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Who’s Your Financial Advisor?

Dave Van Horn
7 min read
Who’s Your Financial Advisor?

It’s probably safe to say that most people don’t have a financial advisor.

I know this because I used to be one, for a short time. We were actually insurance salesman, and a few of us may have had a securities license as well. This seems fairly common too, which is one of the reasons it can be so difficult to find a good financial advisor. Having a financial advisor may be the most beneficial when that person is helping you assemble your plan to reach your financial goals, instead of simply advising you about options that they offer/sell.

Of course, people need to have a plan, become more organized, and protect their families. The right financial advisor can help each of us think about utilizing insurance to replace our income, building wealth, saving taxes, or protecting our assets. This person could help us establish an estate plan, or even a legacy plan, which may be necessary since no plan means the government plan, and it may not serve us the best.

I remember Robert Kiyosaki (from “Rich Dad Poor Dad” fame) talking about how there’s so much information and advice available to us that it’s hard for many of us to decipher it all.  So, how can someone sift through it to know whether they’re getting the best, most comprehensive, and most accurate information possible?

Well, there are several points from Kiyosaki’s teachings that I am in total agreement with…

Tip #1 – Ask Your Advisor, “Do you make most of your money as a financial advisor or as an investor?”

This is one of my favorite lines.  In fact, Warren Buffett said, “Wall Street is the only place that people ride to in a Rolls-Royce, to get advice from those who take the subway.”  When it comes to money there’s plenty of salespeople, who want to show you how to become rich.

Now, I’m not saying all financial advisors are bad by any means, I’m just saying it can be difficult for the average person to differentiate and to manage all the information that’s thrown at them.  I like to think of it more like an interview process. If I want a financial advisor’s services, I’m really the one hiring them, right?

So maybe I would ask them “How do you get paid?” Now, they could be paid at an hourly rate, which could be a little more expensive, or by assets under management, meaning that they get paid based on how much money you make with their advice. Both of these options exclude planners, who make the majority of their income in commissions. I’m certainly not saying all planners, who work off of commission, are untrustworthy. I know of a few great ones, but the difference is that they put the client first. There are several other questions you can ask to get a good sense of the person you’re dealing with:

  • What type of policy do you have?
  • What do you invest in?
  • What makes your policy different than all the other ones out there?
  • Or, what’s new right now?

After you ask some of these key questions, you get a better sense of who you’re dealing with. If they won’t use what they’re offering you, it could be a red flag. But, if they are up to date on what options are out there, have similar investing goals and still choose the option(s) they’re offering you, it may be a better fit.

Tip #2 – Ask, “Will You Guarantee It?”

How many times have we all been told to invest for the long term, to buy-and-hold, or to be sure to diversify?  Or, we’re told to invest in the stock market because it always goes up? Then there are real estate salespeople, who say that this particular area is up-and-coming and “you can’t lose money.”  The real question we should ask is will they guarantee it.  One thing that I think we can all guarantee is markets will rise and markets will fall.

Like Rich Dad says, “It really comes back to how we manage financial information.”  A savvy investor can distinguish if something is a fact, an opinion, or a principal.

Fact – something that can be proven with evidence.

Opinionmay or may not be based on fact.

Principle – true in all cases.

A few months ago, I went to separate lunches with two different types of financial planners.  Yes, there are some paid by commission from products they sell for affiliates, and some are paid an hourly consulting rate.  But, that’s not what I’m talking about.  One was just interested in making a sale, and the other was interested in me and really helping my situation.

“People love to buy, but hate to be sold”– Jeffrey Gitomer

The one planner, who was determined to tell me what I needed, wanted me to send him over all my information so he could see what he could do for me.  I said, ” Really, I’ll tell you what, send me over your plan, and the companies you personally use, and why use them, and if I like what I see, I’ll send you over all my stuff.  Needless to say I’m still waiting.

Tip #3 – A Wolf in Sheep’s Clothing

Some planners may be like a fox guarding the hen house, meaning that they are working in their own, or their company’s best interest, rather than the individual’s. So, even if that planner is a savvy investor and has an investment that he/she can speak to or guarantee, would that information get passed to you?

When I was working as a planner, I sold insurance policies to friends, relatives, and so on, thinking that I was getting them the best product. But, when I went to get my own product, my boss actually stopped me. He said, “you don’t want that,” and he pointed me in the direction of something better. So all the time that I was offering these policies; my boss’s focus was on commission/making money, instead of having me advice my clients towards the best product. It was difficult for me to stay there after that.

