Mike: Good. You just said you were great two minutes ago. What happened?

Madison: Fantastic.

Mike: All right, good.

Mike: Well, that’s a mouthful.

Madison: Yeah. All right, so we will get into questions about that email, but we have some questions on how to find the right financial advisor. So, Mike, why do you think people need a financial planner? And are planners just for the rich?

Mike: So, Maddie, I think that everybody could probably use at least some services from a financial planner or financial advisor, even if it’s a short hourly engagement, as a double check on what you’re doing. And so the services of financial planners aren’t just for the rich. Now, there are some advisors that only take clients of a certain asset or net worth level. Sure. But there’s a lot of advisors out there who will handle engagements for a more limited scope or for, like, an hourly engagement. And so it might be hard to find the right advisor for you. But I feel like one’s out there, and I think it’s worthwhile for trying.

Madison: Okay, so it’s not just for the rich. It could be beneficial to anybody. Okay. What should people look for in a financial planner?

Mike: So that that’s where it gets harder, right. And that’s where, like, the Bob Veres article is important. So first, crazy enough, they need to be competent, right. You need to be good at it. And so how do you measure someone’s competence? Well, that’s not necessarily that easy. So I think one place to start is look for people who are certified financial planners. Right. To become a CFP or a CFP practitioner, you need to have a certain educational level. You need to take courses and pass exams, and you need to have a certain experience level, right. So you need to have three years experience as a financial planner or a financial advisor to be a CFP practitioner. So I think that’s the first place to start. So somebody needs to be competent, know what they’re doing. They should, and they need to be experienced. And I think that they should be an independent. So that was the subject of my first book, like, ten years ago, Independent Financial Planning. And it was all about how to find advisors and how they work. And I think the independence is important because if you go to a firm where the advisor is not independent, right, so if you go to one of those well known brokerage firms that Bob mentioned or any of the thousands of other independent broker dealers, your advisor is going to be a salesperson working for that firm and is going to have goals that may not be in line with your best interests. And so when you are working with a broker and you can tell you’re working with a broker, because at the bottom of their website, there’ll be a tiny little font of disclosures and disclaimers, like not taking responsibility for anything that they say to you. They have to follow what’s called a suitability standard, so they have to know their customer and suggest suitable investments. And in some cases, they have what’s called a best interest standard, where they’re supposed to have your best interests in mind when making financial recommendations for you. Best interest standard is not… Whereas if you go to an independent advisor who is fee only, not fee based, that person is a fiduciary to you. And the fiduciary is the highest standard. And what a fiduciary is, has to act with loyalty and good faith and put your interests ahead of their own, right. So that they can’t have an agreement where they say, oh, we’re going to charge you x percent and then have 40 pages behind that to say, like, these are other ways that we’re going to make money from you, that you’re not going to actually be able to find out that easily. This whole topic came up, like, I saw the Veres article or the email a couple of months ago, but this week we talked to two different groups of potential clients, and they wanted us to distinguish ourselves from, in one case was Wells Fargo, and in other cases, another independent advisory firm about a half hour away from here. And the distinguishing us from the independent advisory firm up the road really is about matter of, like, size and scale, how personal you want to be, how important it is to have the same advisor. They’re a much larger firm than us, I think they do a lot of things right, and they’re a great firm, and we manage accounts very similarly. We do financial planning very similarly. Difference is, they are a much larger firm, and we’re a much smaller firm. And we could go into it much further if necessary. But distinguishing there is more of a matter of personal fit and a feel like, hey, is it important to you that you’re going to have the same advisor and not just the firm? That’s where you would choose the smaller firm. Is it important that there’s 50 other advisors there, or is it okay if there’s a couple advisors there? And those are things that people, some people, are going to feel differently about. It’s not the same as distinguishing between working with a broker and working with an advisor, which is the much bigger distinction. So when you’re talking about dealing with us versus, say, Wells Fargo, yes, those things about, like, personal fit and comfort come in, and they’re important. But it’s also, do you want to have a relationship where you’re not exactly sure what you’re paying and that your advisor doesn’t have to put your interest first? I’d say, why would you do that? Like, if you have