Financial guru Bonnie Kirchner on how to find the right financial advisor
Picking a financial planner can be hard. Bonnie Kirchner ought to know. The certified financial planner and Boston-based financial personality discovered in 2004 that she was married to one of the biggest swindlers in American history. Her husband, Bradford Bleidt, defrauded his clients of $30 million in what was one of the biggest Ponzi schemes before Bernie Madoff.To demystify the process, Kirchner wrote a handy guide to hiring someone titled "Who Can You Trust with Your Money? Get the Help You Ned Now and Avoid Dishonest Advisors." Kirchner gave WalletPop a quick run-down of what we need to do before signing up with an advisor.
How can the average Joes, who were a lot of your husband's investors and Bernie Madoff's investors, protect themselves?
That is really the premise behind the book. What I found is people are pretty much running scared at this point and are not getting help that they need. So they either make the decision to do it themselves, which many people can but it does take time and it takes educating yourself and all of that. Or you hire somebody. The good news is that the vast majority of advisors out there are good people who want to help people. That's why they are in this field. But there are certainly people who are either inadequate in what they are doing or somewhat manipulative and can hurt you or out and out stealing from their clients.
So what I usually recommend for the first step is getting referrals from other advisors that you have and trust, like your CPA or lawyer or friends, colleagues, family members, people who have similar circumstances to you, similar goals. Then it's a bit of a process to narrow that list down to maybe three people to sit down and interview.
Remember, you're hiring them to do a job. So there are quite a number of questions to make sense to ask through that process. Eventually you do have to go with your gut, but once you've hired somebody, there are steps you can take to verify they are doing what they said they would do.
You had a lot of great questions but you also said we may only get 15 minutes of this person's time. How would you prioritize the questions?First of all, the biggest issue is custodianship. If you are going to be investing money, where will it be kept? Is it covered by the Securities Investment Protection Corporation (SIPC) insurance? What institution is actually going to take physical asset of your money? That is probably the Number 1 thing because you need to be able to follow up and verify when you're receiving statements that your money is actually being kept at that institution. That you are not getting some manufactured statement.
Number two is issue of compensation. How is the advisor going to be paid? Are you going to be paying them directly? Will you be paying them a fee? If so, how much? What is it based on? Will it change? Will that advisor receive commission? If so, on what products? It varies from situation to situation on what works better, but you need to understand how the advisor will get paid. The advisor has to get paid somehow. So if they are telling you that they are not getting paid or they are vague about how they will be compensated, that is certainly a red flag.
I love your idea of doing your balance sheet and your income statement. That's how you're going to figure out your priorities. Given how the economy has been going and the high unemployment, what should our priorities be? Should it be saving for retirement? Having a rainy day fund?
In times like these, it's really good to go back to basics. Everyone should have an emergency fund, which is rule of thumb, three to six months of your basic expenses, whether it's rent and utilities, mortgage and utilities, food, things of that nature. The reason why that's important is if God forbid you lose your job, if you become disabled or ill and can't work, you need to have a cushion to rest on in the event that there is an event that causes you to lose your income.
That being said, I don't like people to ignore their retirement plan. That is such a huge benefit to people who have it available to them. It helps you now, because you'll save on taxes that you would normally have paid on that money if it weren't going into a retirement account. Number 2, my friend Dee Lee likes to say, "there is no scholarship for retirement." We don't know what is going to happen with Social Security. Employers are moving more and more to what are called defined contribution plans and away from traditional pensions that our parents enjoyed. So more than likely, upon retirement, and while you're saving for retirement, you are going to be responsible for those monies that are in that retirement plan – how they are going to get there and how they are going to be invested and, eventually, how you are going to take them out.
The first priority is the emergency fund. The second is the retirement plan. Then after that, once you've maxed out your retirement plan, you should be focusing on other investments. College, or if there isn't another goal, building up an asset base. Too much is never enough.
When I started working, I heard that a fee-based advisor is the best. Does that still hold true? Or does it depend on your situation?
