What to Know Before Hiring a Financial Advisor

21:40Mindy Jensen:Hey, Scott, is there a way that our listeners could go and find a step-by-step walkthrough of how to determine what your goals are? Yeah, great leading question. Yes, you can also go to biggerpocketsbody.com slash resources, and you can download our second most popular artifact there, which is the goal setting workbook here. And it's just like a seven page PDF, but it will help you draft a vision for your life. And it just shows an example of what my wife, Virginia, and I want for our life, right? We want a house in this location. We want this for our kids. We want this level of fitness. We want to spend our weekdays doing this, our weekends doing this.

22:15We want this level of community in our lives. And then we want our financial position to support that at this time with this amount. And that provides a level of clarity because now I can make decisions that are grounded in that. You can disagree with my decisions, but I think you'll find it very hard to argue that my decisions are not coherent in pursuit of the stated goal that I have and I've written down with my wife. And I think that's really important because once you have a clear goal and you understand the trade-offs, ideally you're not binary. Like some people are way too binary about this.

22:44I want to literally die with zero. bad goal. I want to die with maximum net worth, bad goal, right? There's a balance here. Even if you want to go 98-2 on some of these, you know, 98 % of the way towards diagonal zero, 2%, which is a little buffer. That's great. Be realistic about these trade-offs and don't go to these crazy extremes in the space. And that will help the discussion with your financial planner if they understand your biases. They may suggest you change those biases at some point. There may still be an element of therapy, but I think it's kind of unproductive when someone comes in and they don't really know what they want or they have conflicting goals with their spouse.

23:15that haven't really been discussed.

23:17Mindy Jensen:Yeah, I think Hand in Hand with the Goals is a short, to the point summary of what you think you need help with and what actions you are considering. Because Scott, what you might consider might be very different than from what I might consider. And that doesn't make either of us right or wrong. That just gives the advisor a little bit of insight into what we're thinking and a bit of our risk tolerance. I think that like common threads that probably come up in the BiggerPocketsMoney community in particular, the most common challenge that we get is some version of we are close to our FI number or approaching it.

23:56You know, we're somewhere along that journey, you know, three, five, ten years out. And one spouse wants to stop working either to stay home with the kids or just retire early or because they want to start a business. and we're just not quite comfortable for whatever reason with that dynamic, maybe because the other spouse's income will be slightly below the amount we need to spend for our lives. Maybe the other spouse's income will not allow us to continue to save and we won't be able to go anywhere close to as far down the retirement stack, maybe because we'll actually be burning cash for a little bit and we're betting on that business coming up.

24:30That's a great way to frame a problem, a central problem to a financial planner, I think, so they can give you an opinion about what the trade-offs really are and what to do about that and how to either reduce the risk of a decision like that or delay or defer it or approve it and say, actually, we're fine in this situation to some degree. But having that central problem labeled and understood about why there may be tension or anxiety, even if both are aligned in that situation, that's a great way to frame those goals.

24:58Mindy Jensen:Yeah. The more questions you can anticipate that they are asking and have an answer for them, the better your conversation is going to go. Another thing, Scott, that I want to point out is having an investor policy statement. You could find an advisor who says, oh, you want a maximum growth? Let's put you in Bitcoin. But your investor policy statement says, I do not want to be in anything alternative. If you don't provide this to your advisor, they have no idea what your mindset is. So this goes along with the goals. It goes along with the short to the point summary of what you think you need help with.

25:39Mindy Jensen:It goes along with all of these other, your personal financial statement and all these other things. What is your investor policy statement? Now, this doesn't have to be a set in stone thing. This can be something you're like, well, I think this is what my investor policy statement is. And combined with all the other information you're giving your advisor, perhaps your advisor says, you know what, I think we need to adjust your investor policy statement. All of these documents are fluid, except your tax returns. All of everything can be maneuvered, but it's like that series of gears where this one moves, and then this one moves.

