retirement planning

Why Would I Hire You? A Financial Adviser Answers a Friend’s Pointed Question

Financial advisers and doctors have a common occupational hazard: Friends and acquaintances often want free advice. When asked point blank, “Why would I hire you?” here’s what one financial adviser had to say to his friend.

“Why would I hire you?” With our wives and children inside a friend of mine poses this question in a relatively strong tone. We were sitting by the fire watching basketball playoffs and his question, one I answer regularly, somehow brought a flurry of simultaneous thoughts. There was so much I wanted to say.

Then he restated himself, “like truly, why would I hire you if the returns are the same?” Specifically, Dan (changed name for this article) was asking why he should hire my firm and me to manage his 401(k) rollover.

Here’s some background, over a couple years I had offered several suggestions as a friend to Dan.  Dan is not a formal client but had recently inquired about investing his rollover in a casual conversation at a social gathering. That conversation led to a visit in my office and to discussing some investment options. I ultimately proposed half of his portfolio be allocated to a SMA (Separately Managed Account), which had a three-year past performance equivalent to his current 401(k), but with much less risk.  Dan’s current 401(k) allocation is 99% equities.  However, my suggestion reduced his standard deviation (a measure of risk) by 27%. The other half of my proposed portfolio would be allocated into our firm’s Qualified Aggressive Growth Model, which incorporates stocks, ETFs and institutional share class mutual funds. 

A Helpful Heads-Up on a Backdoor Roth IRA

What gave me such great pause to the question was a few other interactions we had in the recent past. One example was sitting around our kitchen table with Dan and another friend, Chris. Chris was inquisitive about my work and was interested in various retirement savings vehicles. Ultimately, I introduced how the “backdoor Roth IRA” strategy works and its potential benefits. To which Dan says, “What?! Why hasn’t my adviser at the bank told me about this?”  Dan went on to text his adviser to look into it.

As an independent adviser, I commonly look for subtle ways to educate and add value in a hope that a prospective client will acknowledge the potential benefits of becoming a client. The next day I followed up with Dan about some details on the Roth conversion strategy and some pitfalls to avoid. I don’t recall receiving a reply, so I let it drop. It can be awkward re-approaching a friend when the ball is in their court, and I do my best to be conscious of boundaries.

Some Advice for His Dad’s Estate

Some time had passed between that interaction and the meeting in my office to discuss Dan’s possible rollover. I was encouraged that he approached me to talk, even if it was just as a friend, not a client. Dan’s father’s property has also been a topic of discussion. Dan is the executor for his father’s estate, and they are at the stage of making end-of-life arrangements. I thought to myself, “OK, I am glad I am here and can add more value for a friend.” I then introduced the importance of having updated beneficiaries and TODs on Dad’s assets to avoid probate. His dad lives in Pennsylvania, and a sizable portion of the estate is the house and the acreage it sits on. Pennsylvania does not allow for TODs on real estate so there are advantages in cost, time and privacy to having the property transferred to a living trust.

Dan and his wife were receptive. They asked questions and even wanted to discuss it more in subsequent interactions. Dan’s wife mentioned they were hesitant to talk about this with his Dad and the rest of his family and asked for suggestions on how to approach them. I was happy to offer additional insights about responsibilities of an executor, stressing the potential headaches of probate and recommended involving an estate planning attorney to assure things are in proper order.

A Rude Awakening at Dinner

After all that friendly advice I gave Dan and his wife, what came next  stung. While having dinner together one night, Dan’s wife looked at me and commented that an advisory fee seems like the equivalent of stealing. OK, wow!  There it is. 

At the time I laughed it off. But when someone close to you, or anyone for that matter, equates what you do to stealing it’s going to bother you, whether it was said in jest or not.

A Frank Discussion of Advisory Fees

So, let’s discuss the advisory fee. Here’s some of what clients who pay me an advisory fee get for their money:

  • They receive support with allocation based on time horizon, risk tolerance and current capital markets outlooks.
  • They get access to institutional share class pricing of mutual funds.
  • They can be assured that as an adviser, I carefully select each stock, ETF or mutual fund and am constantly assessing their relevance within their assigned sleeve(s).
  • They may be introduced to investment options they don’t know exist, such as buffered ETFs or Unit Investment Trusts.
  • There is diligence that goes into rebalancing and value when doing so during emotional times in the markets. Holdings are replaced when appropriate, such as when there is a run-up on a stock, an investment objective change or a change to the fund manager, etc.
  • There may also be advice related to tax loss harvesting, offsetting gains and tax-sensitive investing.
  • There could be suggestions to dial risk up or down depending on market conditions. Ultimately the goal is to outperform.
  • They get an ongoing interaction with a credentialed and licensed adviser with over 20 years of successful industry experience.

Phew, I got it most of this off my chest … but there’s more! Dan had previously asked whether his wife could roll over the cash value of her pension plan to an IRA and trade stocks. I subsequently learned she had, in fact, executed that rollover but to her bank adviser. On yet another subsequent visit with them, self-directed stock trading came up, and I mentioned access to no-cost trading. That was news to our friends. The rationale as to keeping the funds at the bank and paying $10 per trade was, “It helps him, and we’ve known the guy forever.”

‘Why Would I Hire You?’ Well, Here’s Why

Back to the original question, “Why would I hire you?” Let’s revisit some previous points related to Dan’s case: I introduced and educated you on how the backdoor Roth IRA works, I called to light the significant impact of Pennsylvania estate law and suggested a pivot, I identified that your 401(k) didn’t have a listed beneficiary and that you could be trading for free and weren’t aware.

The return on Dan’s 401(k) is just one reflection of the services he would get through a formal client relationship. A more valuable aspect of an ongoing relationship, I believe, would be the education he’d get, stressing the importance of looking forward. 

This entire experience reinforced a key belief I have, something I already knew in the past and lost track of: Education has always been paramount in our business, and value for advice is realized when there is a consulting fee for that professional advice. 

About the Author

Jeremy DiTullio, CFP® , CRPC®

Founding Partner | Financial Planner, Cleveland Financial Group

Jeremy DiTullio is the founding partner and a financial planner of Cleveland Financial Group, a team of financial planners who have prodigious experience in wealth management, wealth transfer strategies and executive-focused planning. He serves clients in 20 states throughout the U.S.

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