When You Need a Financial Advisor and How Find the Right One with Peter Mallouk (CEO of Creative Planning)
In this episode of the Money Rehab podcast, guest Peter Mallouk offers valuable insights on finding the right financial advisor to meet your needs. He emphasizes seeking advisors who act as fiduciaries, prioritizing your interests over their own profits. Mallouk covers the key qualifications to look for, including relevant certifications and experience managing portfolios of your net worth.
The conversation explores the comprehensive services advisors should provide beyond just investment management, such as tax planning and insurance. Mallouk further discusses red flags like lack of communication, subpar performance, and unreasonable fees you should watch for. By highlighting key factors for evaluating advisors' services and fit, this episode provides practical guidance for building a productive advisor relationship.
This is a preview of the Shortform summary of the Jan 15, 2025 episode of the Money Rehab with Nicole Lapin
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1-Page Summary
Qualifications and Credentials of a Good Financial Advisor
Ensuring Fiduciary Responsibility
Peter Mallouk emphasizes seeking advisors registered solely as investment advisors who act as fiduciaries, putting clients' interests first 100% of the time without commission-based conflicts. He cautions against brokers who may prioritize earning commissions over client needs.
Proper Certifications and Relevant Experience
Mallouk recommends advisors with certifications like CFP, CPA, and JD to offer comprehensive tax, legal, and financial planning expertise. He stresses working with advisors experienced in managing similar-sized portfolios as your own net worth.
Services Provided by a Financial Advisor
Comprehensive Services Beyond Investments
Mallouk underscores the importance of advisors offering holistic services tailored to individual needs - tax, estate, insurance, and financial planning - not just investment management. Advisors must understand clients' financial goals and provide a roadmap to achieve them.
Managing Accounts, Trading, and Custody
While managing client assets directly, advisors should never hold custody of clients' money. Mallouk recommends using third-party custodians like Charles Schwab to securely hold assets.
Evaluating Financial Advisor Performance and Fit
Communication and Responsiveness
Both Mallouk and Nicole Lapin emphasize the necessity of clients feeling comfortable openly discussing finances with their advisors and receiving timely reviews. Lack of responsiveness may signal seeking a new advisor.
Performance Benchmarks
For public investments, Mallouk states advisors should match market performance after taxes. However, private investments must consistently outperform public markets over 5 years.
Reasonable, Transparent Fees
Mallouk advocates for fee-based models (typically 0.25-1.2% of assets managed) over commission-based to avoid conflicts of interest. He advises against excessive fees above 1.3-1.4% in today's market.
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Counterarguments
- Not all fiduciaries are equally competent or ethical; the fiduciary standard alone does not guarantee the best advice or service.
- Certifications like CFP, CPA, and JD are valuable, but they do not necessarily equate to practical investment skill or success.
- Experience with similar-sized portfolios is helpful, but advisors should also be adaptable to different market conditions and client needs.
- Holistic services are important, but some clients may prefer advisors who specialize in a particular area of finance.
- Third-party custodians are generally a good practice, but there can be exceptions where direct custody by a highly reputable advisor firm might be more efficient.
- Comfort in communication is subjective; some clients may prioritize an advisor's performance over their communication style.
- Matching market performance is a reasonable expectation, but some investment strategies intentionally diverge from market benchmarks for various reasons.
- The expectation that private investments must consistently outperform public markets over 5 years may not account for the complexity and risk profile of certain private investments.
- Fee-based models are generally considered to align interests, but commission-based models might be suitable for certain types of transactions or clients.
- The suggested fee range may not be appropriate for all types of advisory services or all levels of service provided.
Actionables
- Create a checklist of advisor qualifications tailored to your needs to screen potential advisors effectively. Start by listing the certifications and experience levels that align with your financial situation, such as a CFP for comprehensive planning or a CPA for tax expertise. When interviewing advisors, use this checklist to ensure they meet your criteria, and ask for examples of strategies they've implemented for clients with similar-sized portfolios.
- Develop a communication plan with your advisor to maintain a comfortable and open dialogue. Decide on the frequency and method of updates you prefer, whether it's monthly emails, quarterly calls, or biannual meetings. Outline topics you want to cover, like progress towards your financial goals or market performance reviews, and create a shared document where both you and your advisor can add agenda items for upcoming discussions.
