Today I’m wrapping up our series on Financial Advisors by answering five (5) common questions.
Questions such as:
- How important are professional designations like CFP or CFA?
- What is the process for firing a financial advisor?
- Will I incur fees and taxes when transferring investment accounts to another financial institution?
I’m also sharing more about financial coaches + what to do if you are a victim of bad financial advice.
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How to Listen to Today’s Episode
- Subscribe to the Stay Wealthy Newsletter! 📬
- Financial Advisor Series [Stay Wealthy]:
- Professional Designations
- Search for Licensed Financial Advisors:
- Filing Complaints
- What is a Financial Coach [Investopedia]
Financial Advisors (Part 5): Answering FIVE Frequently Asked Questions
Taylor Schulte: Welcome to the Stay Wealthy podcast! I'm your host Taylor Schulte and today I'm wrapping up our series on financial advisors by answering FIVE Frequently Asked Questions.
Questions such as, how important is it to look for advisors with professional designations like CFP or CFA? What is the process for firing a financial advisor? Will I incur fees and taxes when transferring investment accounts?
If this is your first time tuning into the podcast, be sure to go back to part one of this series which aired on December 8th to get caught up.
For all the links and resources mentioned in today's final episode of the series, head over to youstaywealthy.com/178.
Much of what I read and listen to about financial advisors contains a lot of “should'ing.”
You should only work with an hourly advisor.
You should only work with a big company.
You should work with MY advisor.
You should never work with THAT advisor.
You should manage your own finances and never hire an advisor.
The constant “should'ing” is what inspired me to put this series together. Instead of telling you what you SHOULD do, my goal was to clear up common misconceptions and provide clear, objective information about working with a financial advisor so you could make an informed decision about finding one that makes sense for you, your situation, and your needs and goals.
There is no one-size-fits-all solution when working with a financial advisor.
Just like there's no one-size-fits-all solution when working with an attorney, CPA, real estate agent, or any other professional service provider.
Everyone measures the value they receive from something differently. Everyone values their time differently. And everyone has different levels of complexity.
Hiring a financial professional is one of the most important decisions you'll ever make. Don't let someone “should” you into making it.
To help round out this series and cover as much ground as possible before we tie a bow on it, I'm going to answer X commonly asked questions I get from talking to retirement savers every day.
Question 1 - Are professional designations like the CFP or CFA important to look for when evaluating financial advisors?
As noted in part one of this series, there are far too many designations out there to keep track and make sense of. The CFP and CFA are the most well-known but we also have CIMA, CLU, RMA, CDFA, CMT, PFS, and dozens more.
Let's first start with the big two. CFP stands for Certified Financial Professional. I'll link to the detailed requirements in the show notes, but in short, to obtain the CFP certification, a financial advisor must have a bachelor's degree, complete 12-18 months of coursework on financial planning from a registered program, and pass the 170-question CFP exam.
Even after meeting those requirements, a licensed financial advisor still needs 6,000 hours of professional experience related to financial planning before they are certified.
As the designation suggests, CFP professionals are trained to take a holistic, personalized approach to financial planning. The 8 domains and topics covered on the exam include professional conduct, insurance planning, investment planning, tax planning, retirement savings and income planning, estate planning, and psychology of financial planning.
You might remember me sharing earlier in this series that you don't need a bachelor's degree to be a licensed financial advisor. That the requirements to give financial advice and call yourself a “Regional Vice President” are quite thin. So, while the CFP Board and certification process is far from perfect, it has certainly done a good job elevating the standards of this profession by introducing some basic experience and education requirements. If those requirements are important to you, filtering for CFP professionals during your search will eliminate over 200,000 advisors.
While the CFP introduces some well-received standards, it's still a fairly broad designation. The CFA, and many other designations out there, are more narrow in scope. The CFA stands for Chartered Financial Analyst and requires a passing score on three exams that test the fundamentals of investment tools, valuing assets, portfolio management, and wealth planning. In other words, the CFA is mostly focused on enhancing investment management knowledge and skills.
But don't let the narrow focus fool you, the three exams are some of the most difficult in the industry. In fact, the first exam, CFA level 1, had a pass rate of 36% last November. For comparison, the CFP had a November pass rate of 64%. In addition to higher education requirements and work experience, the CFA also requires 2-3 reference letters commenting on your work experience and professional character.
To summarize, if you're looking for a financial advisor who is primarily an investment manager focused on trading stocks and bonds in an attempt to outsmart the markets, you might look for someone with a CFA designation.