26:15Mindy Jensen:And if this one moves, then this one moves. And if this one moves, then this one moves. So that's just all interconnected. But knowing where your mindset is, is going to be so helpful for your advisor to give you the best advice for you specifically in your specific situation. And guess what? We have a document for that too. Now it is like the least downloaded document on our resources page, but that's because it's brand new. You can go to biggerpocketsmoney.com slash resources and scroll all the way down, or you can go to biggerpocketsmoney.com slash IPS. That's investor policy statement, IPS, and download that.

26:57Mindy Jensen:It's a set of instructions that gives you some guidance for how to set up your own investor policy statement if you've never done it. Probably arguably the best investor policy statement out there in the world is going to be the boogleheads one, where I think that ours can be more helpful if you're not a booglehead and have other assets, right? Like I have real estate That changes how I construct the rest of my portfolio and how I think about bonds, for example. And Boglehead doesn't have as much of a framework around that. And you're going to have to develop that yourself to some degree, depending on what else you have.

27:29There's examples out there that work for totally passive investors. But many people listening to BiggerPocketsMoney are not truly totally passive investors and have things like real estate, private equity, debt funds, alternative assets in businesses or pensions. And those things and how they intersect with your portfolio matter. That may change the way you think about your bond allocation or how you think about the way you want to involve factor tilts in your portfolio, if that's something that you're interested in. So you may need that if you have something that deviates from true Boglehead philosophy.

27:57But if you don't, then I think the Boglehead philosophy is one of the greatest investor policy statements out there. You can Google that and find that in various corners of the Internet. We talked about how one of the big challenges for BiggerPocketsMoney listeners is often the one spouse wanting to step down. Another big challenge is liquidity. right? And we've talked about this as the deferral dilemma, no longer the middle class trap, the deferral dilemma, where I've put a very large percentage of my wealth pre-tax or tax deferred. And that is starting to conflict with some of the things I want in the next few, five to seven years before I hit true and lasting financial independence.

28:29That's a great problem to bring to a financial planner so that they can walk through the tax math. And in some cases, there's a huge opportunity cost and you can't justify stopping or slowing the deferrals. And in some cases, the opportunity cost is very small and they may be willing to allow you to dial those back. And in some cases, you may be over contributing to the deferred accounts and you may be actually creating a tax bomb for yourself like what Mindy has and having to start doing Roth conversions. Once you're starting to talk about Roth conversions while you're still earning income, you know you've gone too far in the tax deferred account.

29:00So that's a great question to bring to the financial planner as well, if that's something that you need help with. And the answer is going to depend. And for the population of wealthy, high savings rate individuals in high income tax brackets that often listen to bigger pockets money, for example, there could be cases where where there's an opportunity to scale that back in some cases. So that's a great trade off to bring to a financial planner. Another great one to bring is I had somebody recently bring a wonderful portfolio that was basically close to being finished. Same deal here. They had a couple of rental properties.

29:30They had a liquid portfolio that was, you know, big third in the 401k tax deferred, small third and small third in the Roth and the after tax. And the question was, you know, I'm thinking next year when my spouse stops working, I might want to do a big Roth conversion. I said, perfect. That's a great, great plan. I love it. What I would do is towards the end of next year, bring this to a flat fee or a fee only hourly in this particular case, financial planner. when you have a good idea about what your income is going to look like. So maybe like November of 2027 in this particular case. And ask them how big of a Roth conversion should we be thinking about doing towards the end of the year and get their help executing that.

30:08So that would be a great case, for example, for an hourly advisor for that particular person. So those are some of the great ways to use these advisors in select situations, depending on your goals and challenges and how strong you feel you are at managing your money.

30:20Mindy Jensen:Okay, so Scott, we talked about finding an advisor and interviewing advisors. Let's talk about some questions to ask these advisors. My number one is what experience do you have in working with clients like me? Here's my net worth. I'm on the path to financial independence. Here's my goals. like very succinctly give them this information. If they've never heard of financial independence, if they have never worked with anybody on the path to financial independence, that's not really the financial advisor for you, in my opinion. I think a lot of these calls with a good hourly or even comprehensive financial planner, they're going to give you some information upfront about how they think about the situation.