a choice, there’s 300,000 advisors in the country. There’s a lot. In this area there are a lot of advisors. We’re pretty close to New Jersey, not that far from New York. There are tens of thousands of advisors around here. It’s not that hard to find one. If you have that many around and you’re going and you’re choosing between one who has to put your interests first and is legally required to do so and voluntarily does that, it gives up the possibility of commissions so they can do that, why would you go to one where you’re not sure how they’re going to get paid and where they’re not going to, you know, they’re going to say, oh, yeah, I’m going to do things, I’m going to treat you like family, I’m going to do the right things for you. But they voluntarily stay in a firm where they don’t have to do that. It’s easy now to go independent. I did it 18 years ago. It wasn’t that hard then. It’s really easy now. And so they say they have your best interests, like, why are they continuing to work in a firm where they’re not allowed to actually do that? So that’s a little bit of a rant, but it’s something that’s important to me, something that I’ve been thinking about for over 20 years. You know, I started with Merrill Lynch back in 1998. I was there for just under three years, and I worked for another independent firm where I learned about this. Like, I didn’t know that there were independent firms. You know, it was something I learned after being in the industry. So it’s important. So finding one, you need to find somebody who’s qualified. Again, when there’s tens of thousands of people, why would you go to someone that has no experience and is not a certified financial planner when there are 80,000 or 100,000 CFPs, why would you go to someone who’s not? It doesn’t make any sense to me. And so then the other thing is, if you have a situation that is not plain vanilla, maybe you have an inheritance coming, or maybe you have company stock, or maybe you have compensation that is based on the company you work for maybe going public, these are all specialties. You need to know what your situation is and look for an advisor who can handle that specialty. You know, maybe the advisor down the street can, but maybe you need to find someone else. Somewhere else. It’s easy to find.
Madison: Okay. Do you think it’s necessary to look for someone, you know, you live in Yardley, does it have to be in Yardley do you believe?
Mike: It doesn’t. So we have clients, we have three different clients in the UK, England, Scotland and Ireland. We’ve had a client who, for a time, lived in Portugal. So you could have clients all over. Where it’s important to have a local one is, if it’s important to you, every once in a while to come in and meet face to face. Right. And that is important to some people. And if that’s the case, then, you know, look for a, you know, a ten mile geography or something that, you know, you’re not going to be going there that often. Right. So in the beginning, you’ll probably go there a few times and after that, maybe once or twice a year. Keep that in mind. I had somebody reach that one time from Richboro who said they really liked what we did, but did I know anybody closer to them? It’s like, well, it’s like 25 minutes away. How often do you think you’re going to be coming here? It’s funny, good question, Maddie.
Madison: Yeah. So do you think people can benefit from the FINRA BrokerCheck website?
Mike: So what I’d say is you could go to the FINRA BrokerCheck to see if the broker has had any kind of legal claims brought against them and whether they’ve settled any. And so I think when you’re looking for an advisor, if you are going to settle on a broker, I would go to the FINRA BrokerCheck. There’s also one of those pages for investment advisors. And so it’s IAPD, the Investment Advisor Public Disclosure website. And I’d go there and take a look at that. And now, just because someone has some mark there, like, if somebody has had one person in a long career sue them or they had a company that they, like, an employer, ding them for something, I wouldn’t automatically disqualify them because there’s two sides to every story. And in fact, I don’t know if it’s the case now, but I know historically when a broker would leave a firm and either go to another brokerage firm or to go independent, the firm that they left would sometimes say something not great on their record as kind of like a punishment for their betrayal because they left. A lot of those environments are pretty closed environments. And, yeah, they would get personal. So if somebody has some sort of blemish there, read what it says, think about it, and then if you still want to go to that advisor or interview them, ask them about it. And I’d say, see how they respond. If they’re open and say, hey, it was a miscommunication this happened, or, yes, I was leaving that firm and so they didn’t like it, so they did this. I would say how they respond would be a great indicator of whether to continue with it, If they really don’t like talking about it, if they’re reluctant to answer it, or if they, like poo poo your concerns. Yeah, I would put that as a strike against them. Right. If they’re going to be open with you and transparent, then I would say, don’t let one or two things disqualify you. Now, we’ll talk more about the FINRA BrokerCheck later. I know you have some questions about that later. We’ll talk about that.