On the other hand, if you're looking for someone who provides comprehensive retirement and financial planning - and evaluates every piece of your financial life when making recommendations - an advisor with a CFP designation is likely more fitting.
Now, while meeting the requirements to obtain designations like the CFP and CFA are impressive, and introduce some professional standards and requirements that don't otherwise exist, these fancy letters many of us put after our names aren't necessarily a shortcut to finding a professional who has the right expertise to help you. There are great financial advisors who don't have any professional designations and terrible advisors with every designation available.
An advisor doesn't need to spend $10,000 or more and 18 months of their life in order to become an expert at solving specific problems for their clients. There are plenty of alternative learning paths outside of professional designation programs.
So, depending on what is most important to you, professional designations might be “icing on the cake” but maybe not necessarily a deal breaker. There are certainly many other ways to judge an advisor's competence and ability to help you solve your biggest problems, but professional designations can help narrow down your search.
If you want to learn more about other popular designations and what they mean, I'll link to a few resources in the show notes.
Question 2: What are the best practices for firing a financial advisor?
While I'm not advocating that anyone rush out to fire their advisor, it does happen from time to time. Because it's not a frequent occurrence, I'm often asked how the process works and how to go about it the right way. To help, I've put together a 5-step process:
1. Step #1 is to sleep on it. If your advisor did something that upset or hurt you, and you have a sudden urge to end the relationship, hold off on taking any action, sleep on it for a day or two, and then revisit the situation. I know, it kind of sounds like marriage advice. But advisor/client relationships can often be very emotional and feel like a marriage.
So, step 1 is just to clear your head and take a breather before rushing into making a big change. You might determine that having a calm, vulnerable conversation with your advisor is more appropriate than parting ways.
2. However, if you wake up the next day and parting ways is the right decision, step number two is to read through the contract or client agreement you signed when hiring them. In addition to familiarizing yourself with what you agreed to, I would specifically look for the Termination clause. In some cases, advisory firms will require you to provide a written letter and notify them X number of days in advance. There may even be a termination fee.
However, two things to note here. One, most advisors don't want to cause any additional problems in these situations and will waive the fine print in their agreement and offer to help make your transition easy. Many will also reimburse recently billed fees as a gesture of goodwill. Two, if there are any termination fees and you are hiring a new advisor, the new advisor will often offer to cover those fees on your behalf.
3. Which leads to step #3, and that is to determine where you're going next. If you plan to hire a new advisor, it would make sense to interview at least three potential candidates and unofficially choose one before doing anything else. And this is for three reasons.
One, we're talking about your life savings here, we owe it to ourselves to have a plan of action, especially after sleeping on this decision and making it with a sound mind.
Two, the advisor you plan to hire next will likely not only offer to cover termination fees but they will also process the entire transfer process for you, ensuring everything is handled smoothly and nothing falls through the cracks.
On the other hand, if you plan to self-manage your finances, and specifically your investment accounts, talk to your existing custodian about what that process looks like. In most cases, especially if your accounts are with a major independent custodian like Schwab or Fidelity, the process is pretty painless. Account numbers and investments remain intact, and when your advisor is officially terminated, you will take over control of the ongoing management. Other institutions, especially publicly traded brokerage firms, will reroute your accounts to another arm of the business, sometimes introducing new fees and potentially the liquidation of certain securities.
4. With your next step determined and your due diligence complete, step #4 would be to gather your investment account records and any financial planning work that has been done for you. In addition to having a personal record of these important documents, they can also be helpful to the new advisor you're hiring, if applicable.
Investment account statements are easy to grab from your custodian's website and you might only decide to archive a year or two, especially since financial institutions like Fidelity or Schwab often maintain copies for the past 10 years for you. Financial planning documents may be trickier to gather on your own, but if all else fails, you can always request records from your advisor.
5. Which leads into step #5 and that is to determine how, and if, you want to communicate the termination to your advisor. I say “if” because you don't actually need to verbally fire them or submit a letter if it's not in their agreement.
As previously mentioned, if you are hiring another advisor to replace them, that advisor will be processing the transfer, and the transfer process they initiate will notify the advisor that you are departing. And if you are opting to self-manage your accounts, the custodian, with your verbal authorization, will simply remove access from your existing advisor when you're ready - they don't require you to notify the advisor.
All of that being said, when new clients join our firm and ask me what to do, I always tell them that, if I was the one being fired, I would appreciate having a conversation versus waking up to an email notification from the transferring institution. Relationships with an advisor are often years, if not decades-long, and are likely deserving of a conversation or at least a short phone call.
