Financial Advisors (Part 5): Answering FIVE Frequently Asked Questions
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm wrapping up our series on financial advisors by answering five frequently asked questions. Questions such as, how important is it to look for advisors with professional designations like CFP or CFA? What's the process for firing a financial advisor? And will I incur fees and taxes when transferring investment accounts?

If this is your first time tuning into the podcast, be sure to go back to part one of this series, which aired on December 8th to get caught up. And for all the links and resources mentioned in today's final episode of the series, just head over to youstaywealthy.com forward slash 178.

Much of what I read and listen to about financial advisors contains a lot of shoulding. You should only work with an hourly advisor or you should only work with a big company. You should work with my advisor. You should never work with that advisor or you should manage your own finances and never hire an advisor.

The constant shooting is what inspired me to put this series together. Instead of telling you what you should do, my goal was to clear up common misconceptions and provide clear, objective information about working with a financial advisor so that you can make an informed decision about finding one that makes sense for you, your situation, and your needs and goals.

There is no one size fits all solution when working with a financial advisor, just like there's no one size fits all solution when working with an attorney, a CPA, a real estate agent, or any other professional service provider. Everyone measures the value they receive from something differently. Everyone values their time differently, and everyone has different levels of complexities.

Hiring a financial professional is one of the most important decisions you'll ever make. So don't let someone should you into making it.

To help round out this series and cover as much ground as possible before we tie a bow on it, I'm going to answer five commonly asked questions today. Questions that I get from talking to retirement savers and hearing from listeners just like you. So question number one, are professional designations like the CFP or CFA, are these professional designations important to look for when evaluating financial advisors?

Well, as noted in part one of this series, there are far too many designations out there to keep track and make sense of. The CFP and CFA are the most well-known, but we also have the CEMA, the CLU, RMA, CDFA, CMT, PFS, and dozens more. But let's just start with the big two, the CFP and the CFA.

CFP stands for Certified Financial Professional. I'll link to the detailed requirements in the show notes, but in short, to obtain the CFP designation, a financial advisor must one, have a bachelor's degree, two, complete about 12 to 18 months of coursework on financial planning from a registered program, and then three, pass the 170 question multiple choice CFP exam.

Now, even after meeting those requirements, a licensed financial advisor still needs 6,000 hours of professional experience directly related to financial planning before they are officially certified.

And as the designation suggests, CFP professionals are trained to take a holistic, personalized approach to financial planning. The eight domains and topics covered on the exam include professional conduct, insurance planning, investments, tax planning, retirement savings and income planning, estate planning, and psychology of financial planning.

You might remember me sharing earlier in the series that you don't need a bachelor's degree to be a licensed financial advisor, that the requirements to give financial advice and call yourself a regional vice president are quite thin. So while the CFP board and certification process is far from perfect, it has certainly done a good job of elevating the standards of this profession by introducing some basic experience and education requirements.

If those requirements are important to you, filtering for CFP professionals during your search will eliminate over 200,000 advisors. While the CFP introduces some well-received standards, it's still a fairly broad designation. The CFA and many other designations out there are more narrow in scope.

The CFA stands for chartered financial analyst, and it requires a passing score on not just one exam, but three exams. And these three exams test the fundamentals of investment tools, valuing assets, portfolio management, and wealth planning. In other words, the CFA is mostly focused on enhancing investment management knowledge and skills.

But don't let that narrow focus fool you. The three exams are some of the most difficult in the industry. In fact, the first exam, CFA level one, had a pass rate of 36% last November. For comparison, the CFP had a November pass rate of 64%.

In addition to higher education requirements and work experience similar to the CFP designation, the CFA also requires two to three reference letters commenting on your work experience and professional character.

To summarize, if you're looking for a financial advisor who is primarily an investment manager focused on trading stocks and bonds in an attempt to outsmart the markets, you might look for someone with a CFA designation. On the other hand, if you're looking for someone who provides comprehensive retirement and financial planning and evaluates every piece of your financial life when making recommendations, an advisor with a CFP designation is likely more fitting.

Now, while meeting the requirements to obtain designations like the CFP and CFA are impressive, and they do introduce some professional standards and requirements that don't otherwise exist in the profession, these fancy letters that many of us put after our names aren't necessarily a shortcut to finding a professional who has the right expertise to help you. There are great financial advisors who don't have any professional designations at all and terrible advisors with every designation available.

An advisor doesn't need to spend $10,000 or more and 18 months of their life in order to become an expert at solving specific problems for their clients. There are plenty of alternative learning paths outside of professional designation programs.

So depending on what is most important to you, professional designations might be icing on the cake, but maybe not necessarily a deal breaker. There are certainly many other ways to judge an advisor's competence and ability to help you solve your biggest problems, but professional designations can certainly help narrow down your search.