Madison: Okay. So how much do independent financial planners charge?
Mike: So that really depends, and it varies widely. If you go for one off consultation, right, so you say like, hey, I want to know these questions answered. There will probably be financial planners who will do an engagement for some hourly amount, right. 100, 200, $300 an hour, something. And if that number sounds high to you, remember that they have to prepare and do stuff before and after, both for their firm things and for compliance. Right. And so it’s just the same thing as if you hired an accountant, or a lawyer and they have this big hourly wage. Remember that in those instances, the professionals compensation is generally about a third of that, because a third of it goes towards, like the firm, a third goes towards expenses, and a third goes to, to the actual advisor. And then when talking about an advisor with an ongoing relationship managing accounts, the general fee has been somewhere around 1% per year. Some are a little bit higher than that, for smaller amounts, and some are a little bit lower than that. But I think that, industry average has been the same, really for 80 years, since 1940, when the Investment Advisors Act came out. I don’t think it’s changed that much.
Madison: Okay. What are the pros of working with a large financial services company?
Mike: Sure. So if you want to work with a big company, like a bank or brokerage firm that you’ve heard of, a lot of people take comfort in the fact that it’s an easily recognizable name. You can see branches when you go into your community. You see their ads on tv. And for a lot of people, that familiarity, I think, means something. There’s also the whole continuity aspect. If your advisor dies or becomes disabled or retires, there’s other advisors there that can take over for that advisor. They have thousands or some of the firms have tens of thousands of advisors. So if you’re with, Mary Smith and Mary Smith decides to retire, you don’t necessarily have to find a new firm because maybe Joan Jones can take over the management of your account.
Madison: Okay, so what would you say the cons would be?
Mike: So the cons would be, when you’re working with an advisor, what does it matter, like that you know that they have branches all over. Like, it’s really like a, for most clients, it’s a pretty personal relationship. They don’t really consider themselves clients of such and such firm, but clients of Joan Jones, not, not clients so much of Smith Barney, but clients of Mary Smith. And so the fact that it is a big firm, doesn’t usually mean too much in that relationship. And I don’t think that the familiarity or the comfort of the firm being all that large really should mean anything, because it doesn’t mean those resources are going to be going towards you. You’re going to have that relationship with that advisor. And if that advisor decides to retire and they say, okay, well, now you’re going to be working with Mark Smith, well, that’s still your choice. Well, maybe you don’t like Mark, or maybe Mark’s not qualified or whatever. You’re still going to go out and find somebody. You’re either going to say, okay, that’s fine, or you’re going to go and look for somebody, but you’re going to have to be comfortable with it. You know, whoever they have randomly assigned you to doesn’t necessarily mean that they’re the right ones for your family. And then the cons, I already spoke before about the whole misaligned incentives, where they don’t have to put your interest first and they’re going to get paid based on how their firm wants them to do things. So when I worked at Merrill, in the less than three years I was there, they made firm choices as to how we should work with clients. And so they at one point, wanted us to sell B share mutual funds. Then it was C share mutual funds. Then it was a wrap account of mutual funds. Then it was a consults, which is a separately managed accounts where there was like a higher minimum and an outside advisor would do individual stocks or bonds. And then it was Unlimited Advantage, which is similar to how we work now. That’s a lot of changes in less than three years. Now, maybe that was a particularly change worthy era? I don’t know because I haven’t paid attention since I left. That’s a lot. You know like, does that make sense? Does it really make sense for there to be so many changes? One of the other issues that I would have with someone who gets broker compensation is that there’s something called a grid. And so when that broker or advisor is working with you, they get paid more the more accounts they have and the more activity there is, and the more revenues there are. So lets just say hypothetically, the grid starts at 30% and goes up to 50%. So if you’re a new advisor and you don’t have a lot of clients, for the clients that you have, whatever revenues or commissions come in, you’ll get paid out at 30%. And then say once that gets