If I had to guess, I'd say 80% of clients joining my firm from previous advisor relationships, ultimately decide to call the advisor they are firing to inform them before we process any transfers. The other 20% either send a short email or are so frustrated with the prior relationship that they don't make any contact at all and just inform us to get everything transferred.
These situations are never fun or easy. But by being thoughtful about it, taking your time, and preparing properly, you'll eliminate a lot of stress and headache, and, if applicable, begin your new advisor relationship on a much stronger foot.
Question #3 - What is the process for transferring accounts to a new financial advisor or another financial institution? Should I worry about fees and/taxes? What happens to my investments?
This question is similar to the last one, but I separated the two because there are situations where someone transfers investment or retirement accounts from one institution to another without necessarily firing a financial advisor.
For example, maybe you have an existing advisor you're very happy with and you are finally getting around to transferring a long-lost investment account from another institution to your current advisor. Or, maybe you are retiring from your company, and it's time to roll over your 401k into an IRA.
In these situations, rightfully so, people get a little nervous. We're often talking about six or seven figures transferring through cyberspace, this isn't a quick $10 Venmo transaction.
So, three things to note here:
1. When rolling over a 401k into an IRA, the investments inside of your 401k will be liquidated and the funds will get rolled over as cash. This means that your money will be in cash and not invested for as long as the transfer process takes (typically between 3 and 10 business days).
It also means you will need to be ready to have a plan for how the cash will be invested when it safely lands in your IRA. There are no tax consequences because you are transferring funds from a pre-tax account to another pre-tax account and there are typically no fees from the departing 401k plan. However, one unique thing to keep an eye out for is how the funds will get transferred.
In some cases, more than I care to see, the 401k plan custodian will mail you (not your advisor), you, they will mail you a physical check made payable to your IRA at XYZ custodian. You'll need to notify your advisor or custodian immediately and deposit this check within 60 days to avoid any taxes or penalties.
2. Most other accounts you might be transferring, like plain vanilla brokerage accounts and IRAs, can be transferred electronically and what we call “in kind.” In other words, the investments inside the account DO NOT get liquidated and remain intact during the transfer process. This means that not only will your money remain invested during the transfer process but you also won't incur any capital gains taxes since nothing is getting sold.
Which brings to the surface another important point and that is that most major custodians are required to also transfer the cost basis of your existing investments along with the accounts. Years ago, this wasn't the case, and it was a nightmare to track cost basis history. But today, pretty much every custodian (except some of the robo advisors out there) are required to send over the cost basis as part of the transfer process.
Just know that the cost basis can often take multiple weeks to show up, so don't panic if you look at your accounts after the transfer is complete and you don't see any cost basis history. Lastly, unlike 401k rollovers, direct transfers of other investment accounts often result in a transfer fee from the transferring institution. A nice little gesture on your way out the door.
These fees typically range from $50 to $200 per account being transferred, depending on the institution. As previously noted, if you work with a financial advisor, and they initiate the transfer, they will often offer to cover any transfer fees. Even if you don't have an advisor, it never hurts to ask your existing custodian if they'll cover the transfer fee.
3. In some cases, advisory firms will help clients establish a line of credit that is pledged by their investment accounts. These are similar to home equity lines of credit, but instead of your home being the asset tied to the loan, it's your stocks and bonds. Financial institutions have all different creative names for these lines of credit, and while there are some use cases for them, it's important to note that they are often established to make it harder for customers to leave.
Because, unfortunately, another financial institution can't initiate a transfer of an account if the account is tied to one of these lines of credit, even if the line of credit hasn't even been tapped into. You, the client, would need to go through the process of terminating the line of credit, paying back any balance or working with your new financial institution to absorb it, and then initiate the account transfer.
Similarly, most financial institutions, including brokerage firms like Schwab and Fidelity, have portfolio management solutions that also prevent simple and seamless transfers. These portfolio management offerings require you, the client, to terminate the investment manager, and in some cases, liquidate all of your holdings and move the cash to an entirely new account before it can be transferred.
It's important to explore all of this prior to initiating a transfer to prevent any surprises at the last minute. And if you have a financial advisor helping you, they will be able to dig into the fine print and even contact the transferring firm to learn about any issues that may occur in the transfer process. But, at the end of the day, there are still a lot of unique products out there that continue to cause issues during the transfer process.
So if you have a complex situation - or you were previously sold a wide array of investment solutions and banking products - just know that you may run into some of these issues I've noted when attempting to transfer accounts to a new institution.