31:09And there should be reasonable information or directional lean in some cases about what they're going to look for, what questions they're going to ask at the very least in the first free call, the intro call in a lot of these situations, not all of them, but in a lot of them. And I think you should interview at least three if this is the first time you're going to be talking about folks. And I might even consider doing that across several different fee models here. But if you just go with the very first person you talk to, how are you going to know that that's good? You have no idea. You don't even have one or two or three comparisons in your toolkit in terms of how to hire this person or see what the options are.

31:42So I think that's really important. It's going to empower you greatly if you talk to three, even if you really like the first one that you talk to and eventually end up hiring them. It'll just empower you to know there's other options out there. And this is somebody you can hire and somebody you can fire when you need to for any reason or no reason at all. That's the first thing I think. Yeah. What experience do you have in working with clients like me? How are you compensated? Right. And I think that question matters, even if they offer an hourly or flat fee model, if they also offer AUM services or also sell commissions and their model is flexible depending on what you want, I still think that's a big flag because who's going to get the better attention long-term or where's that bias going to go?

32:25Where's the revenue for this business going to come over a long period of time? Is it going to come from you paying 250 bucks an hour for a few hours a year? Or is it going to come from the person that they're going to generate a 40 or$50 ,000 commission from by buying the whole life insurance policy, the permanent life insurance product or the annuity? That's a major conflict of interest. I want to know if they make any money in these other models, including the one that I'm looking for in the hourly or comprehensive flat fee.

32:51Mindy Jensen:I'll go you one further, Scott. I want you to ask, do you recommend any products where you are paid a commission for recommending that product? There are advice-only advisors out there who will say, these are the things I think you should do. Let's look at you, Scott. Outside of your financial situation, you are a young couple with two young children. Should something happen to one of you, let's say that you both earn the same income, which covers about 50 % of your spending and investing, and one of you passes away, you're going to have a problem. So I have no issue with an advisor saying, I think you need life insurance.

33:36Mindy Jensen:I have an issue with an advisor saying you need this specific policy. And also they make$20 ,000 off of selling you that specific policy. Is that really what I need? Or did they really need that$20 ,000? One of the big things I have is let's say that you're tempted to buy that permanent life insurance product. It's going to cost you several thousand dollars a month for the rest of your life and premiums here. And you know, the person's going to get a big commission, but they've sold you. They really feel struggling about it. They clearly believe in the product or seem to. That's a great use to call up one of these hourly financial planners and just say, before I commit to this very large permanent life insurance product, could you let me know what you think as an unbiased source on this, that with no skin in the game other than the 500 bucks I'm paying you to review my decision here?

34:20That could save you a lot of money. And 500 bucks in the context of a lot of these permanent life insurance products to get a second opinion from somebody who's not selling it is potentially one of the best investments you can make in your life. If they approve it and they say you're one of the rare cases that you need it, that tells you a lot if you get a second opinion that says that. I think it'll be rare, but it will not be a never situation.

34:41Mindy Jensen:Another question is exactly how much will I pay? If they can't answer this, thank you, next. I think that's right. I think there should be an hourly cost, if that's clear, or a cost per the engagement or an annual recurring cost in there. The next question you want to ask is, are you going to manage my assets for me, or am I going to manage them? And you're going to be providing advice only. So that's this term advice only and comprehensive financial planning and where they diverge, right? Because a flat fee advisor or even an hourly advisor in some cases can manage your money for you. They can manage your accounts, do Roth conversions on your behalf, distribute funds, that kind of stuff from the portfolio, make investment decisions.

35:21Or they can be advice only where they never touch your money. They only tell you actions to take that you will be on the hook for taking downstream from that. So that's a question. Many planners will offer both. Some will be only one or only the other.

