Three Questions You Should Never Be Afraid to Ask Your Investment Advisor

Congratulations. You’ve decided to work with a financial professional to help improve your financial situation. How do you find a good one? Unfortunately, that’s harder than it sounds. There is a huge barrier between people seeking good financial advice and professionals offering it. Advisors can be found in the yellow pages (Millennials, you might have to Google that), on various online sites, by answering incoming phone calls, by asking your friends and neighbors, or any number of other ways. Personally, I believe a referral or introduction from an existing client is the best way, but that could be another entire article. Here are some suggested questions you should ask a prospective advisor.

1. Start by asking yourself what kind of help you think you want and/or need

Are you just seeking help with your investments? How about someone who will be the “quarterback” of your entire team of professionals (tax preparer, estate attorney, bookkeeper, banker, investment manager, etc.)? Are you looking for someone who simply suggests things for you to go do by yourself (what I call the “travel agent” model), or someone who will give you advice and then help you carry it out (what I call the “Sherpa” model)?

The answers to these questions will determine what kind of professional to seek out. I know some of you are thinking, “Wait—aren’t they all the same?” Trust me; the answer is an emphatic “NO”! One of the best ways to determine what type of professional someone is, is by asking about their credentials.

2. What are your credentials and what do they mean?

Anyone can call themselves a financial advisor. A stockbroker, a life insurance agent, a mutual fund sales rep, an annuity salesperson, a banker, a mortgage broker. Seriously, there are no rules for the title Financial Advisor. The title Financial Planner, on the other hand, has very definitive rules. There are only two kinds of people who can legally call themselves a planner. One group took classes, passed some exams given by an industry group, and received the Certified Financial Planner (CFP®) designation. The other group took classes, passed some exams by a governmental group, and received their Series 65 or Series 66 registration. These folks are called Registered Financial Planners, although that moniker hasn’t caught on yet the same way the CFP® has. Both of these groups can legally charge you a fee for giving you advice.

You might also encounter professionals who received a Series 6 registration (this allows them to sell you a mutual fund) and/or their Series 7 registration (commonly called the stockbroker license). You will also encounter people who have some combination of these.

Someone who only has a CFP® can give you advice but can’t help you execute it. These are the “travel agents” I referred to. This might be a good choice if you want to pay for advice but then go do everything yourself. Another example might be people who hire a personal trainer at the gym one time to teach them the right exercises to do; then they go do them by themselves.

Someone who only has a Series 6 or 7 registration can sell you products for a commission, but they can’t give you any advice. Let’s call them “luggage salespeople.” This might be good for people who don’t want professional advice, make their own decisions, and simply need to buy financial products in a transactional relationship with a salesperson.

Someone who has their Series 65/66, or has their Series 6/7 and 65/66, or who has their CFP® and Series 6/7 and/or 65/66 can perform the “Sherpa” function of going on the journey with you and helping you implement the advice. These are good choices for someone who recognizes the value of professional advice and knows they need a little extra help with actually getting things done (or want that extra accountability). Think people who hire a personal trainer at the gym and see them week after week. In my experience, clients of these professionals make the most consistent progress toward their long-term goals.

3. How will I be charged? How do you get compensated?

Sometimes those are the same question and sometimes not. Does the professional make a commission when you buy a product? If so, how much is it? Do they charge an hourly fee, a monthly fee, or a one-time flat fee? Is the professional paid a fee based on the size of your invested assets? What is that fee?

If you are buying products, are there any fees built into the products themselves? How much? Are the fees for the product clearly spelled out or are they buried internally?

Will ALL of your fees be clearly itemized on your statements? Ask to see an example.

4. What services do you provide?

This should line up with your answers to Question #1. Don’t make any assumptions here. Make sure the service you are seeking is actually provided by the professional you are interviewing. The professional might want to sound like they can do everything for you. For example, a stockbroker can open an IRA for you, but that’s not the same thing as doing retirement planning for you. Be clear.

5. Are you a Fiduciary?

Due to a recent regulatory change, this is the new industry buzzword. There are multiple standards of care in the financial services industry. One is the “suitability” standard. Professionals who do not give advice are held to this standard. They need to show that the product is appropriate for someone in your situation, but they don’t have to disclose their compensation or prove that the product they recommended is actually in your best interest. If there were two products that both accomplished the same thing, but one resulted in the professional receiving higher compensation, the professional doesn’t have to tell you that.

The other standard is the “best interest” standard. People held to this standard are fiduciaries. They must always act in the client’s best interest. If they sell you a product, they must demonstrate that it is in your best interest rather than their own.

Conclusion

I’m a Sherpa, so I naturally believe that’s a better choice for most people seeking professional help with their finances. My fees are very clear and, they appear right on the statement or contract signed by the client. I think hidden fees should be avoided at almost any cost. My clients hire me on an annual basis to be their DecisionCoach. I give them advice, I help them make better financial decisions over time, and I help them implement the advice. Depending on the client, I might be helping with organization, cash flow, investment management, budgeting, retirement planning, college planning, income planning, tax mitigation, asset protection, insurance, advanced medical expense planning, estate planning, and much more. Are you looking for a professional like me?