up to a certain level, that goes to 32 or 35. When you get a higher level, it becomes more. And then like, when you’re like their superstar, rock star, corner office broker or advisor, maybe you get like 45 or 50%. Okay, so what is the issue with that? Well, what if it’s the end of the year and you currently get 30% because you have $195,000 in commissions, but if you go above 200,000 or 300,000, whatever that is, you’re going to go to the next level. That next level is for all of the money you’ve done. So, it gives a terrible incentive for somebody to rack up a commission or a charge that might not be in your best interest because they might get paid three times as much based on what they do. So say they want to sell you a product where there’s a $5,000 commission for them, right. So they’ll sell you $100,000 annuity and they would make, let’s say $6,000 for that. If that $6,000 takes them from earning 30% to 35%. Right. That $6,000 commission could actually be worth like $18,000 to them. Right. So they’re going to find a reason for that to be in your “best interests”. Those are air quotes I’m using there. Right. So that’s a terrible, that’s a wrong incentive for an advisor. And my big issue is, I think there’s lots of advisors at those firms that are great people that really want to do what is best for their clients and really think that they are doing it. But the way that the firms set themselves up, the firms instilled, they have those conflicts. And you talk to a broker and they don’t see it. They just don’t see it. They’ll talk about how they always do the right thing. It’s like, well, why is selling an annuity in IRA on December 30 the right thing for your client? It’s wrong. It shouldn’t be done. Yeah, go ahead, Maddie.
Madison: I was going to say it gives me Deja vu with the whole lawsuit with Wells Fargo that happened a few years ago.
Mike: Yeah. Yeah. So that’s like the banking part, but yeah. In the banking lawsuit. Right. They wanted people to open accounts even if it made no sense. And so you have these people that have eight accounts opened up when they only need one account or two accounts. Right. But you give somebody an incentive. Economics. Right. People respond to incentives. If somebody can make more doing something, well, they’re probably going to try to do that.
Madison: Yeah. Alrighty. So why do you prefer fee only independent investment advisors?
Mike: Yeah. So I think that if you get rid of the incentives for selling products, it really changes the nature of the relationship. If that advisor knows that, you know, you’re going to have this relationship where they’re going to just give advice and you’re going to pay 1000 or $5,000 and leave you that advice, well, then you know that advice is going to be in your best interest. Because there’s no hidden agenda to sell some product. Or if you know, that you’re going to be charged 1% on your accounts that the advisor manages, you know that it doesn’t matter what’s in those accounts, it just matters what the size of the accounts are. And so, you know, the big conflict of interest there is that the advisor can try to get you to invest more with them. Right. So if you’re not sure whether you should pay off your mortgage or not, and the advisor says, well, don’t pay off your mortgage, invest that money, then you know that advisor has that conflict. So that is a really, really easy conflict to see and everybody knows it. And I don’t know if other advisors do that. But when I give advice in that area, I will say, listen, I have a conflict of interest here. Here are the pros and cons. Let’s talk about whether it makes sense to pay off that mortgage or not. And it should still get down to whether it makes financial sense. And yeah, that’s why I think somebody who’s independent and fee only. If you take away the chance of a big, big commission for selling a product, I think it really takes out some of the worst behavior of advisors and some of the wrong incentives. And so that’s why I think it’s pretty important.
Madison: Okay. All right. So we will go back to the email from Bob Veres. I have some questions for you. So what is the significance of the marketing strategy employed by the advisory firm in Minneapolis in the 1990s? And how does it relate to the challenges faced by financial advisors today in competing with large brokerage firms?
Mike: Yeah. So I think that they had a funny take on it, right? Like they wore t-shirts that said, we rescue people from their Wall street brokers. And they had that in all their marketing. I think they made things up about it, like cups or whatever. So it’s funny. It’s humorous. Kind of humorous. But I totally get the stance. I totally get it. And it’s still relevant. Since the nineties, many less advisors work at the wirehouse brokers, but a lot of them still work at independent broker dealers. And for too many of them, I think they still see their job mainly as sales and not financial advice.
