You’re doing everything right — living below your means, have a sufficient cash reserve, and are taking advantage of your tax-deferred retirement accounts to the full extent. So what’s next when you still have discretionary cash flow left over?
First of all, this is a good problem to have and you should congratulate yourself for not falling victim to lifestyle creep!
When deciding on how to allocate additional cash flow towards a worthwhile goal, consider the following:
Is there a shorter-term goal you have outside of investing for financial freedom (retirement)?
Do you have a business idea you’d like to pursue? Investing in yourself is often the best return on investment.
Real Estate – consider adding a rental property to your portfolio for income generation.
Enjoy life in the present more — travel more, go out to dinner more and invest in experiences!
From an investment standpoint, continuing to do more of the same is often a great option! Sometimes, as our net worth and incomes rise, we believe adding complexity to our investments is a natural form of progression.
This is not the case!
If you’re looking to use your money to enjoy life more in the present, consider what your money dials are.
Think about the things in your life that you can outsource, because you:
Don’t enjoy doing them.
Want to free up your time for things you do enjoy.
Want increased convenience.
Time is our most valuable commodity, freeing it up is a form of wealth on its own!
Choosing an appropriate fee structure as a fee-only financial advisor is one of the hardest parts of the business. Especially when clients can have such unique needs, it can be difficult to charge appropriately without knowing ahead of time the level of service someone is going to require.
This is (partly) why I have chosen to take the route of charging a flat fee based on what my time and expertise is (currently) worth. Let me be clear — I do not care how much other financial advisors charge their clients, as long as they are transparent about what their time and services are worth. If a client is willing to pay $3,000 a quarter for your services — great that’s called free market capitalism.
However, I don’t believe the standard 1% assets under management (aum) fee is an equitable way of charging fees. It also still leaves potential conflicts of interest open, even for the fee-only financial advisor.
I think any advisor that’s honest with themselves would admit, there’s incremental (if any) additional work required to manage a $500,000 portfolio vs. a $5,000,000 portfolio. So why should we be entitled to a 10x fee ($5,000 vs. $50,000 annually), when we’re not doing 10x the work?
With the increased efficiencies that technology has provided the financial advisory community, there is no reason someone cannot create a profitable practice (IMO) charging an appropriate $5,000 annual fee regardless of assets under management (for example). Again, if your time and expertise is worth more — charge more.
Since I tend to work with high earning young professionals, I can also tell you that the next-gen of consumers are not going to sit back and pay 1% on a million dollar portfolio to meet with someone once a year. In my (brief) experience, the next-gen of investors I’ve worked with are considerably more informed compared to previous generations that are used to “doing business” a certain way.
This has led them to demand a higher level of transparency and service that aligns with an appropriate value proposition.
Arguably the most important question you can ask your advisor. Incentives are a powerful motivator, and even the best advisor can be compromised when given incentives that do not align with the client’s best interest. A quick way, (although not foolproof) is to ask if your advisor is considered a “fiduciary”. Being a fiduciary means the person is legally required to do what’s in the best interest of the client. If the advisor is considered a fiduciary and does not do what’s in the best interest of the client (i.e. selling a product solely for the benefit of the advisor), then they’re leaving themselves open for lawsuits. Consider working with a fee-only advisor since their business model by default dictates they act as a fiduciary. If the advisor works based on commission, be very skeptical, since products can offer a wide variety of commissions to the advisor. The advisor may be incentivized to sell higher commission products that are deemed “suitable” for the client, but not necessarily what’s in the client’s best interest.
2. What is the advisor’s investment philosophy?
Does the advisor have a passive or active approach to investing, or maybe a combination of both? How does the advisor determine an appropriate asset allocation for a client? What factors warrant changes to client’s investments; for example, changes to a client’s circumstance versus changes in market environments. There is no perfect answer, as a wide variety of investment philosophies can drive long term success. However, you should look for an advisor who has a disciplined process, and one that can be reasonably/easily explained in plain English. Some of the best investment strategies can be very simple, but require behavioral coaching to make sure the client sticks to the chosen strategy. Don’t be sold on complicated investment strategies that you can’t understand; the finance industry has developed jargon over the years to keep consumers from asking important questions.
3. How does the advisor select investments and products; are there any proprietary products?
This goes along with question 1 and how an advisor is compensated. Again, if an advisor works for an overarching corporation, that does not necessarily mean they’re bad, however, they often have incentives from the corporation which may or may not align with the client’s best interest. The corporations are concerned with driving profits and appeasing shareholders, which can sometimes trickle down to the clients being taken advantage of. An example of this abuse can come from proprietary products. Many large broker-dealers and investment firms own mutual fund subsidiaries, whose funds their advisors can recommend to clients. Advisors may be incentivized to use a particular fund family because they are owned by the overarching corporation, regardless of the fund is the best one for the client. Proprietary products are not necessarily the number one thing to be wary of, it’s just better to have an advisor who you know has no incentive to recommend one investment over another.
4. What value does the advisor provide beyond investment returns?
With fee margin compression and investment automation, investment returns should not be the sole value provided by your financial advisor. Does your advisor provide advice on other financial aspects of your life? For example, budgeting and cash flow, protection planning, education planning, estate planning, and tax planning. You should look for an advisor who provides holistic advice, meaning they’re looking at how each aspect of your financial life is connected. The investment returns are only a piece of the pie.
5. What are the advisor’s expectations of you?
What does the advisor expect from your relationship? How often are you expected to meet and review your financial situation? Ask the advisor what their ideal client relationship looks like so that you can both properly set expectations. Setting expectations for both the client and advisor is crucial in creating a successful partnership. Discussing finances can be emotional, therefore it’s important to work with someone who you can trust and be open with.
Unquestionably the most important characteristic of a financial advisor (FA) is their trustworthiness. You’re relying on this person to provide objective financial advice and potentially manage your life savings. Also, you’re relying on your FA to safeguard large amounts of personal data, so making sure their trustworthy is a given.
Knowing your FA has the necessary technical competence is crucial when choosing to work with him or her. Financial planning isn’t rocket science but does require a wide variety of subject matter expertise, since everyone’s situation differs. Designations such as the CERTIFIED FINANCIAL PLANNER™, can help indicate someone with the appropriate training and education. However, when searching for an FA, it’s important to ask them what their value proposition is, to help give you a snapshot of their technical competence.
Money is emotional, and can often be the root of anxiety and/or fear. When discussing your financial situation with an FA, many aspects of your personal life will come into play. Therefore, it’s important to work with someone who has the empathy to recognize your emotional feelings beyond the financial ramifications. An FA client relationship can be life-long; look for someone has empathy for your situation outside of the financial implications.
How responsive is the FA in getting back to emails and phone calls? Look for an FA who is known for being responsive and prudent. Your financial life can change at any moment, so you’ll want someone who can respond when you truly need them. Hopefully, your FA has put you in a position to deal with adversity when it strikes, but you’ll want someone who can help you execute predetermined plans when financial challenges arise.
Financial planning and investment management are constantly evolving. Financial technology is always adapting to provide increased value to clients, therefore you want an FA who will keep you up to date with the best FinTech has to offer. With the shift towards passive investing and fee compression, you want an FA who continues to weigh the pros and cons of new investing strategies. The current investment landscape will surely look different 10, 20, and 30 years from now. Look for an FA who is committed to adapting, someone constantly searching for the best value in providing financial advice.