Do you want to know if your advisor is “great”? One way to tell is to evaluate what’s being said to you. Advisors have conflicts of interest. If your advisor is charging you a fee based on assets under management, advice that reduces those assets will reduce your advisory fee. Registered investment advisors are required to disclose these conflicts, but some conflicts aren’t disclosed, much less discussed.
Here are some things great advisors will tell you. Note that all of them are against their own financial interest.
“Before we discuss investing, let’s review your insurance.”
Money you spend on insurance reduces your assets under management. A great advisor will want to be sure you and your loved ones have adequate life and disability insurance in place, before discussing your investment goals.
The average American who is married, partnered or has dependents is underinsured by $1.2 million. A great advisor will be sure you won’t fall into this category.
“Speaking of insurance, don’t believe the hype about ‘buying term and investing the difference’”.
It’s true that the primary purpose of life insurance is protection. For some people, the only way to obtain adequate protection is through low cost term insurance. For others, there’s a case to be made for the right whole life policy. There’s evidence most purchasers of term insurance actually “rent the term and spend the difference.”
You might end up with more assets through “forced savings” of whole life insurance. You can learn more about the pros and cons of term versus whole life insurance here.
Although spending more money on whole life insurance reduces assets under management, a great advisor won’t glibly assume term insurance is right for everyone. Instead, he (or she) will insist on a careful analysis.
“You’re renting a home. Let’s consider whether you should buy one”.
If you are renting a home, buying one will significantly deplete the amount of your assets available for investments.
The decision to rent or buy is a complex one, involving many factors. A great advisor won’t assume the status quo is right for you. He will do a comprehensive analysis of the costs of each option and run a calculation so you fully understand the financial consequences of this important decision.
I can tell you this with great confidence. If you are renting and your advisor —after a careful analysis— recommends buying a home — you have an advisor who is placing your interest above his own.
“Let’s review your mortgage and consider whether you should pay it off early”.
There are lots of sound reasons why you shouldn’t pay off your mortgage early. These include losing out on the mortgage interest deduction, limiting your liquidity and losing the potential to secure an income stream via dividends, interest payments and capital gains.
But there are also compelling reasons why paying off your mortgage early might be right for you. It can save you significant interest. It gives you the peace of mind of knowing you have secured shelter for you and your family. It reduces your fixed monthly expenses. It can provide asset protection in many states. You can learn more about the pros and cons of paying off your mortgage early here.
Here’s the bottom line: A great advisor is concerned about your bottom line. He won’t shy away from giving you advice that reduces the fee you pay him.
That’s what great advisors do.
The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.
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