The Three Levels of Advisors

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Transcript

Zach:

Hello, everyone. Welcome to the retirement today podcast. I’m your co-host, Zach Holcomb alongside me. We have Michael Reese. He’s a certified financial planner, founder and president of Centennial Advisors, and retirement expert. Mike, how are you today?

Mike:

I’m doing great Zach. And by the way, if you’re listening on the podcast, you don’t see this, but if you’re watching this video, maybe on our website, on our blog, then you can see that Zach, he’s all, he looks like a male model here. I mean, look at this guy and then there’s me. So, hopefully I can make up for my lack of male model-ness with some great information today.

Zach:

Oh, Mike you’re too modest. You have the bigger plant behind you in our backdrop.

Mike:

Yeah, that’s good. We’ve got this working out. So always, always working to improve, right?

Zach:

Absolutely. So today on our show, we’re going to be talking about the three levels of financial advisors and finding the right one for you.

Mike:

Oh yeah, that’s great. So let’s yeah, let’s dive right into this. So, whenever I think about the levels, you know, of financial advisors, I think of it like a pyramid.

Zach:

Sure.

Mike:

And it’s a pyramid with three levels to it.

Zach:

Sure.

Mike:

And each level, by the way. So each level of financial advisors, Zach, there’s nothing wrong with any of them. They’re all great for the right person. And the real question is, you know, that, that all of our listeners need to be thinking, or those of you watching, what you need to be thinking about, is, are you working with the right level of financial advisor? And that’s going to really, I think come through as we talk about this. So I want you to imagine the base level or the first level

Zach:

Biggest part of the pyramid covers the most area.

Mike:

Actually, in this case, it’s a PR and this is appropriate because it covers the most, uh, the most people, right? And that base level is what we would call the product provider. Now, a product provider is where you go to get product. So that could be the Fidelity’s of the world or the Vanguard’s or the TD Ameritrade’s of the Schwabs. And the reason it covers the most people is, I mean, think about it. Where do most people have their money? 401k plans, 403b plans. All of those 401k plans and 403b plans, I shouldn’t say all of them, but 99% of them,

Zach:

A big chunk of them.

Mike:

are at the product providers. So if you have a 401k plan, maybe you’ve dealt with fidelity or van- I had a person, for example, come to the office, that we spoke to recently, he was telling me, he said, Mike, I’ve been dealing with Fidelity’s website for, he said, I think 30 years now, because every job that he had, he had, he was on his fourth job. But just coincidentally, every place he worked all use fidelity.

Zach:

Well, yeah, it probably looks exactly the same too, 30 years later, hasn’t changed,

Mike:

He never had to change his login. So it’s like every website was fidelity. He was used to their website, used to their platform. And when you’re in a 401k plan, of course, they give you a menu of product or a menu of options. It’s product, they’re a product provider. But even in this case, he actually had, some of his money was in a fidelity IRA. He had all these different products he could select from, that he could get at Fidelity.

Zach:

Sure.

Mike:

Stocks, bonds, mutual funds, exchange traded funds, et cetera.

Zach:

Sure.

Mike:

So, product providers, and there are a lot of people out there, they like to manage money themselves.

Zach:

Sure, you’re your own advisor. You’re doing everything yourself.

Mike:

Yeah. Now, if you are your own advisor, where you love to manage money yourself, then the base level, level one of the product providers, that’s a wonderful option for you. That’s where you want to be. Because if you’re going to make all your investment choices on your own, then why would you pay anybody to help you. The product provider level to cheapest level? It’s a commodity. And quite frankly, I mean, gosh, it doesn’t matter if you’re at Fidelity or Schwab or TD Ameritrade, you know, or wherever they all have the same options.

Zach:

Sure. The names change, but the options remain the same.