However, there is a grey area here. For example, my business planner, who is paid commission by the way, actually told me to keep some of my policies. That’s how you know you have a good one, because that person is thinking of your needs before their payment. Someone, who’s thinking of their payment before your needs, may advise you to change all of your policies, regardless of whether they’re the best fit for you. But, here’s where it get’s grey.

There are times that a new policy is better than your previous one, so how can you tell the difference? Well, that’s where research can help you.

Educating yourself in what options are really available to you and knowing what questions to ask is an invaluable way to protect your best interest. To be better prepared, I suggest reading some good books like Douglas Andrew’s “Missed Fortune 101″ or R. Nelson Nash’s ” Becoming Your Own Banker – The Infinite Banking Concept,” before your next meeting. As Douglas Andrew taught, with the insights you gain through research, “choose not to always accept conventional advice on your journey toward financial independence.”

So, why is financial planning still important for a savvy, cash-flowing real estate investor?

Many real estate investors tend to avoid planners altogether. Maybe they feel their investment real estate is the answer to everything, or maybe they don’t have an advisor that they feel they can trust.  I can definitely relate to this, but it can be a major mistake, as there are many things someone could be missing out on by not utilizing a good plan.

As Douglas Andrew described, there are actually six components of sound financial planning:

  1. Cash Flow Management
  2. Credit Management
  3. Asset Management
  4. Risk Management
  5. Tax Planning
  6. Estate Planning

An active real estate investor may already be employing several different strategies for cash flow management. But, whether you’re a newbie or seasoned investor, there are several other areas where unique wealth building strategies can be employed.

For example, one of the biggest misconceptions that people have is that it is always best to pay off debt, instead of leveraging debt. But, if you read Andrew’s book, you may start to think differently.

Paying off Debt vs. Leveraging Debt

Say you owe $200K on your primary residence at a rate of 6%, and you have an extra 25K available to you. Maybe you’re considering paying the 25K against your mortgage so that you would only owe 175K. But, another option would be to place the 25K in a conservative investment vehicle, such as an IRA/Retirement account, insurance policy (no variable rate), or an annuity. And with either of these, you were able to get a 5-6% return. Would it be better to pay the 25K to the 1st mortgage or put that money in a conservative investment?

Scenario 1: Paying it down on the property.

By doing this, you would reduce your mortgage interest deduction (the biggest tax deduction the government gives you). You also lose liquidity of the 25K, because you can’t access it very quickly/easily—you would have to take out a home equity loan or refinance to get that money. You would be making no rate of return on that money (the bigger the down payment, the lesser rate of return you make).

Meanwhile, the house will appreciate, whether you pay it down or not. Also, you just put that 25K at risk, because the property could drop in value, as market conditions are out of your control. It is also exposed to creditors and lawsuits, and you have less asset protection through debt.

Scenario 2: Placing it in a safe investment vehicle.

If you put the 25K in a conservative, tax-favored investment vehicle at 5% interest, you would be keeping your higher mortgage interest deduction. You would have liquidity to your capital. You would have taken risk off of the table instead of adding it. You would get a return on your 25K, and it would build tax-free or tax-deferred in the investment vehicle.

The fact that there’s no tax on the 5% means that it’s actually a higher yield, depending on what tax bracket you’re in. The money passes favorably to heirs and avoids probate in the event of death. It’s also protected from creditors, lawsuits, and bankruptcy.

Personally, I prefer to see my house paid off on a balance sheet as opposed to reality. As Doug Andrew’s said, “A home can be ‘paid for’—even though it may be mortgaged to the hilt—if you have sufficient liquid assets in a safe environment that could wash out the mortgage.”

Now, this strategy may not be the most commonly shared, but this type of insight can be gained through reading books like “Missed Fortune 101” or having the right financial advisor.  Some people, simply, may not have found access to this type of information. But, if your advisor can speak to you about less conventional options and is knowledgeable about them, you may have found a strong ally.

Keep in mind, when hiring a planner, or any type of advisor, you should be on your guard as to who you let on your team. What’s their track record, were they referred to you, and do they work with super successful people? One good giveaway is whether the planner asks you questions about your wants and needs or whether he starts to tell you what you need. This is a huge difference.

So, how do you hire your advisors?
Photo Credit: Dave Dugdale

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.