Madison: How does the author suggest financial advisors differentiate themselves from brokerage firms in the current landscape of fee based and best interest standards. Do you agree with the proposed approach of presenting a signed fiduciary oath and using the FINRA BrokerCheck website?
Mike: Okay, so what he’s talking about there is regulation best interest is like, kind of like a watered down fiduciary standard. So the fiduciary standard was already in place. And instead of like, imposing that on brokers, the SEC came up with this regulation best interests. But if it’s not the same as having to put your clients interests first, it’s obviously a lesser standard. They could have gone to the highest standard and they decided not to. You have to remember that all these rules are political. Big firms make big contributions. One of the things I have with a broker friend of mine, we go back and forth like, hey, you want to put your client’s interest first, your firm spends millions of dollars a year lobbying so they don’t have to, why do you still work there? And he’ll talk about the size or the compensation or whatever, or the long term incentive compensation plans or things like that. But anyway, so that’s the one thing. And then the fee based, your other air quote was. You know, we’re fee only. And so people say that they’re fee based. And what does that mean? Well, it means they still make commissions from selling annuities and life insurance and any other kind of complicated products, but they also will manage money for a fee. And so they say theyre fee based. But last time I looked, fee based advisors still got like 70% of their compensation from commissions. So fee based is a word that initially had a good reason, but now I think it’s just like trying to make things confusing for clients or prospective clients. “Well, we’re fee based.” They don’t know that means they still make more than half of their money from commissions. Then the FINRA BrokerCheck and signing the fiduciary pledge. So one of the things that he wrote in the article was, if you want to compete with the Merrill Lynch down the street, he said, have your client go to FINRA BrokerCheck, put in Merrill Lynch, and then search for the number of barred financial professionals that they’ve had. And so if you go to any of the big brokerage firms where they hire thousands of advisors, many of them have had a dozens, hundreds, maybe even thousands of their advisors barred from the financial securities industry because of shenanigans that they’ve pulled in the past, whether stealing from clients or doing things that they shouldn’t have. And so while earlier I said, people like to go to those places for comfort. We also have had the conversation a couple of times where you open up the Wall Street Journal, any day you go in there, there is going to be some instance of a bank brokerage insurance company settling some sort of claim with a client or some sort of industry watchdog or a governmental body, all the time. And they’ll say, it’s just numbers, cause there’s so many of them. But there have been like two or three instances of a fee only advisor doing something like that. And they were bad, but it’s two or three instead of thousands and thousands. And so the other thing is that Bob in the article says he likes the idea of signing a fiduciary pledge to the client to say, hey, we’ll act as a fiduciary. And even if I didn’t sign one, I’m legally required to be one. The SEC requires me to act as a fiduciary. And he says, so he says, you know, sign one and then hand one to the prospective client and say, hey, have your, you know, the other broker you’re interviewing with sign that fiduciary pledge. And they won’t. And they can. Right. They’re not allowed to. So I get it, and it kind of makes sense, but it’s more of a stunt that, than I would pull. Like, I think like my personality. While I try to be funny and I try to be, like, humorous, I don’t know that I would be comfortable doing that myself. I certainly sign the fiduciary statement to anybody who wants to come in, but I’m not going to say, oh, here’s a blank one. Have them sign one. It’s just not me.
Madison: Yeah, absolutely. So in your opinion, how effective is the use of regulatory infractions and banned broker statistics as a tool to educate prospects about potential conflicts and predatory behavior in the financial industry?
Mike: So I’ve never done it. So I don’t know, but it would be pretty interesting, right? So if those people at Wells Fargo come in and I were to give them a stack of, like, complaints from doing a broker check, maybe that would make a difference. Maybe it would be something that would open their eyes. Maybe we’ll do that. We’ll have like a big folder full of, you know, complaints and bard advisors. So I don’t know.
Madison: Okay. What are the potential limitations or drawbacks of the suggested approach in using barred broker statistics from the FINRA BrokerCheck website? And how might clients react to this information?