If you want to learn more about other popular designations and what they mean, I'll link to a few resources in the show notes, which again can be found by going to youstaywealthy.com forward slash 178.

Okay, let's move on to question number two. What are the best practices for firing a financial advisor? And look, I'm not advocating that anyone go rush out and fire their financial advisor, but it does happen from time to time. And because it doesn't happen every day, I'm often asked how this process works and how to go about it the right way. So to help, I've put together a five-step process for anyone in this situation.

Step number one is to sleep on it. If your advisor did something that upset you or hurt you, and you have this sudden urge to just end the relationship, hold off on taking any action, sleep on it for a day or two, and then revisit the situation. I know it kind of sounds like marriage advice, but advisor client relationships can often be very emotional and feel like a marriage sometimes. So step number one is just to clear your head and take a breather before rushing into making a big change.

you might determine that having a calm, vulnerable conversation with your advisor is more appropriate and more constructive than just parting ways.

However, if you wake up the next day and parting ways is the right decision, step number two is to read through the contract or client agreement that you signed when you hired them. In addition, just getting familiar with what you agreed to in the beginning, I would specifically look for the termination clause because in some cases, advisory firms will require you to provide a written letter notifying them X number of days in advance in order to terminate. There may even be a termination fee.

However, two things I want to note here. Number one, most advisors being terminated don't really want to cause any additional problems in these situations, and they'll often waive the fine print in their contract and offer to help make your transition out as easy as possible. Many will also reimburse recently billed fees as a gesture of goodwill.

And then number two, if there are any termination fees that won't be waived and you're hiring a new advisor, the new advisor will often cover those fees on your behalf.

which leads to step number three, and that is to determine where you're going next. If you plan to hire a new advisor as a replacement, it would make sense to interview at least three potential candidates and unofficially choose one of them before doing anything else. And this is for three reasons. Number one, we're talking about your life savings here, and I think we owe it to ourselves to have a plan of action, especially after sleeping on this decision and making it with a sound mind.

Number two, the advisor that you plan to hire next will likely not only offer to cover termination fees, but they'll also handle the process, the entire transfer process for you, ensuring that everything is handled smoothly and nothing falls through the cracks. On the other hand, if you plan to self-manage your finances and specifically your investment accounts, talk to your existing custodian about what that process looks like.

In most cases, especially if your accounts are with major independent custodians like Schwab or Fidelity, in those cases, the process is pretty painless. Account numbers and investments remain intact. And when your advisor is officially terminated, you'll take over control of the ongoing management.

Other institutions, especially the publicly traded brokerage firms that are out there, will sometimes reroute your accounts to another arm of the business, sometimes introducing new fees and potentially the liquidation of certain securities. So you'll want to know where you're going next to get ahead of any of these surprises.

With your next step determined and your due diligence complete, step number four would be to gather your investment account records and any financial planning work that's been done for you. In addition to having personal record of these important documents just to have them on hand, they can also be helpful to the new advisor that you're hiring if that's applicable.

Investment account statements are pretty easy to grab from your custodian's website, and you might only decide to archive maybe a year or two, especially since financial institutions like Fidelity or Schwab often maintain copies for you for the past 10 years. Financial planning documents may be a little trickier to gather on your own, but if all else fails, you can always request records from your advisor.

Which leads into step number five, and that's to determine how and if you want to communicate the termination to your advisor. And I say if because you don't actually need to verbally fire them or submit a letter if it's not in their agreement. As I previously mentioned, if you're hiring another advisor to replace them, that advisor will be processing the transfer and the transfer process they initiate will notify the advisor that you are leaving them and

And if you're opting to self-manage your accounts, the custodian with your verbal authorization will simply remove access from your existing advisor when you're ready. They don't necessarily need you to notify the advisor.

All that being said, when new clients join our firm and ask me what to do in this situation, I always tell them that if I was the one being fired, I would appreciate having a conversation versus waking up to an email notification from the transferring institution. That wouldn't feel very good.

Relationships with advisors are often years, if not decades long and are likely deserving of a conversation or at least a short phone call. So if I had to guess, I'd say 80% of clients joining my firm from previous advisor relationships ultimately decide to call the advisor that they're firing to inform them before we process any transfers.

The other 20% either send a short email or are just so frustrated with the prior relationship that they don't make any contact at all and just inform us to go ahead and just get everything transferred.

These situations are never fun or easy, but by being thoughtful about it, by taking your time and preparing properly, you'll eliminate a lot of stress and headache. And if applicable, begin your new advisor relationship on a much stronger foot. Okay. Question number three, what's the process for transferring accounts to a new financial advisor or another financial institution? Should I worry about fees and or taxes? What happens to my investments?