- Compare fee structures by creating a personal fee assessment tool. Use a spreadsheet to calculate the potential impact of different fee percentages on your investment returns over time. Input various scenarios, such as fee-based versus commission-based models, and project how these costs could affect your portfolio's growth. This will help you make an informed decision about which fee structure aligns best with your financial objectives.
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Qualifications and Credentials of a Good Financial Advisor
Peter Mallouk and Nicole Lapin discuss the essential qualifications and credentials one should look for when selecting a good financial advisor, noting the importance of fiduciary responsibility, proper certifications, and relevant experience.
Ensure Advisor Is Fiduciary Acting In Client's Best Interests
Advisors Must Register As Investment Advisors, Not Brokers With Commission Conflicts
Peter Mallouk underscores the importance of distinguishing a true financial advisor acting as a fiduciary from a broker who may work on commission. He advises directly asking potential financial advisors if they are fiduciaries and cautions against brokers or dual-registered advisors who could have conflicts of interest due to commissions. Mallouk stresses that a fiduciary acts in the client's best interest 100% of the time without exceptions. He recommends looking for advisors who are solely registered as investment advisors who always operate as fiduciaries. Nicole Lapin echoes this sentiment, emphasizing the importance of finding an advisor who is a fiduciary and not regulated by FINRA to avoid potential conflicts of interest.
Look For Advisors With Proper Credentials and Experience
Advisors Should Be CFP, CPA, or JD Certified
As for credentials, Mallouk advises seeking out financial advisors with the right certifications—often referred to as the "three C's." While specific certifications are not listed in the provided transcript, Mallouk suggests that credible teams should include individuals who offer tax advice as CPAs, legal advice as JDs, and overall financial planning with Certified Financial Planner (CFP) qualifications.
Advisor Should Have Experience With Similar Net Worth and Portfolio Cl ...
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Qualifications and Credentials of a Good Financial Advisor
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Counterarguments
- While fiduciary duty is important, some non-fiduciary advisors may still offer valuable advice and suitable products, especially if they are transparent about their commissions and how they are compensated.
- Being registered as an investment advisor is a good standard, but some brokers or dual-registered advisors may have access to a wider range of products and could potentially offer more diverse investment opportunities.
- Credentials like CFP, CPA, or JD are significant, but they are not the only indicators of a good financial advisor. Other qualifications and ongoing education can also be valuable, and practical experience can sometimes outweigh formal credentials.
- Experience with similar net worth clients is beneficial, but advisors with a diverse client base may bring a broade ...
Actionables
- Create a checklist of advisor qualifications tailored to your financial situation, including fiduciary status, registration, and relevant experience, to use when interviewing potential advisors. This will help you streamline the selection process by having a clear set of criteria to match against each candidate, ensuring they align with your specific financial needs and goals.
- Use online platforms that offer advisor reviews and ratings to research potential advisors' reputations and client satisfaction. Platforms like this often provide insights into the advisors' client demographics, which can help you find someone experienced with portfolios similar to yours.
- Engage in a trial co ...
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Services Provided by a Financial Advisor
Peter Mallouk shares insights on the comprehensive range of services that a financial advisor should offer to effectively manage a client's wealth.
Advisors Should Provide Comprehensive Services Beyond Investment Management
Services: Tax, Estate, Insurance, and Financial Planning
Financial advisors must offer a suite of comprehensive services beyond just managing investments. Mallouk insists on the importance of ensuring that a financial plan is tailored to the individual, asking clients to consider if tax advice, legal advice, insurance, and planning advice are included in their financial management fee. He emphasizes the significance of an advisor using this comprehensive knowledge to set up accounts, minimize tax, and align investments with the client's unique needs, including considerations for college tuition for kids, retirement plan funding, and estate plans.
Advisors Should Closely Understand Client's Financial Goals
An effective financial advisor must closely understand a client’s financial objectives. Mallouk mentions the necessity of having a certified financial planner to create a roadmap for achieving these goals. He agrees that advisors should engage in discussions regarding insurance needs and implies that annual comprehensive reviews are critical. These reviews should encompass net worth assessment, retirement and education planning, insurance coverage, tax mitigation, and the accuracy of wills and trusts. Advisors need to be comfortable discussing significant life events such as marriage or divorce that impact the client's financial landscape and thus tailor recommendations accordingly.
Advisors Should Manage Accounts, Trade, and Rebalance
While the content does not specifically address managing accounts, trading, and rebalancing, Mallouk outlines the importance of advisors assisting ...
