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Kitces: The 5 Most Important Traits Investors Should Seek in an Advisor

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What You Need to Know

  • Buckingham Wealth Partners' Michael Kitces took to Twitter to discuss what questions prospective clients should and shouldn't ask of a potential advisor.
  • Kitces offered up 5 things investors should be looking for, noting they are “what I'd tell my mother if she had to find a financial advisor alone after I'm gone.”

There are several useful questions prospective clients can ask an advisor before selecting a financial expert but one of them is definitely not what percent return they should expect, says Michael Kitces, head of planning strategy at Buckingham Wealth Partners.

Kitces pointed out, at the start of a long Twitter thread on Sunday, that he was just asked that exact “infamous (for advisors) question that prospects often ask.” In reaction, Kitces said he was “feeling compelled to take a few minutes [and] explain why this is NOT what any consumer should ever ask when trying to vet a financial advisor.”

So, why is that such a bad question? “The reality is that returns are determined by the market, not the advisor,” he explained. “At best, an advisor may say they can beat the market BY a certain amount (1% or whatever?), but that’s still relative to whatever the market turns out to deliver.”

For example, the market may deliver 15%, and an advisor may get anywhere from 6% to 16%. “But whether the market returns 5% or 15% or -20%, the truth is no one knows for any particular year,” Kitces tweeted.

“At best, some market fundamentals can give guidance over the next 5-10+ years that returns will be better (above-average) or worse (below-average), but even brilliant managers fail to beat the market routinely in any particular year (b/c no one knows year to year),” he added.

Why It Matters

Kitces recalled a prospective client who had asked this question back in 2004, “when real estate was booming but rates were really low and valuations were already getting high.” The response from an advisor at his firm was that 6% to 7% was all that could be expected over 10 years, he said.

A second advisor, however, told the prospect he’d get 8% returns, so the prospect picked this rival firm instead because, after all, “8% beats 6%,” he noted. It’s really that simple, right?

Well, no, it’s not. Kitces pointed out it “really was a low-return environment” that year, “so 8% was only achievable w/ concentration in high-dividend #FinServ preferred.” Then, “barely 4 years later, along comes the financial crisis” and about 30% of that investor’s portfolio was in Lehman preferred, Kitces noted.

The investor “got the promised 8% yields for 4 years… until nearly 1/3rd of his portfolio lost 99% in a few weeks when Lehman went under,” Kitces said. Because the investor “evaluated advisors by their promised returns, he picked the one w/ the highest %-return promises that really just gave the riskiest portfolio,” he added.

The “key point is that, especially in low-return environments, asking advisors what returns they can get pulls you away from ‘good’ advisors w/ realistic advice about low returns, & skews towards those who overpromise & then dial up risk trying to make good,” he tweeted, which, he added, is “NOT good.”

So What Should Investors Look For?

When vetting a financial advisor, there are five specific things Kitces said that investors should be looking for, noting they are “what I’d tell my mother if she had to find a financial advisor alone after I’m gone.”

1. Incentives matter.

“Most ‘financial advisors’ are legally salespeople, not advisors, paid for products they sell (commissions) rather than the advice they give (fees). And when you’re paid to sell hammers, every problem looks like a nail,” Kitces said. Therefore, he advised: “Seek out a ‘fee-only’ advisor.”

2. Accountability matters.

“Salespeople have different (lower) standards of care than advisors,” according to Kitces. “In our industry, broker-dealer reps & insurance agents (salespeople) have lower standards than RIAs (advice-givers). You want an advisor who has consequences for bad advice.”

He added: “Fiduciary is the advice standard, w/ real legal consequences for those giving bad advice & don’t follow a good process. Seek out an RIA who operates as a fiduciary at all times. (And look them up on BrokerCheck to verify no disciplinary history.)”

3. Education matters.

The only obstacle to somebody putting the title “financial advisor” on his or her business card and then advising on an investor’s “entire life savings is ludicrously low — it’s a high school diploma & a 3-hour regulatory exam you can study for in a week or two (& the diploma is actually optional),” he pointed out.

Therefore, he warned, if “you want good advice, demand more competency,” which he said means “certification as a bare minimum, and ideally a graduate degree in financial planning or another relevant field or other advanced designations (esp. if your situation is more complex).”

4. Expertise matters.

“Education covers the core body of knowledge, while expertise is about applied experience gleaned from helping lots of people in situations like yours,” according to Kitces. “The wisdom that comes from seeing those client challenges & solving them repeatedly.”

An educated advisor will “run projections to see if you can afford to retire; expertise is knowing pre-65 transition creates pre-Medicare health insurance gap, an HDHP w/ HSA can bridge the gap, but claiming SS early triggers Medicare application & invalidates HSA contributions,” he said.

It is also best for investors to “seek out advisors who have experience with (and ideally, a focus in) working with other clients of a similar income/wealth level and age/circumstances to you,” Kitces added.

5. Communication matters.

“In the end, open conversation about your money issues w/ your advisor is crucial,” according to Kitces. “Yet money is still one of the most taboo subjects. So even if someone checks the other boxes, if you don’t feel the communication click, it’s not a good fit,” he said.

He urged investors to “seek out an advisor that feels comfortable to talk to and communicate with, and trust your gut that if it doesn’t feel right in the first meeting, it’s not going to be a good fit in the long run either.” And he further suggested that investors “always vet w/ a final 1-hour conversation to make sure you get along.”

Tweeting in response to the intial prompt about investors who ask what returns they’ll get from hiring an advisor, “JorgeTM” (Jorge I. Blanco, a CFP who is president of Success Wealth Management in Tampa, Florida and serves as an advisor for LPL Financial) said: “IMHO these are clients best not taken on.”

He added: “Though the question is reasonable in a broader context such as planning assumptions, those who measure an Advisor’s value by X% return, are almost always going to be disappointed, and may never see the value of planning.”

Also weighing in was John Stoj, founder of Verbatim Financial in the Atlanta, Georgia area, who tweeted: “If asked, my initial answer would be, ‘no idea,’ followed by, ‘what were you hoping I’d say?’ I’m super lucky though: if someone has any idea what I do before we talk, they’re not asking that.”


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