Mike: Yeah, so I think there, there are potential drawbacks because I don’t know. Right. So if anybody questions somebody else’s behavior or thought process, they get defensive. So, say I show that stack of bad brokers to a potential client, but the client has had a good experience, well, maybe they will just get defensive and not take it well at all. Right. I get that. You know, none of us like to be reminded that we’re doing something that might not be the best thing. You know, like show it in somebody’s face like that might be a bad idea. You know, um, it’s not something I feel like I would be comfortable with personally anyway, so I’m not going to do it, but I would love to see how it would play out. You know, if you got 100 advisors to do that to all of the press prospects they came in every year and see how many reacted well and how many reacted poorly. Like, if overwhelmingly people reacted well to it, maybe I would do it. But there’s really no way of knowing. And there’s, there’s not ever going to be any kind of like a study of that. Yeah, but it’s interesting.
Madison: It is interesting. So how do you view the author’s acknowledgement of good brokers within the industry and the suggestion for them to go independent? And do you believe there is a growing trend towards independence among wirehouse reps?
Mike: So I do agree. I think most of the brokers that I have met, and I’ve met a fair amount, are good people trying to do the right thing, but they’re in a spot where that is not necessarily easy for them. And I think that once they are successful enough that they can do it, I think they should go independent. And I mean all the way independent. There has been a big trend over the last 25 years or 30 years of people leaving the warehouse brokerage firms and going independent. But most of that growth has gone to the independent broker dealer channel, not the fully independent RIA channel. So we’re a registered investment advisor, so we’re fully independent. This company is owned by Rachel and me. Rachel’s my wife. We have a relationship with Schwab, and we used to have one with TD Ameritrade. We’re trying to have one with Fidelity, we’ll see how that goes. But we don’t make money from them. They don’t make money from us directly. We open accounts there and they make it easy for us to manage those accounts by having institutional platforms so we could trade all of our accounts on that platform. Were not logging in 150 different times to do trades for 150 different clients. So I do think that more so, like I said, a lot have gone to independent broker dealer channel. So that’s a little bit better than the wirehouse channel. But it’s still not the same as going fully independent because they still make too much money from commissions. They sell annuities, they sell life insurance for like whole life insurance or variable life insurance. It’s expensive. It’s not always in the client’s best interest. The problem is going fully independent, while I found it liberating, is daunting. Right. Because you need to decide, okay, well, where are we going to have clients money custodied? What software we’re going to use for portfolio, what software we’re going to use for financial planning? How are we going to handle compliance? When you go fully independent, you have to figure out all those things. I like the challenge, but it’s a challenge. Theres no getting around it. It’s a challenge. And I think a lot of people have gone to the independent broker dealer because they could set things up how they like, but then pay something to the broker dealer and have like the support of compliance and they might get HR support and they’ve already decided whatever software they’re going to use. And so the advisor goes there has got to be okay with that software and, you know, it gets a trade off or choice. I wish more would go fully independent.
Madison: So how might the evolving regulatory landscape, such as the SEC’s best interest standard, impact the strategies financial advisors use to differentiate themselves from brokerage firms and build trust with clients?
Mike: Sure. So that’s, you know, the landscape is always evolving. Right. And that best interest standard is something now that brokers say, hey, SEC now says I have to like, go to your best interests. And clients don’t know what that means. Prospective clients don’t understand. They’re not in the industry. It’s not their job to know what this is. And so again, it’s something else that independent advisors will have to fight, will have to educate consumers, make sure they know. Fortunately, most of the consumer related organizations websites have, you know, understand the difference and recommend fee only advisors. You know, if you look in the newspaper or magazines, they will generally tell people to look for fiduciary advisors or fee only advisors. So it’s caught on with people who have done research and think about it. But, you know, in this industry for 25 years, and most of that has been as an independent advisor. And it’s something we’re still fighting through, still trying to get people to understand that being a fiduciary is important. Most people just think that their advisor has their best interest in mind, and maybe they do. But why go with maybe if you go for real, for sure.
Madison: So for more information on Yardley Wealth Management or Yardley Estate Planning, you could visit our website at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. This podcast has been produced by Madison Demora and Mike Garry with the technical and artistic help from Poe Productions.