Now, this question is similar to the last one, but I separated the two because there are situations where someone transfers investment or retirement accounts from one institution to another without necessarily firing a financial advisor. For example, maybe you have an existing advisor that you're very happy with, and you are finally getting around to transferring some long-lost investment account from another institution to your current advisor and their financial institution. Or,

or maybe you're retiring from your company and now it's time to roll over your 401k from that provider into an IRA at your existing financial institution.

In these situations, rightfully so, people get a little nervous. I mean, we're talking about six or seven figures transferring through cyberspace here. This isn't a quick $10 Venmo transaction. So three things that I want to highlight here. Number one, when rolling over a 401k into an IRA, the investments inside of your 401k account will typically be liquidated and the funds will get rolled over as cash.

This means that your money will be in cash and not invested for as long as the transfer process takes, typically between three and 10 business days, sometimes shorter, sometimes longer. This also means that you'll need to be ready and have a plan for how that cash will be invested when it safely lands in your IRA at your existing financial institution.

There are no tax consequences here because you're transferring funds from one pre-tax account, your 401k, to another pre-tax account, your IRA. And there are typically no fees from that departing 401k plan.

However, one unique thing to keep an eye out for is how the funds will get transferred. In some cases, more than I care to see really, the 401k plan custodian will mail you, not your advisor, you, they'll mail you a physical check made payable to your IRA at XYZ custodian.

So if this happens, you'll need to notify your advisor or custodian immediately. And you'll want to deposit that check as soon as possible, but within 60 days to avoid any taxes or penalties.

The second thing I want to highlight is that most other accounts you might be transferring, like plain vanilla brokerage accounts or IRAs, like Roth IRAs, traditional IRAs, SEP IRAs, all these kind of traditional investment and retirement accounts, these can be transferred electronically and what we call in-kind. In other words, the investments inside these accounts typically don't get liquidated and remain intact during the transfer process. The transfer is done in-kind.

This means that not only will your money remain invested during the entire transfer process, but you also won't incur any capital gains taxes since nothing is getting sold.

Which brings to the surface another important point, and that is that most major custodians and financial institutions are required to also transfer the cost basis of your investments along with the accounts and the holdings. Years ago, this wasn't the case. And as you can imagine, it was a nightmare to track cost basis history when a client left one financial institution and went to another.

But today, pretty much every custodian, except for some robo-advisors for some reason, are required to send over the cost basis as part of the transfer process. Just know that the cost basis can often take multiple weeks to show up. So don't panic if you look at your accounts after the transfer is complete and you don't see any cost basis history.

Lastly, unlike 401k rollovers, direct transfers of other investment accounts often result in a transfer fee from the transferring institution. A nice little gesture on your way out the door. These fees typically range from $50 to $200 per account being transferred depending on the institution.

As previously noted, if you work with a financial advisor and they initiate the transfer for you, they'll often offer to cover these transfer fees. And even if you don't have an advisor, it never hurts to ask your existing custodian if they'll go ahead and cover these fees for you as well.

The third thing to highlight, in some cases, advisory firms will help clients establish a line of credit, a line of credit that's pledged by their investment accounts. These are similar to home equity lines of credit, but instead of your home being the asset tied to the loan, it's your stocks and bonds.

Financial institutions have all different creative names for these lines of credit and offerings. And while there are some use cases for them, it's important to note that they're often or sometimes established to make it harder for customers to leave because unfortunately another financial institution cannot initiate a transfer of an investment account. If the account is tied to one of these lines of credit, even if the line of credit hasn't even been tapped into.

So in this situation, you, the client, your new advisor or new institution cannot do this. You, the client would need to go through the process of terminating the line of credit, paying back any balance or working with your new financial institution to absorb that balance and then go ahead and initiate the account transfer.

Similarly, most financial institutions, including brokerage firms like Schwab and Fidelity, most have portfolio management solutions that also prevent simple and seamless transfers.

These portfolio management offerings require you again, not your new financial advisor or new institution, but you, the client has to terminate the investment manager. And in some cases, liquidate all of your holdings and move them to cash to an entirely new account before it can be transferred. So it's important to explore all of this prior to initiating a transfer to prevent any surprises at the last minute.

And if you have a financial advisor helping you, yes, they will be able to dig into the fine print and even contact the transferring firm to at least learn about these issues and what may occur during the transfer process so you can get ahead of it and not be surprised. But

But at the end of the day, there are still a lot of unique products out there that continue to cause issues during the transfer process. So if you have a complex situation or you were previously sold a wide array of investment solutions and banking products, just know that you may run into some issues that I've noted when attempting to transfer accounts to a new institution. Okay, question number four, what is a financial coach and would they be someone to consider instead of a financial advisor?