Mike:

Yeah. If I want to go out and buy the Vanguard index 500 fund, I can get it at, at Fidelity, Schwab, Vanguard, TD Ameritrade, E-Trade you know, any of those places. Right. So they’re a great option. They tend to, and, heck, a lot of the trading these days is free. You don’t even have to pay for it. So, for example, if we trade for our clients, we use Fidelity and TD Ameritrade, if we trade there. I mean, I don’t think we’re paying anything on trades, other than mutual funds, mutual funds are still for some goofy reason, they’re still an expense. I don’t know why. But you know, we don’t really use mutual funds. We use exchange traded funds or stocks and, you know, it is free to trade that stuff. So, and if you’re, if you’re like me, I have some of my money actually in options. Sure. So my personal account, I use TD Ameritrade, I have options. But you know what it costs me to trade options like 65 cents or so-, I mean, just not enough money, even as my parents would say, shake a stick at.

Zach:

Right.

Mike:

Have you ever heard that?

Zach:

I don’t have a stick to shake, but yes.

Mike:

You ever heard the phrase shake a stick at?

Zach:

I have heard that phrase, yes.

Mike:

Okay. So there you go. So that’s level one. Level one: product provider. It’s a wonderful place if you do it yourself, a lot of 401k plans, people do it themselves.

Zach:

Sure. Absolutely.

Mike:

By the way, uh, as a heads up on that, we should probably do a talk on this in the future, Zach. But if you want professional help with your 401k, there’s a lot of ways to get it these days. Well, let’s, let’s hold that off for another, podcast. So then next level, the middle level, right? It’s not as many peoples in level one, but still a lot of people in the middle level. Though, that’s the level of your investment advisor.

Zach:

Okay. So just to be clear, let’s say I was working with a product provider and maybe I want a little more oversight on the investments I’m choosing myself, this is the next level.

Mike:

So this is where you go. If you’re saying to yourself, “You know, I don’t want to manage my money myself”, or maybe it’s like the gentleman I was talking to the other day. He is perfectly comfortable managing his own money. In fact, he did it his whole life. And I said, “So why are you talking to me? Like what, what, where do I come in here?” And he said, “Actually, no, Mike, you don’t understand. I don’t want to do it anymore.” He goes, “I’m 66 years old. I’d rather spend my time. Now that COVID is kind of loosening up, I’d rather go travel. I don’t, when I’m traveling, I don’t want to be looking at my investment statements, making it. I want someone that I’m comfortable with it and kind of take that over. So I don’t want to do it anymore.”

Zach:

Right

Mike:

And he goes, “and on top of that if something happens to me, man, my wife has no idea what I’m doing. I mean, she would be lost and I need someone that she can rely on, you know, if I were to die first. Now he’s really healthy. I don’t, I mean, he’s gonna live in under 20 years easy, but still it’s something to think about. And so a lot of people who are do-it-yourselfers, level one type of people. For various reasons, they might want some help on the investment side. So that’s level two investment help. Now, investment advisors obviously charge something for their services, so it’s more expensive right now. They might charge commissions. They may charge fees or a combination. Zach is, is one better than the other. Is it better to pay someone commissions or fees or a combination or does it even matter? What do you think?

Zach:

No, I think it’s just appropriate based on your situation. I mean, in some cases, maybe one may benefit somebody else more than the other.

Mike:

Yeah. I mean the bottom line is, I mean, let’s be honest, as long as you’re dealing with someone who is ethical, who has integrity, who cares that they’re charging a fee or a commission, they got to get paid somehow. Right? And there are some situations where commissions actually are cheaper in the long run. And there are some situations where fees make more sense. So it’s not like one is better than the other. And you know, I know in the financial industry, people talk about that all the time. They’re like, “Oh my gosh, if you’re not fee-based then you must lack integrity. Commissions are the devil.” You know, this type of thing. No, they’re not. I mean, come on an advisor either has integrity or they don’t, and I don’t care how they’re compensated. The 99.9% of advisors have integrity. They’re trying to do the right thing for you. You do have 0.1% of the Bernie Madoff’s of the world that are complete, ugh, the bad apples, and you know what every industry has those bad apples.

Zach:

Sure.

Mike:

They all do. But, generally speaking, most advisors just try and do the best they can regardless of their structure. So, but here’s the key with that middle level. The key is that normally their goal, the advisor’s goal is they want to gather as many assets as they can in order to, they call it a book of business. They want to build up as many assets as they can. And for them to be able to really organize that effectively for their business, they have to run a very templated model.

