I’m going to let you in on a little secret of the money management world: Most advisors’ incomes are solely dependent on the investment account balances under their watch, which means they are laser focused on growing their ‘assets under management’. The statement, “Our firm has $X of assets under management (AUM),” is a common measuring stick amongst folks in my world. Because it drives the advisor’s income, it’s what they will focus on. Most people want to earn a good living--that’s not inherently bad, but if ‘AUM’ drives an advisor’s income, then that’s what they’ll focus on. That’s just human nature.
It becomes a problem, however, when an advisor is more focused on growing their ‘AUM’ (and in turn, their income) than the financial health of their current or future clients. This doesn’t mean they are taking advantage of people, but it can mean service might slip over time or legitimate financial questions their clients might have may go unanswered. Proactive financial advice that might be good for clients, but doesn’t add to ‘AUM’ is at risk of getting moved down the priority list. Once your assets are under their watch, they are incentivized to keep them under their management while doing less and less for you over time as they focus on finding the next client with new dollars to invest.
Here are 5 signs your advisor may have become complacent in serving your needs on the path to growing their ‘AUM’:
1. You hear from them much less NOW than you did when you first started working together.
There is certainly a degree of heavy lifting that needs to be done at the outset of any advisory relationship. You must build rapport, establish the goals you’re trying to accomplish, share your personal data, build a plan, prepare paperwork, implement the plan, etc. It’s natural to be meeting with an advisor more in the first year of working together.
You should not, however, expect to hear from your advisor only once every few years. A good advisor stays engaged with clients. Your life, the markets, tax code, politics and the world are constantly changing, which means your financial plan needs to be monitored proactively and consistently. To us, that means a minimum of semi-annual reviews.
2. They don’t ask for your tax return.
Taxes play a huge part in all of our financial lives. If you’re going to get good, comprehensive advice from an advisor, they should have a grasp on your tax situation. It impacts the type of accounts you should be saving into, the way you invest inside those accounts and how you plan for retirement. If your advisor isn’t reviewing your tax returns each year, it’s a major red flag.
A comprehensive financial planner reviews your tax return each year and uses it to make informed decisions around your investments and retirement plan.
3. They ignore your company retirement plan (401k, 403b, etc.) unless you are nearing retirement or a job change.
Because most traditional ‘AUM’ advisors don’t earn any income on the dollars held inside of your workplace plan, some will ignore them completely. They will however, be very interested in it if you are near retirement or changing companies. It likely has to do with the fact that they will push you to roll into an IRA that they can manage and charge on you once you separate from your employer.
A financial planner, on the other hand, takes the time to understand your workplace plan and help you think through investment selections that compliment your overall financial plan and investments. They will include it in your meeting reviews, monitoring to let you know if and when adjustments should be made.
4. They deter you from withdrawing money from your investments.
Again, less dollars in an investment account managed by your advisor means less income for them. Maybe you’d like to pay off a mortgage or other debt, or purchase a second home or buy an investment rental property. The risk here is that the advisor encourages you to keep existing debt or take on new debt so that you can leave investment accounts intact, keeping their income from falling. Sometimes using debt is the right answer, but you shouldn’t have to wonder whether their advice is based on the impact to their income or in your best interest.
When an advisor isn’t compensated solely on an investment account balance, this risk can be mitigated. You can be confident that the advice they’re giving is conflict free.
5. When you meet with them, the conversation is almost entirely focused on investments.
Investments are certainly an important part of our financial lives, but there is so much more an ‘AUM’ advisor can and should be helping you with than just the accounts they manage. To a true financial planner, this is just one piece of your financial life. Taxes, cashflow, retirement planning, estate planning, insurance, employee benefits, social security planning, etc. are all part of a comprehensive approach to financial planning.
If during your meetings with your advisor, the only deliverable you receive is a performance report on the portfolio they manage for you, it’s likely you’re not getting ‘real’ financial planning, yet you might be paying just as much or more than you would if you worked with a comprehensive financial planner.
There’s nothing wrong with working with an investment focused advisor. If you are the type that is completely comfortable handling the other pieces of your financial puzzle, an investment advisor might be the right solution for you. Just remember that there are other choices available to you that can and will help you with your entire financial life.