Ok, Question #4 - What is a financial coach and would they be someone to consider instead of a financial advisor?
This question is becoming increasingly popular given the rise of financial influencers and content creators on social media, YouTube, and even in the podcasting world.
In many cases, it's not even questioned at all, because investors don't realize that they are working with or considering hiring a financial coach to begin with.
Financial coaches, on the surface, appear to be licensed financial advisors based on their service offerings. But they are NOT the same for three distinct reasons:
1. Financial coaches don't have any professional licenses and anyone, including my 5-year-old son, can call themselves a financial coach
2. A financial coach can not give specific investment or financial advice
3. Financial coaches are not regulated by FINRA or the SEC like a licensed financial advisor
So, what is a financial coach then? What do they do and what purpose do they serve? According to Investopedia, financial coaches provide motivation and information. For example, you might ask a financial coach what mutual funds to invest in. Instead of recommending that you invest in Mutual Fund A, they will simply provide information about mutual funds and the mutual funds that are available in an effort to help you come to your own conclusion.
Financial coaches often help people document financial goals and provide general tips and frameworks for reaching those goals, but they aren't going to build a financial plan, provide recommendations, and do the heavy lifting to help you reach the finish line.
While some financial coaches can provide good education and helpful information, the lack of oversight and licensing requirements means that you have to be extra careful who you're getting your information from and what their motivations might be. They might appear to be smart and compelling and be providing accurate information, but since nobody is governing what they say, the information they are providing may do more harm than good or may not be applicable to your situation.
So, be careful, and do some extra due diligence if you consider working with or getting your information from a financial coach versus a licensed financial professional.
And if you're not sure if someone is a financial coach or a licensed financial advisor, just head over to the FINRA and SEC websites and type their name into the advisor search box. If someone is a licensed financial professional, like myself, their information and all public disclosures - including any trouble they have been in - will be disclosed. If you don't see any record of them, they are not a licensed professional.
You can, of course, also ask them. Most financial coaches have chosen not to be a licensed financial advisor for a reason and don't want to cause any confusion. They'll be the first to tell you as clearly as possible that they are not a financial advisor.
Question #5 - This isn't so much of a question but something I wanted to briefly address in this series. And that is what to do if you or someone you know were taken advantage of by a financial advisor, sold investments without proper disclosures, sold investments that were not suitable, or were given incorrect advice that has caused financial harm.
Like many of you, I'll pretty much do everything I can to avoid getting attorneys involved. So, while contacting an attorney who specializes in defending investors who have been harmed by a financial advisor is an option, it doesn't necessarily need to be your first option.
One option to consider starting with, depending on the severity of the situation, is to simply contact the advisor directly to share your concerns. In some cases, the advisor will work with you to make things right in an effort to avoid things escalating. If you don't feel comfortable broaching the situation with your advisor, you can always contact another person at their firm, like their manager or compliance officer. Again, they may work with you to make things right to avoid things from escalating
If you don't feel comfortable talking to anyone at the firm that has caused financial harm - and you aren't interested or ready to get an attorney involved - another option is to file a complaint with FINRA, the SEC, and/or the CFP Board if they are a CFP professional. These complaints can be filed online and are typically taken seriously and responded to in a timely manner.
Lastly, while this is not my favorite solution, it's common for people to do nothing at all, put the past behind, and move on without taking any action against the advisor at all. In fact, we've unfortunately had a few clients join our firm who could have very easily taken legal action or filed complaints against their prior advisor, and ultimately decided to just chalk it up as a loss and move on. They just didn't feel like it was worth their time and energy and preferred to focus on the future and fixing the problems that were caused.
Again, not my favorite solution to know that a financial advisor caused financial harm and got away with it, but I can certainly understand why some people choose it.
More than anything, I want people to know they have options, and while hiring an attorney might be the best option, I recognize that sometimes the thought of that can encourage people to do nothing at all and live with the financial loss for the rest of their lives. Just like hiring and firing an advisor, I think it's important to know your options if you've been financially harmed so you can make an informed decision and not sweep it under the rug. I'll be sure to link to the resources mentioned if you or someone you know can benefit from them.
Ok, that wraps up our series on financial advisors. If there are any questions you still have that I didn't address, please send me an email at firstname.lastname@example.org. I read and respond to every message and love hearing from our listeners. Once again, that's email@example.com
Lastly, to grab the links and resources mentioned in today's episode, just head over to youstaywealthy.com/178.
Thank you, as always, for listening and I will see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.