Zach:

Right. So it’s the same for a lot of people, regardless, Maybe of specific needs.

Mike:

Yeah. Well, right. So here’s what I mean, a templated model means that they might have four or five different portfolios that they put everyone in.

Zach:

Sure.

Mike:

And what they do is, let’s say that you, Zach, were talking to a person like that. Cause you, you said, “Hey, I’m 27 and I want to grow my portfolio, I need help with my, I want someone to help me manage it.

Zach:

Sure.

Mike:

So they say, all right, Zach, no problem. Step one: let’s fill out this risk profile questionnaire so we can understand what your comfort is, taking risks.

Zach:

Sure.

Mike:

Based on the results of that questionnaire, they will put you in one of those files.

Zach:

Sure. And I score aggressive. So I’m going to be in an aggressive model

Mike:

There you go. If you score. But you know, what what’s weird is you might be 27 and you might be a little more, maybe you don’t know a lot about the market. Maybe you’re, or just more conservative by nature. You might say you might end up in a balanced portfolio, something in the middle. Well, let’s compare that to maybe your parents and I don’t know how your parents are, but let’s say they’re 66 or so. No, they’re you’re 27. So let’s say they’re.

Zach:

Mid fifties. Yeah.

Mike:

No, I was going to go 62, but whatever, mid 50, 62, obviously they’re in a different position than you are in their life and their life planning.

Zach:

Sure.

Mike:

But they go to the same advisor and they take the exact same questionnaire. And let’s say that they score pretty close to you. And you know, there may, because of where they are in life, they end up also being kind of balanced, like in the middle. You guys would end up with the same portfolio. Now, is that the right thing to do? Is it right that you at 27 has the same portfolio as your parents who are 57?

Zach:

Knowing what I know the answer to that question is most likely, no.

Mike:

Probably not. Probably not. So what’s happening here is, but because it’s a templated approach, it doesn’t catch things like that. It’s you’re not going to get those, you know, probably you need more, education to get you to a level, to be a little more the aggressive side, because you have time in your side, whereas your parents, you know, maybe in the middle is fine for them. Maybe they should be more conservative, but the point is simply a template and approach is it’s okay, but it may not be a panacea.

Zach:

Does it make sense to say, because this level of advisor covers so many different people that the approaches are so broad because they offer, they, they work with such a broad range of people.

Mike:

Yeah. Yeah. That’s a great point. They don’t normally have a specific part of the, of, of the market or a niche that they might work with.

Zach:

Like we just said, like they could be working with somebody my age who’s 27 or like my parents, and they’re like, mid fifties.

Mike:

They don’t care. Do you have money? Bring it in. It’s like, you know, that’s, there is a, if you go online, there is a guy who writes for Forbes. He writes his advertising all the time. ‘I hate annuities and you should too.’ You’ve heard of him, but in his office, it’s like, you got 500,000 come on in, you’re a prospect. Right? There, minimum 500,000, you got 500,000.? We’re going to manage your money. And they don’t care if you’re 18 years old or you’re 80 and they’re probably going to manage it about the same way. So does that make these people bad that they’re doing that? No, not at all. If you’re the kind of person that all you need is a little help investing money. You want to, especially, especially if you want to grow and accumulate. that might be a good place for you. Level two might be good for you. Is it going to cost you more than level one? So is a, an advisor going to cost more than just dealing with the product providers directly? Of course it is. It should cost more. You’re receiving some services from that advisor.

Zach:

All right. We’ve covered the first two levels. Now we’ve reached the tip of the pyramid, level three.

Mike:

Right now we’re going to level three.

Zach:

Yeah. We’re at the top.

Mike:

Right now, level three. This is the smallest number of advisors, right? These are your true holistic planners. And the word holistic. I could have said comprehensive planners, but holistic makes me sound a lot smarter. So that’s why I went with that one.

Zach:

And we want to make you sound smart on this program.