It does depend on your situation. When you're first starting out, if you are paying a fee, it may be by the hour or the amount of assets you are having managed. Understand what that pay is and whether or not it's affordable to you. A lot of people when they're first starting out can't afford to pay an advisor $200 or $250 an hour to do what they need to do. Maybe a commissionable type of situation could work out better initially. But understanding the two and how they work is very important because it is going to affect how that advisor might be incentivized.
You also mentioned that not all credentials are created equal. Can you tell what we should be looking for?
Again it comes back to your needs. If you are looking for overall financial planning, certainly the financial planner designation shows the advisor has a diverse knowledge in all the areas of financial planning. But you do want to ask if they have specialties as well. In the event that you are solely focused on investments, you might want to consider somebody who is a chartered financial analyst. The credentials do vary, and that's one of the reasons why I put the descriptions in the book, because your particular needs may dictate what type of advisor is best for you. The common ones are certified public accountant, obviously if you have accounting needs, if you have tax issues. The chartered financial consultant tends to be more insurance-oriented. If you need to focus on your risk management, then that type of advisor might be able to help you. But it doesn't just go back to the designations. You need to also understand what that person's experience is, what their specialties are, and how it fits in with what your needs are.
You recommend revisiting the plan once a year. What about revisiting the advisor? How often should you reevaluate your relationship?
If you are unhappy, you need to get to the bottom of why. If it's just communication issues and they can be ironed out, that's worthwhile [to fix]. If you change advisors, it's going to affect you expense wise. If an account has to be moved, sometimes there are closure fees. A new advisor may have different advice, in which case you might change investments, which could cost money. First, try to see if you can come to terms with the existing advisor. Develop a good communication plan so that you can be happier and feel more comfortable.
You recommend revisiting the plan once a year. What about revisiting the advisor? How often should you reevaluate your relationship?
If you are unhappy, you need to get to the bottom of why. If it's just communication issues and they can be ironed out, that's worthwhile [to fix]. If you change advisors, it's going to affect you expense wise. If an account has to be moved, sometimes there are closure fees. A new advisor may have different advice, in which case you might change investments, which could cost money. First, try to see if you can come to terms with the existing advisor. Develop a good communication plan so that you can be happier and feel more comfortable.
You should be revisiting your own financial plan once a year. Again it depends on how you are compensating the advisor. The more you compensate them, the more you should expect out of them. People should at least be having a telephone conversation with their advisor once a year. Also when there are any significant changes, like the market fluctuation that we had, or a something major in your life, like a marriage, a death, a birth, and a job loss. All of these major life changes warrant a discussion with your advisor.
You said one of the questions to ask is what happens if your advisor is unable to help you because they're sick, takes a leave or something. What is a good succession plan?
You said one of the questions to ask is what happens if your advisor is unable to help you because they're sick, takes a leave or something. What is a good succession plan?
You need to understand, in the event that your advisor cannot take care of you and your account, who is next in line to do that? Is it someone who is junior? A partner in the firm? Someone who is supervisor? This is very important. You never know what can happen.
Anything else you want our readers to walk away with from the book?
Just understanding that if you need help, get it. You shouldn't be frightened given what has developed over the past several years, with many advisors being exposed as frauds. Most advisors go into this career path because they want to help people, and they want to help people obtain their financial goals. But it does take a little bit of work, knowing yourself, knowing your financial self, to get the proper person in place. Once you do that, it's going to pay for itself. Because you'll have a coach there to help you obtain your financial goals and make sure you are on track.
Anything else you want our readers to walk away with from the book?
Just understanding that if you need help, get it. You shouldn't be frightened given what has developed over the past several years, with many advisors being exposed as frauds. Most advisors go into this career path because they want to help people, and they want to help people obtain their financial goals. But it does take a little bit of work, knowing yourself, knowing your financial self, to get the proper person in place. Once you do that, it's going to pay for itself. Because you'll have a coach there to help you obtain your financial goals and make sure you are on track.
