you can seek referrals directly from the National Academy of Elder Law Attorneys.

Q&A: A husband handles the investing. What happens when he’s gone?

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Dear Liz: My husband has always handled our investments. He doesn’t think it makes sense to pay someone 1% to do what he can do on his own. As we’re getting older, I’m starting to worry about what I would do if he dies first. We also have a friend who got scammed, and it’s made me wonder whether that could happen to us. I would like to talk to a fee-only advisor like you always recommend, but I’m not sure how to get him on board.

Answer: Start with your concerns about having to take over the finances should he die or become incapacitated. Having someone trustworthy to help you through this process can be incredibly valuable, and it doesn’t need to be someone who charges 1% to manage your investments.

You can get referrals to fiduciary, fee-only planners who charge by the hour at Garrett Planning Network. The XY Planning Network and the Alliance for Comprehensive Planners represent fiduciary, fee-only planners who charge retainer fees. (Fiduciary means the planner is committed to putting your best interests first. Most advisors are held to a lower suitability standard, which means they don’t have to put your interests ahead of their own.)

Researchers have found that our financial decision-making abilities peak at age 53. Unfortunately, our confidence in our financial acumen remains high even as our cognition declines. The growing gap between our self-regard and reality can leave us vulnerable to bad investments, bad decisions and bad people.

An advisor could take a look at your portfolio and recommend ways to make it easier to manage as you age. The advisor also could discuss strategies and safeguards to protect you from mistakes and predators. Once you have established the relationship, you should be able to get more help down the road if you need it. (Consider the advisor’s age and status, though; a younger advisor or one who’s part of a large practice might be a better idea in this scenario than a solo practitioner who is approaching retirement age.)