Mike:

Got to do everything I can. I mean, I’m not, you know, I’m not the male model here like you are. So I’ve got to do my best to add value. Anyway, the point is that, a holistic planner is more of a customized approach and the holistic planner, typically, you know, they look at your investments of course, but that’s just a part of what they help people with. So for example, a holistic planner is typically going to help you with, you know, how are you managing your income, your budgeting, cashflow coming in, cashflow going out, is that relationship a healthy one?

Mike:

They help you with your investments. Of course, taxes, big area that holistic planners help with, that you don’t get anywhere else. What do you do? How are you handling your tax liability today? How are you handling your tax liability tomorrow? What strategies are you implementing today to really make sure that you’re paying the least amount of tax over your lifetime? What about taxes on the surviving spouse? What about taxes on your 401k or IRAs? You know, that’s a big area that holistic planners deal with that most advisors don’t even want to touch with a 10 foot pole.

Zach:

And those are really important questions. And it’s pretty crazy to think about they’re only covered at this level.

Mike:

Yeah. Well, on top of that, you also have, we’re not done yet though, because we also have a state planning concerns. How do you make sure that your money goes, where you want it to go in all of your assets for that matter, go where you want to go when you die and make sure that as little as possible goes where you don’t want it to go, which is usually like the IRS, right? In 25 years, no one has said to me, “gee, Mike, if, if I could get all my money to go the IRS, like I want to maximize the IRS as a beneficiary. That would be great.”

Zach:

Hey, never say never.

Mike:

I’m just saying I’ve not had that yet. I’m just saying in 25 years, no one said that to me, or anything close approaching that another area that holistic planners, help with our health care issues and especially things like when you get into retirement, Medicare long-term care, but if you’re still working disability and that brings up another area, which is all the insurances, like, what are you doing with disability insurance? What are you doing with your life insurance? Do you have an umbrella, a liability insurance coverage. Right. All right. You know, so all of these areas are covered by a holistic planner and they focus on, you know, building a customized plan for the people they work with. Right. And normally, normally, Zach, what you see as a progression over time, right? So a lot of times, especially when you’re young, you start out with a product provider and you’ve got a 401k plan, maybe is all you have, and you’re just adding money. You know, you’re working like you, you’ve got a 401k plan here at work. We have. And we use a lot of Vanguard funds here at work for our 401k. And you have, and you’re just putting money in there, right? Every, every paycheck and, and you know, and it’s just an, and that system, they give you a kind of a simple little questionnaire, so you can kind of arrange your, your money to best fit you. Now let’s imagine let’s fast forward. Now you’re in your forties. And you’ve been doing this for a while and the money has been growing in your next thing you know, it’s like, Holy cow, I’ve got, you know, couple hundred thousand or more here, already this getting to be a pretty good pot of money. That’s usually the time that people naturally start thinking, “all right, I’ve been kind of messing around with this myself, but this is getting large enough. I need some, I probably should get some help with-

Zach:

Getting some cold feet managing this big stack of cash.

Mike:

I probably should get someone that knows what they’re doing. And normally this happens right after a drop in the market. It’s like, you’re looking at your 401k. And it was 200,000. The market drop. You’re like, “Holy cow, I just lost 50 grand. That happened fast. Oh, I maybe I better get some help.

Zach:

I can’t do this myself.

Mike:

I’m not, maybe I’m not sure what I’m doing here. So, so typically people in their late thirties and early forties, they start going out and searching for level two advisors, a financial advisor or an investment advisor, rather an investment advisor that can help them start making good choices with their investments.

Mike:

And then, you know, fast forward another 15 years or 20 years now, you’re in your mid to late fifties, maybe early sixties. And you’re starting to say, Oh my goodness, I’m going to have to retire soon. And you start thinking now I’ve got a lot of money. And that financial, that investment advisor I’ve been working with that level two advisor, they’ve done a great job helping me grow this money over time. But then you’re starting to recognize, but wait a minute, things aren’t as good as they once were because not because they’ve changed. Not because they’re a bad person, simply your needs are starting to change. You’re getting to a stage of life where suddenly you’re looking in the future and you’re saying, “well, wait a minute. When should I take social security? You go to your investment advisor. And they’re like, “well, I’m not sure I don’t really do that.

