Ask Liz Weston

Get smart with your money

fiduciary

Q&A: What to do when your financial advisor isn’t doing right by you

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Dear Liz: My husband and I are in our 80s, living in a retirement community. Our investment account is valued at $550,000. This has to see us through till we die. We have no pension, no other assets. Social Security provides $2,760 a month and we are in the lowest tax bracket. Our financial advisor is using tax loss harvesting “to save us from capital gains tax.” We are both uncomfortable with this. Taking a loss on purpose doesn’t feel like a secure path and should be for people with a long-term future. Should we ask him to stop using this method of trading?

Answer: Tax loss harvesting involves selling investments that have gone down in value to offset some or all of the gains from investments that have gained in value. The point is to reduce capital gains taxes. Since you’re in the lowest tax bracket, however, your federal tax rate on long-term capital gains is effectively zero. It’s hard to imagine how your advisor would justify tax loss harvesting, given your situation.

Go ahead and ask them. The answer should give you some insight into how much your advisor knows, or cares, about your individual circumstances. Obviously, you should halt the tax loss harvesting if there’s no good reason to do it, but you might also want to start looking for a new advisor.

Keep in mind that most financial advisors don’t have to put your best interests first. They can recommend investments or pursue strategies that make them money, regardless of whether the recommendations are the best fit for your financial situation.

If you want an advisor committed to putting you first, you’ll need to seek out one who is willing to be held to a fiduciary standard. Such advisors include certified financial planners, certified public accountants (including those who are personal financial specialists) and accredited financial counselors. A fiduciary would have taken the time to understand your financial situation and then crafted a strategy to best fit your circumstances.

Q&A: Be patient! Find an expert!

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Dear Liz: I have a quick question and would like a personal response. What email address can I use?

Answer: You can use the email address of the financial planner you hire to advise you.

Just because a question is quick doesn’t mean the answer will be. Answers to financial planning questions take time and effort to craft, plus the appropriate response may vary depending on the details of the questioner’s circumstances. This column answers a few questions of general interest for educational and entertainment purposes. A hired advisor can answer an array of queries and provide truly personalized guidance to help you get the most from your money.

Q&A: Should this reluctant retiree pay an advisor?

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Dear Liz: I’m about to retire. A friend’s money manager has done well by her, doubling her portfolio in five years. This manager would charge a 1.5% fee to take control of my money, invest it, and generate income to supplement my Social Security. My heart is truly uncomfortable turning over control of my life savings to professional management, even though my head tells me it makes sense. Would a fair compromise between my heart and head be to pay a financial advisor to tell me what to do, but allow me to retain control of my hard earned savings?

Answer: Yes. You may have to search a little harder to find such an advisor, but you could be better off.

First, don’t be too impressed by a manager who doubled a portfolio in the last five years. An investment in a plain vanilla S&P 500 index fund would have performed about as well, at a much lower cost.

Speaking of cost, a 1.5% fee is relatively high for asset management. A 1% fee is much more common. If instead of a money manager you hired a fiduciary, fee-only financial planner — one committed to putting your best interests first — you typically would get comprehensive financial planning advice as well as investment management for that 1%. Such planning could include a tax-smart, sustainable plan for tapping your retirement funds, advice on Social Security claiming strategies, help picking the right Medicare coverage and a review of your estate plan, among other services.

If you’d rather not have someone else manage your portfolio, though, you have other options. The Alliance for Comprehensive Planning (www.acplanners.org) and the XY Planning Network (/www.xyplanningnetwork.com) represent fiduciary, fee-only planners who charge retainer fees. You can find fiduciary, fee-only financial planners who charge by the hour at Garrett Planning Network (www.garrettplanningnetwork.com).

Q&A: Finding a fiduciary advisor

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Dear Liz: I am having difficulty finding a fiduciary, fee-only financial advisor. I have inherited considerable investments from my parents’ trust and now that their house is sold, there will be a payout in excess of $1 million. I believe that my parents’ money manager has done an excellent job of investing and managing their money, so I want to stay with him. My IRA is with another money manager. Without any personal recommendations, I do not know how to go about selecting a financial advisor from a list of advisors on the internet. Interviewing and selecting one based on likability makes me uneasy.

Answer: If anything makes you uneasy, it should be that an advisor isn’t required to look after your best interests.

A fiduciary is someone who is committed to putting their clients’ interests ahead of their own. Most financial professionals are not fiduciaries and are typically held to a lower “suitability” standard. That means they’re allowed to recommend investments that are more expensive or that perform worse than available alternatives, simply because the recommended investments pay the advisor more.

You can start your search for fiduciary, fee-only advisors by getting referrals from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the XY Planning Network or the Garrett Planning Network. LetsMakeAPlan.org has a list of questions to ask.

Q&A: Finding a fiduciary

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Dear Liz: I am 55 and a single mom of three teenagers. My money has been sitting at a discount brokerage firm unmanaged … ugh!! I need help, but I am afraid to hire someone who will lose my money. Plus, two of my kids are old enough now to open a retirement account. We need help!

Answer: There’s actually no age minimum on contributing to a retirement fund; your kids just need to be earning at least as much money as they’re putting into the account. If they want to contribute the maximum $6,500 to an IRA, for example — or you want to contribute that much on their behalf — they have to earn at least $6,500.

The word you’ll want to keep in mind when seeking help with your money is “fiduciary.” Your advisor should be willing to put in writing that they will put your interests ahead of their own.

Many advisors are held to a lower “suitability” standard, which means they can recommend investments that are more expensive or perform worse than available alternatives, simply because the recommended investment pays the advisor more.

You don’t actually need a human being for investment management, though. Your investing firm probably offers target date mutual funds, which adjust the mix of investments to be more conservative as your retirement date nears. Another option is a robo-advisor, which handles the investing according to a computer algorithm.

Where a human can come in handy is if you have broader financial questions, such as whether you’re saving enough, when you can safely retire and whether your family is adequately insured, among other issues. Your discount brokerage may offer access to fiduciary advisors for a fee or in exchange for investing a certain amount of money.

You can also find fiduciary advisors through the Assn. for Financial Counseling and Planning Education, the XY Planning Network, the Garrett Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners, among others.