In 2015, Americans spent $225 billion on long-term care. That’s 7 ½ times what was spent 15 years prior, in 2000. With the great advances we have made in medicine and medical technology, people are living longer. The downside to that is that it means people are more likely to need care and need it longer. In fact, over half of people turning 65 will need long-term care at some point in their lives.(1)

Types Of Long-Term Care

When you think of long-term care, skilled nursing facilities are probably what comes to mind. However, that is actually the last step in the long-term care journey. Most long-term care is not medical; it is simply assistance with basic activities of daily living like bathing, dressing, eating, and going to the bathroom.

Even without serious medical problems, most people become less and less capable of taking care of themselves as they age. Traditionally, people would turn to family for help with such things. However, in our modern era where families live far apart and adult children are already overburdened with careers and children, more and more people have to pay for long-term care services.

The most basic, and least expensive, form of care is homemaker services. Homemaker services do not involve anything medical, but rather things like meal preparation, cleaning, and running errands. The next step up, which does have a medical component, would be a home health aide.

Once basic in-home assistance is not enough, specialized facilities are needed. Care outside of the home can be in the form of adult day healthcare, assisted living facilities, and nursing homes.

Costs Of Long-Term Care(2)

Costs vary depending on the type of care needed and the part of the country in which you live. On an annual basis, the national average goes from just under $48,000 for homemaker services to over $97,000 for a private room in a nursing home, and that number is growing about 3-4% a year.

Things change drastically when you look at specific locations. In San Francisco, homemaker services are more than 150% the national average and growing twice as fast. A private room in a nursing home averages $171,185 a year. Even downgrading to a semi-private room still costs over $141,000 a year. Twenty years from now, that same semi-private room is expected to cost over a quarter of a million dollars.

As you can see, long-term care can be very expensive, especially with the rise of dementia, where people can live a long time while needing care. In 2018, the estimated lifetime cost of care for someone with dementia is $341,840,(3) and it’s probably much higher in a state like California.

Ways Of Paying For Long-Term Care

Because of the high cost, it is important to plan ahead for long-term care. There are a number of ways to pay for care, each with its advantages and disadvantages.

Medicaid

The vast majority of Americans turn to Medicaid for their long-term care expenses. However, it’s not because it’s a great option. Rather, it’s their only option. In order to qualify for Medicaid, you have to have a low income and low assets, so it’s not really something people plan for intentionally.

Self-Insure

On the opposite end of the spectrum from the people that can qualify for Medicaid are those who have amassed enough wealth to self-insure. If you have $50 million in assets, you can afford to pay $170,000 a year for a nursing home and it won’t have a significant impact on your finances.

The danger is that sometimes people take too great a risk thinking they can self-insure. Often, care is needed later in retirement when savings have already been spent down significantly. Having $500,000 in the bank may seem like a lot of money, but long-term care expenses can eat through it very quickly. Unfortunately, it’s not uncommon for a couple to spend all of their savings on the husband’s care only to leave the wife destitute at his passing.

Life Insurance With A Long-Term Care Rider

One option for those that find themselves in between broke and very wealthy is adding a long-term care rider to their life insurance. If you have, or are planning on purchasing, permanent life insurance, your policy may allow you to add a rider that would help pay for your long-term care costs. Using the long-term care option will often lower your death benefit, but many people appreciate knowing they will receive a benefit even if they never need long-term care.

Premium Paying Long-Term Care Insurance

Another option is buying pure long-term care insurance. Like with most kinds of insurance, you pay a regular premium in exchange for receiving a benefit when you need long-term care. One downside to this for many people is that you will only receive a benefit if you end up needing long-term care. As with car insurance where you have to get into an accident in order to get money out of it, if you never need care, you never see your money again.

Asset-Based Long-Term Care Insurance

The final option has been the fastest growing long-term care option over the last decade.(4) It is a combination of long-term care insurance and single premium life insurance, commonly called asset-based insurance.

The way it works is that you pay a large amount up front and then low annual premiums. You have several times your initial deposit available tax-free for long-term care needs. If you never use it or cancel your plan, you usually get your deposit back plus interest. Some plans even include tax-free death benefits.

Choosing A Long-Term Care Option

Looking at the statistics, you can tell that planning for long-term care is an important thing to do. Failing to do so can be a costly mistake. Because the multitude of options available can be complex and confusing, it’s important to work with an experienced financial professional.

An experienced advisor can explain all of your options to you, help you consider the pros and cons of each, and decide which is the best solution for your particular situation. If you want that kind of help choosing a long-term care option, call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com to set up a no-strings-attached meeting.

(1) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(2) https://www.genworth.com/aging-and-you/finances/cost-of-care.html

(3) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(4) https://www.525longtermcare.com/asset-based-ltci/