Mike:

What are my taxes going to look like in retirement?” You start thinking, I fill up like a million dollars in my 401k. That’s a million dollars. I’ve never, never paid tax on. That’s a million dollar income tax liability. Sure. What am I going to do about that? You go to your finding, you know, should I be doing Roth conversions? Maybe?

Zach:

That’s a big one.

Mike:

You go to your investment advisor, “Hey, I need some help with my tax planning. Should I be doing some Roth conversions or something like that?” “I don’t know. We don’t do that.” In fact, I maybe they know an accountant you can talk to, and then you go to the accountant and you’re like, “yeah, the accountant is not, not the greatest experience.” You start asking questions like, “well, what am I going to do? How does Medicare work? Because when I’m 65, I’m going to be on Medicare.

Mike:

How does that work? And, and like, how do I sign up and what are the supplements I need? And I mean, like, how does that whole system work?” You go to your investment advisor, like, “I don’t know. I don’t do that.” “Okay. What about long-term care maybe? Or should I hold, do I need long-term care insurance? Should I hold life insurance in retirement? Or should I get rid of it?” Go to your investment advisor? “Oh, insurance. Maybe I know somebody.” And I’m not trying to paint that level two advisor in a bad light here. I’m just saying it’s not reasonable to expect them to know those answers because it’s not what they do. Now, if they’re really, really good, they might be able to introduce you to somebody they know that does that, but now you’re having to go outside and then your planning starts. You’re like, okay, I got a little planning over here, a little planning over there. And before you know it, you got lots of little plans. It’s kind of like a junk drawer in the kitchen

Zach:

We talk about the junk drawer a lot.

Mike:

And it’s not, it’s just not cohesive. So usually that’s the stage. And also the other thing is all your life. You’ve been on the investment side, focused on growth and accumulation. And you start asking your advisor, “well, wait a minute. When I retire, how are we going to generate income out of these things?” And your advisors were like, “yeah, we’re just going to move some more money to fixed income to bonds.” And you’re thinking, well, wait a minute, bonds aren’t paying anything. Is that really the best way to do this?” But it’s really the only answer they have, right. Or they say, “Hey, we’ll just take 4% out of the portfolio or something.” The point is you reach a stage of life where you’re thinking, you know what? I might need a different level of expertise now than what I’ve had previously in my life.

Mike:

That’s when you’re naturally saying, okay, maybe it’s time to find that level three advisor, that holistic planner, someone who can sit down with you, who specializes with someone at your stage of life. Sure. Who can answer all those questions for you and who can help you put together a cohesive plan, not just put a plan together, but then in future years help you review that plan and update it because you know, the tax laws change, you know, a state laws change, the market changes, the economy changes your personal circumstances change. So naturally you’re going to have to monitor and update that plan each year over your lifetime. So natural progression, you kind of start at level one, you get some money, you move to level two. Then you get to a point where you’ve got serious money and serious questions, a lot of times tax related. And that’s when you’re moving to level three.

Zach:

Yeah. It’s an easy progression and it makes a lot of sense, but I feel like there’s misconceptions from a lot of the general public of how these levels operate, and I think we did great job of explaining how they work.

Mike:

Yeah. And one of the biggest things you see is the biggest challenge out. There is a lot of people who are level two advisors. And usually these are advisors that work for the really big firms Man, they hate it when you have to leave them and go to level three, because they’re like, “Oh no, I’m losing another client.” This happens to them all the time, right? “I’m losing another client.” And the problem is, and they try to do, they try to be all things to all people, but you can’t, you cannot be all things to all people. You can be all things to certain people. Right? But not all things to all people. So, in any event that’s a pretty natural progression that’s but that’s the pyramid, that’s the three levels. And by the way, what did we say about fees and expenses? We said level one’s the cheapest. Level two, is that going to cost you more than level one? Like, is it going to cost you more to work with an advisor than just do it yourself? Of course it will, and you would expect that. But then if you go to level three, the holistic planner, what do you think is that probably going to cost you more than a level two advisor who just focuses on investments?