35:35Mindy Jensen:Scott, this next one is a big one. Are you a fiduciary? And a fiduciary means a person or organization that manages money or property for someone else and is legally required to put that person's best interests ahead of their own. As a real estate agent, I'm a fiduciary. If I am hiring somebody to give me advice about my money, I want them to be a fiduciary. Yeah, I think that's right. And not all financial advisors are fiduciaries. And the standard for some financial planners is that they only have to recommend products that are suitable for you, even if those products pay them higher commissions than alternatives.

36:18That's something to note about this industry. And asking if they are a fiduciary is a great way to start that. And I think that even inside of the fiduciary world, I believe that incentives matter. And this is my small beef that's receding, right? I've walked it back. I'm not saying that AUM financial planners are all bad. I was saying that for a while and I've walked that back. I no longer feel that way after talking to many very high quality planners who charge AUM fees. But I have to believe that if a decision to pay off the mortgage, for example, or stay invested is going to cost the planner 40 % of the portfolio, that that's going to influence their decision to some degree.

36:59They can be a fiduciary and that incentive can provide a powerful reason to believe that one course of action is better than the other. And that's a challenge in there. And there's no free lunch here. So a financial planner that charges you a recurring fee for every year, a flat fee, will want to provide value to keep the relationship going. So there's no perfect incentive model in any of this. An hourly person may want to do more hours, and a flat fee person may want to get the job done quicker. There's no perfect incentive model. Just know that that may have some impact in some of the recommendations folks have, even if they are fiduciary.

37:39Mindy Jensen:another question i want people to ask is who will i actually work with i would hate for somebody to interview the person who answered the phone have a great rapport with them think that that's the person they're going to be working with and then arrive at their meeting and be like who are you know who it is that is going to be giving you advice before you sign up that appointment i think that that also brings up another question around should I work with an individual solo practitioner or should I go with a firm that has a rotation of professionals on staff? And I think that's a big challenge here.

38:14And I'll say I don't have the right answer to that. I don't think that question will be permanently resolved ever across any industry here because I think you can always theoretically get better quality at lower price directly from a solo practitioner and that in practice, that can be very hard, right? In practice, I will say in my experience working with solo practitioners, I've had a great, wonderful experience in year one, for example. And then if they're very good in many cases, by year five, this person is now fully booked and I no longer have that power dynamic with the professional where they're going to pick up the phone and respond to my email with my annoying question that I need answered.

38:50That can be a challenge. A firm may be more expensive, but I would argue often have less risk of that dynamic occurring over long periods of time, but not no risk. And there could be, I get handed from this guy I used to work with to a new person or partner in the firm as that person moves on and takes their book of business with them. So I don't think there's a perfect answer in this world. And I think you'd be foolish to attempt to get to perfect. I think you should just understand there's trade-offs between these two models in there. And you may wanna interview a couple of solo practitioners and a firm or two in your search for a financial planner.

39:19Mindy Jensen:Other questions that I think you should ask are, does your firm handle tax advice? do you provide estate planning guidance, and do you provide insurance advice? These are great questions to ask, especially if you're looking for estate planning advice, tax advice, and insurance advice. You don't want to sign up with somebody and ask them a tax question and have them say, oh, we don't do that. Okay, it's great that you don't do that. I wish I would have known ahead of time because that's kind of a big concern. And it's totally fine if people don't provide certain levels of those items. And there's a big fight apparently in the Reddit universe between the lawyers who think the financial planners should not be involved in the estate planning and the financial planners who think, of course, they should.

40:03I don't see how your financial planner can't be involved in your estate planning piece to some degree in there and how there's not a discussion that goes on there. I think it just depends on the planner and the lawyer and how people want to engage in all that. I do think that if you try to get everything all perfect, you can get yourself into the middle of some very expensive phone calls where you have your estate planning person on one, the tax person on the call, and then the hourly financial planner. And you're like, wow, that joke just cost me 40 bucks. How was your weekend?

