GRD Season 4 Episode 5-Why Don’t More People Use Financial Advisors_mixdown
===

[00:00:00] Hi, I'm Ed Slott. And I'm Jeff Levine. And we're two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you the saver, so that you can make better decisions because better decisions on the whole lead to better outcomes. And here's how we're going to do that. Each week, Jeff and I will debate the pros and the cons of a particular retirement strategy or topic with the goal of helping you keep more of your hard-earned money.

At the end of each debate, there's going to be one clear winner you. A more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation. Decide what's best for you and your family. So here we go. Welcome to the Great Retirement Debate. Hi everyone, and welcome back to the Great Retirement Debate.

I'm Jeff Levine. With me as always, my partner in crime Ed Slott. Ed, good afternoon. Alright, great to be back with you. What are we talking about today? I think it has something to do with financial advisors. Yeah. I've got a question for you, ed. [00:01:00] We both, uh, oftentimes we go around and we, we espouse the benefits of working with a professional, but not everyone does.

Uh, and sometimes it's a, you know, it's because they don't know, or sometimes it's 'cause they choose not to. I guess my question for you is, and our debate for today is, why don't more people use a financial advisor? Why don't more people work with a financial professional, especially when it comes to big decisions in their life?

I think we have to say who we're talking about. When you talk about big decisions, people coming into retirement, they have a lot of money in their IRAA 401k, I think. Uh, but you still have those people that could be, they just love do it yourself first stuff. They like to do it themselves. They go online.

They look at a lot of things, but they be younger people too. There are a lot of big decisions while you're young, should you, how much should you save for your kids for college? Where should your kids go to college? Uh, should you buy a house? How much can you afford? Uh, what, so how do you pay down your student debt?

I mean, there are. There are an [00:02:00] awful lot of decisions that people at any age need to make. Well, younger people do use financial advisors, but the problem is they're called Fin-Fluencers. They're, uh, 20-year-old people that make 32nd videos if that long while they're skiing or something, uh, 30 or at the beach, 30 second videos, and then they make all their financial plans, like you just said, buy a house, do this.

Well, I saw that lady online and she's already 22 years old and makes a lot of money. So, alright, so, so why so why, why are people paying attention to those people? And I don't, not real financial professionals? Because they make good videos. I don't know the other reason, I really don't. Production quality is high.

All right. What, what do you think a re, I mean, why would somebody bet their life savings, but maybe younger people don't look at it as their life savings. So let's talk about people that are making, you know, they are serious decisions. Like you said, should I [00:03:00] buy a home? Should I put money in an IRA or 401k?

Uh, and a lot of, and a lot of the problem with these fin-fluencers. That's a new term I learned in the last year. Financial Influencers called fin-fluencers. They do these, uh, I don't even know, TikTok videos or something like that. And they're good at, I'm, I'm impressed. They're excellent. Yeah. Yeah.

And they're not accountable for the advice they give, uh, with financial advisors. Somewhat accountable. There are rules, regulations, sure. You have to go through a lot of training. I think as you develop assets and build and, and have more financial, serious financial decisions, you want to have somebody that has some training in this or at least talk to two or three of them and get a sense.

Yes, it's always important to be well-educated and be our own advocate, but at some point, I believe you need a, a professional to sort it all out for you. Yeah, I, I think there are maybe two to, you know, [00:04:00] four reasons or so why most people who don't use a financial professional have chosen that. And I, I think one of them comes down to, uh, cost, right?

I think there are some people who look and they say it's not worth it from a financial perspective. And, you know, far be it for me to tell someone else how to spend their money. But I think oftentimes that's the way it's being looked at as I am spending this. Right. A, a good financial advisor should not only provide you some peace of mind, but should also provide value in the sense that you are what you, it's not just a pure expense, right?

It's what you're getting in return. I, I know in, in previous episodes, Ed, you and I have talked about. When you, when, when money goes out, it's either spent on something or you can exchange it for another asset, right? And, and if you're exchanging it for another asset, it's really more of an investment, right?

So if you, if you had a, a a thousand dollars in your bank account and you put that into a thousand dollars of stock, you still have a thousand dollars. A good [00:05:00] financial advisor hopefully, even though you're not, you know, you're, it's not an asset necessarily, but a, a good financial advisor should help you to save more of your money, whether it be via taxes or good investment decisions, or making good medical decisions or some combination of those things or more.

They should help you to recoup some of that. There's lots of studies out there that show the, the benefits that can be, uh, you know, provided the annual benefits that can be provided from the right investment mix for folks. Uh, minimizing fees in certain investments, helping to take into consideration taxes and implementing tax efficient investing and decisions in the process.