This question is becoming increasingly popular given the rise of financial influencers and content creators on social media, YouTube, and even in the podcasting world. In many cases, it's not even questioned at all because investors don't realize that they're working with or considering working with a financial coach to begin with.

Financial coaches on the surface appear sometimes to be licensed financial advisors based on their service offerings, but they are not the same for three distinct reasons. Number one, financial coaches don't have any professional licenses and anyone, including my five-year-old son, can call themselves a financial coach.

Number two, a financial coach cannot give specific investment or financial advice. And number three, financial coaches are not regulated by FINRA or the SEC like a licensed financial advisor. So what is a financial coach then? What do they do and what purpose do they serve? Well, according to Investopedia, financial coaches provide motivation and information.

For example, you might ask a financial coach what mutual funds to invest in. Well, instead of recommending that you invest in mutual fund A, they'll simply provide information about mutual funds and the mutual funds that are available in an effort to help you come to your own conclusion. Financial coaches often also help people document financial goals and provide general tips and frameworks for reaching those goals, but they're not going to build a financial plan and provide recommendations and do the heavy lifting to help you reach the finish line. And

And while some financial coaches can provide good education and helpful information, the lack of oversight and licensing requirements means that you have to be extra careful who you're getting your information from and what their motivations might be.

They might appear to be smart and compelling and be providing really accurate information. But since nobody is governing what they say, the information they're providing may do more harm than good, or it may not even be applicable to your situation. So be careful and do some extra due diligence if you consider working with or getting your information from a financial coach versus a licensed financial professional.

And if you're not sure if someone is a financial coach or a licensed financial advisor, just head over to the FINRA and SEC websites and type their name into the advisor search box. If someone is a licensed financial professional like myself, their information and all public disclosures, including any trouble that they've been in will be disclosed. So if you don't see any record of them on those websites, they are not a licensed professional. You

You can, of course, also just ask them. Most financial coaches have chosen not to be a licensed financial advisor for a reason, and they don't want to cause any confusion because that can get them in a little bit of trouble. They'll be the first to tell you as clearly as possible that they are not a financial advisor and they are not giving you advice.

Okay, question number five, and this isn't so much of a question, but just something I wanted to briefly address in this series. And that is what to do if you or someone you know were taken advantage of by a financial advisor, sold investments without proper disclosures, sold investments that were not suitable, or were given incorrect advice that caused financial harm.

Like many of you, I'll pretty much do everything I can to avoid getting attorneys involved. So while contacting an attorney who specializes in defending investors who have been harmed by a financial advisor is certainly an option, and it might be the right option for you, it doesn't necessarily need to be your only or first option. One option to consider starting with, depending on the severity of the situation, is to simply contact the advisor directly to share your concerns.

In some cases, the advisor will work with you to make things right in an effort to avoid things from escalating. And if you don't feel comfortable broaching the situation with that person, you can always contact another person at their firm, like their manager or even their compliance officer. Again, they may work with you to make things right to avoid things from escalating.

If you don't feel comfortable talking to anyone at the firm that caused financial harm and you aren't interested or ready to get an attorney involved, another option is to file a complaint with FINRA, the SEC, and or the CFP board if they're a CFP professional. These complaints can be filed online and they're typically taken seriously and responded to in a timely manner.

Lastly, while this is not my favorite solution, it's common for some people to do nothing at all, put the past behind them and move on without taking any action against the advisor. In fact, we've unfortunately had a few clients join our firm who could have very easily taken legal action or filed complaints against their prior advisor without

and ultimately decided to chalk it up as a loss and just move on. They just didn't feel like it was worth their time and energy, and they preferred to focus on the future and work with us to fix the problems that were caused. Again, not my favorite solution to know that a financial advisor caused harm and got away with it, but I can certainly understand why some people choose it.

More than anything, I want people to know that they have options. And while hiring an attorney may be the best option, I recognize that sometimes the thought of hiring an attorney and paying an attorney can encourage people to do nothing at all and just live with the financial loss for the rest of their lives.

Just like hiring and firing an advisor, I think it's important to know your options if you've been financially harmed so you can make an informed decision and not just sweep it under the rug. So I'll be sure to link to the resources mentioned if you or someone you know can benefit from them.

Okay. That wraps up our series on financial advisors. If there are any questions that you still have that I did not address, please send me an email at podcast at you stay wealthy.com. I personally read and respond to every message outside of normal business hours. And I love hearing from our listeners. So once again, that's podcast at you stay wealthy.com.

Lastly, to grab the links and resources mentioned in today's episode, just head over to youstaywealthy.com forward slash 178.