40:35Mindy Jensen:40 bucks. What kind of discount guys are you using? That was the three minutes that we spent on how was your weekend? You know, Saturday good, you know, dad, a barbecue. No, now we didn't even get to the advice. It's like a thousand dollars an hour going across these three guys. That could be a problem. You don't want to get into that situation. There's trade-offs. That's the word. There's trade-offs in all of this. What do you need? How informed can you get? How prepared can you get? How can you make the most of your time with these professionals? Hopefully, this episode has helped you think through that and some of those trade-offs and help you make it a little bit better of a decision for yourself when it comes time to hire a financial planner in particular.

41:08Mindy Jensen:Scott, do you have any other questions you want to suggest to our audience before we wrap up? Yes and no. I don't frame this as a question, but I think it's what should you get? What is the output of a good engagement with a financial planner, in my opinion? And I think it's four things. One, the financial planner should accurately represent your financial position and the core problems and challenges and opportunities that you face. Diagnosis. Second, this person should give you a clear directional path of where you want to go. We're going to invest in index funds. We're going to pay off our rental mortgages.

41:48We're going to move through this tax-advantaged order of operations instead of this one. The third is there should be a specific set of actions to take that actually address your problem. We're going to make these changes to your financial position or none. You were doing it completely correct and this was a confirmatory. Our diagnosis, our guiding principles are exactly what you came in with. That's fine, but they should be stated in some way. Let's say that, right? So a diagnosis, a set of guiding principles, what you're going to do, and a set of specific actions that actually resolve the problem you came in to the engagement with.

42:19And then last, I think in a financial planning context, there is a checklist of best practices. What am I going to do with my insurance policies? Do I have disability, life insurance, home insurance, auto, umbrella? Do I have all those knocked out and I actually have checked to the box that those are complete? Do I have an up-to-date estate plan? Are my beneficiaries is listed on all my investment accounts. There should be a checklist of best practices that they provide that are tailored or tweaked to your situation. They're not just boilerplate from every single financial plan. It's like, no, your position's here.

42:53You're worth three million bucks. You probably don't need a$5 million life insurance policy if your five number is 4 million. Maybe we'll get a$1 million term policy, for example. So there should be some element of a checklist that is relevant to your situation. And I think if you don't get an output like that, the engagement has largely failed. There's many ways to provide a good output in that context, but I think it should contain those ingredients. Where you're at, what you ought to do at a high level, specifically what you're going to do right now, and a check the box list of best practices to complete.

43:19Mindy Jensen:I love that, Scott. I don't have anything to add to that in the words of Charlie Munger, RIP. So maybe you could turn that into the last question of saying, what is the output of this engagement going to look like for me? And some variation of an answer that addresses those points or a reasonable variant of that. is good from your financial planner, I think. All right, our dear listeners, we threw out a lot of links today. They can all be found at biggerpocketsmoney.com slash resources. If you haven't hopped on over to our website, we have a new website, biggerpocketsmoney.com. We have a blog.

43:53Mindy Jensen:We have a ton of resources. We have a newsletter that you can sign up that goes out every Wednesday. We have a ton of stuff for you to help you on your journey to financial independence. Scott, what do we charge for this? We are free only. Free only. But we also, we should disclose, we should disclose here. Hey, we have financial planners on biggerpocketsmoney.com that we think are FI friendly. They are found at biggerpocketsmoney.com slash FI pro, F-I pro. They are, I think at this moment, all flat fee or hourly, or at least offer those options as primary considerations. I think there's some AUM folks that you can find in some of the marketplaces that we've partnered with here.

44:34But we do partner with that and we will. That's our conflict here. We believe that this is the right way to get financial planning advice. And we are saying that here. We also may make money if you use some of the financial planners that you find at pickerpocketsmoney.com slash 5pro. We recommend you interview a few folks potentially at that URL or elsewhere on the internet as part of your search for a financial planner. But you should know our conflict of interest here. We would like you to use those guys when the time comes and it's right in your situation. And we think it's the right approach, but we also have a financial incentive to recommend that.

45:04Mindy Jensen:I think that's fair. All right, Scott, should we get out of here? Let's do it. That wraps up this episode of the BiggerPocketsMoney podcast. He is Scott Trench. I am Indy Jensen saying see you soon, loon.