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Services Provided by a Financial Advisor
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Counterarguments
- While comprehensive services are beneficial, some clients may prefer a specialized advisor who focuses on a particular aspect of financial planning, such as investment management or tax planning, if they feel that specialization could lead to better outcomes in that area.
- Tailoring financial plans to individual needs is crucial, but there can be a trade-off between customization and cost. Highly personalized services may not be cost-effective for all clients, especially those with simpler financial situations.
- The necessity for advisors to understand a client's financial goals is clear, but there can be challenges in communication and understanding that may lead to misalignment between client expectations and advisor recommendations.
- Annual comprehensive reviews are important, but for some clients, more frequent reviews may be necessary, especially if their financial situation or the market conditions are highly volatile.
- Discussing significant life events is important, but advisors must balance this with maintaining client privacy and comfort, as some clients may not wish to share personal de ...
Actionables
- Create a financial self-assessment form to evaluate your current financial status and goals, including assets, liabilities, insurance policies, and future financial needs like education or retirement. This self-assessment will help you identify areas where you might need more tailored advice or services from a financial advisor.
- Develop a life event checklist that includes financial considerations for events such as marriage, purchasing a home, or starting a business. Use this checklist to proactively discuss your financial situation with an advisor and ensure your financial plan adapts to your life changes.
- Set up a reminder system ...
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Evaluating Financial Advisor Performance and Fit
Choosing the right financial advisor can be a pivotal decision for your financial journey. Lapin and Mallouk provide key insights into ensuring that your financial advisor is not only competent but also a good fit for your needs.
Assess the Advisor's Communication and Responsiveness
Clients Should Feel Comfortable Discussing Finances Openly With the Advisor
It is vital for clients to feel comfortable and trust their financial advisors, as pointed out by both Lapin and Mallouk. Lapin highlights the fact that honesty with your advisor regarding your financial habits is crucial, and clients should not misrepresent their financial situation. Mallouk agrees, stressing that withholding information can lead to misguided advice. Advisors need to be communicative and available for consultations throughout the financial journey. If the advisor lacks responsiveness or isn't providing necessary reviews, it may be time to search for someone new.
Evaluate Advisor's Performance Relative to Benchmarks
Match Market Performance for Public Investments
When it comes to gauging an advisor’s performance, Mallouk emphasizes the importance of the advisor's ability to match market performance, especially after-tax, which would be considered a strong performance.
For Private Investments, the Advisor Must Consistently Outperform
Mallouk further points out that, over a five-year period, private investments should consistently outperform public markets; failing this, clients should reconsider the performance of their advisor in managing these types of investments.
Ensure the Advisor's Fees Are Reasonable and Transparent
Fees: 0.25% to 1.2% of Assets Under Management
Mallouk underscores the importance of transparency in the fee structures of financial advisors. He criticizes commission-based payment models due to the potential conflict of interest they pose and supports a fee-based model, encouraging advisors who charge a percentage of the managed assets with no transaction commissions.
Mallouk also notes that though the percentage charged may scale down ...
Here’s what you’ll find in our full summary
Evaluating Financial Advisor Performance and Fit
Additional Materials
Counterarguments
- While clients should feel comfortable discussing finances openly, some individuals may have valid reasons for privacy or discomfort that need to be respected and addressed differently.
- Absolute honesty is important, but clients may require education on what information is pertinent to share, as they might not know what's relevant.
- While advisors should be communicative and available, clients should also respect advisors' time and understand that they manage multiple clients and may not always be immediately available.
- Matching market performance is a reasonable expectation, but it's important to note that some investment strategies intentionally diverge from market performance in pursuit of different risk or return objectives.
- The expectation for private investments to consistently outperform public markets may not account for periods of market anomalies or economic downturns where this may not be feasible.
- Fee-based models are generally preferred, but commission-based models might be suitable for certain clients, especially if they conduct fewer transactions that warrant a commission.
- The recommended fee range of 0.25% to 1.2% of assets under management may not be suitable for all advisory firms, especially those offering ...
Actionables
- Create a financial transparency journal to track your comfort level and honesty in financial discussions, noting down how open you were in each meeting with your advisor and what topics you found difficult to discuss. This can help you identify patterns in your communication and areas where you may need to be more forthcoming.
- Develop a personal financial performance dashboard using a spreadsheet or a free online tool to compare your investment performance with market benchmarks. Regularly update it with your public and private investment returns to assess whether your advisor's performance aligns with your expectations and the market over time.
- Organize a fee audit day where you review ...
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