Zach:

In some cases yes, it might.

Mike:

Well the reality is it probably should! They’re doing a whole lot more for you! And you know what? You should sit back and say, that’s okay. I need more help now than I’ve had in the past. If you need more help, it’s probably going to cost you a little more money and that’s okay. That’s okay. Because you know what, it’s not about what the cost is. It’s about the value you’re receiving for the dollar you’re spending. Right? So there you go. Those are the three levels. Hopefully this was a good conversation. Any final questions on this as we maybe wrap up today Zach?

Zach:

So if I’m somebody that’s looking maybe to jump one of these levels or look for maybe a broader spectrum of advice, you know, what should I do?

Mike:

Oh, Hey, great question. So here’s the thing. Maybe if you’re a client, you know, we’re level three advisors, that’s kind of what we do. That doesn’t mean we’re right for everyone. Right? I want to be very clear. We are not right for everyone. But maybe you’re not a client. Maybe one of, one of our clients is a friend of yours and they forwarded you this, this podcast. By The way, feel comfortable forwarding these. We’re, we don’t want to be a secret out there. In any, or maybe, maybe you’re not working with us, but somehow you got this podcast and somehow you got in touch with, with us in some way, shape or other. All you have to do is what I would suggest. Maybe you’re working with an advisor now, which is a level two advisor. And just like we were talking about, you’re saying, gosh, I’ve got questions about taxes and I’m not really getting, you know, the answers that I want, or I do have questions about when I should take social security or whatever it is.

Mike:

And you might be level one, you do it yourself, where all you’ve done is manage your own 401k. You might be level two, you’re working with an advisor. Either way, if you are thinking to yourself, “man, I need to talk to a level three advisor. It sounds like maybe that be a good idea.” Then you can either call us, right.? The phone number 512 265 5000. Easy to remember, 512 265 5000. You could email us, you could email Zach. Zach handles the calendar and Zach is Z A C H. So he’s Zach with an H @cenadvisors.com, C as in Charlie, E N, then the word advisors.com. Or of course you could just schedule a time right on Zach’s calendar, because the way it works is, right, Zach? If someone wants to talk to me about their situation, what’s the first thing they have to do?

Zach:

You gotta go through me first.

Mike:

You gotta talk to Zach, and all the only reason is, I mean, Zach, just, you just spend a couple minutes say, “Hey, give me some insight as to what your current situation is, what are you trying to accomplish?” So, and you’re doing it just so that I have, I’m prepared. So we can make the best use of time. And then Zach schedules a time for you to talk to me. And the easiest way to really do this is you go online and you go, you just type in, talktomike.com. So the word talk, T A L K, to, T O, Mike, my name, M I K E. TalkToMike.com. What happens if they type that in their browser?

Zach:

It goes straight to our calendar. You can schedule that 15 minute call. It takes about 15 seconds.

Mike:

Right, so it takes a, I feel like the Geico guy. Oh, 15 minutes says 15%. No, that’s not what’s going on here. You just go to talktomike.com and it’s an online calendar. You guys you’ve seen these things, but just pick a day in a time where you can spend 15 minutes to talk to Zach. Zach will gather your information. He’ll schedule another time for you to talk to me. That might take more like an hour call it. But it’s a really easy process. So if you’re not a client, definitely something to take us up on because it’s a free experience. It doesn’t cost you anything.

Zach:

Yep. All great options before we sign off today. Mike, any final thoughts?

Mike:

Yeah. Same as always. So as you know, if you’ve been watching or listening, I’m a big believer that retirement should be the best time of your life, right? The best time of your life, I believe your best is yet to come. And our job is to help you make those smart financial choices, so you can truly enjoy the future that lies in front of you. So, let’s get together. Let’s talk, let’s help you make those great choices, whether or not we work together. Let’s see if we can bring some value to your life.

Zach:

Love that, Mike. Thanks for joining us, and we’ll see you same time next week on Retirement Today.

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