And so. When you're thinking about it from a cost perspective, you can't just look at the net outflow. You also need to look at the potential savings that an individual who has specific knowledge in these things and a knowledgeable financial professional can provide. Because it's not just a one way street, it can be a [00:06:00] two way street.

Yeah, and I take it, you know, from my years of being a tax practitioner, uh, you could see that with tax planning, many people who do it yourself, who don't use a financial advisor believe they can do it themselves because the only thing the financial advisor or the tax preparer is doing is something they feel they can do themselves.

It's a commoditized service. They don't see the added value. I'll give you an example. The, uh. There's a big difference between tax preparation and tax planning. Oh, yes. So yes, going back to your cost and expense thing, tax preparation costs money, tax planning makes you money. That's a big, big difference.

Mm-hmm. So going back to what you said, if the the bottom line at the end, you are doing way better because you had somebody that gave you great tax advice, but the thing is you don't know what you're missing. You think. Oh, I know all of this stuff. You being somebody who, who wants to do it themselves, they're saving money.

They're not paying an advisor or [00:07:00] even somebody to do their taxes. They may not know what they don't know. So that's, yeah, you just hit on my number two reason. Oh, okay. That's exactly it. Yeah. Then you take it away. No, well, you just hit on it. It, it's the number two reason I think a lot of people don't use the financial professionals they say.

What, what, like what else is there? How, how much can they add? And they don't realize all the different things that are out there. All the different nuances to the rules. You know, when it comes to, and we'll just talk about taxes for a second. When it comes to taxes, there are the rules in most cases. Then there are the exceptions to the rules, and then there are often the exceptions to the exceptions to the rules.

And it doesn't matter. For you until it matters for you. But the problem is when it does, you often don't know, like you have a blind spot. Look, there's a reason, Ed, why surgeons tend not to operate on their own family, right? It's like it's hard to do those things and in the same way, it can be very hard to see your blind spots for your own [00:08:00] financial, uh, decisions when it's just you and no matter who you are, you know, human beings are wired to be emotional creatures. It is in our nature. It comes back from our days of, you know, running around, uh, you know, trying to stay away from wooly mammoths and things like that where our fight or flight response kicks in and we tend like it is easier to make emotional decisions, the emotional part of your brain literally works faster than the logical part of your brain. And so when you don't have someone there to check you, you can oftentimes let emotion into the decision making process. And I'm fond of saying that emotion is the enemy of good financial decisions like that is, and having a, an outside person there can be very, very effective with, with regard to that, the other thing, ed, I, I think that a lot of people don't take into consideration is, you know, what happens to them when they are [00:09:00] not able to handle things right. That's a thing. I wanna go back to what you said before because, all right, let's do it.

Let's go back. You talked about tax efficiency. Some people, again, under you don't know what you don't know, think they are being tax efficient. And I only know this because I saw you presented at our last elite meeting and you talked about people that think they're being tax efficient. 'cause they have these robo plans, I forget how you put it, where they think they're buying and selling tax efficiently.

Can you go through that? Because I thought you made a great point, that advisors can really do that a lot better. Yeah. Yeah. So we were talking about, uh, capital gains management and how to, right, how to minimize capital gains. And, and one of the things that, um, you know, all of the custodians today, or not all of them, but many of the used have language you talked Yeah.

Many of the custodians have something like a tax efficient algorithm, right, right. For selling your investment. So let's say, you know, for [00:10:00] argument's sake, you bought, you know, an investment. 10 years ago and you liked it, so you bought a little bit more nine years ago and then you bought a little bit more eight years ago and you've been buying in something known as a dollar cost averaging.

A lot of people do that, um, either because they wanna try to reduce their volatility while they're buying in or simply because they're making money and so they can't afford to put it all in. Now they. Buy more as they have more. Well, when you buy over time in a, in a regular account, in a non-retirement account, the amount that you pay for an investment is known as your basis.

It's your tax free amount. When you later go to sell that, that's the portion that you should get back tax free. But if you've bought over, uh, different periods of time, the cost, the basis, the tax free portion, can be different for each of what are known as your lots, your different purchases. Yeah. Well, one of the challenges there is when you go to sell something, if you're not selling at all, maybe you are [00:11:00] the same way you bought incrementally, you want to sell incrementally. Uh, maybe you're just using it for living expenses, whatever it may be. You wanna figure out which purchase, like which time that you bought, do you wanna sell, and you can actually trace it and figure out, it's known as the specific identification method.

That method is actually more complex because, uh, you have to specifically tell the custodian effectively what lots or which. Particular stocks you want to sell. Now, most custodians over the last years, and when I say custodians, I mean like the big financial institutions out there where you have your stocks, bonds, mutual funds, et cetera.

Right. Most of them have created, they, they understand that people like efficiency from a tax perspective, so they've created what, what they like to call, like their tax optimizers or the tax efficient Oh yeah. Method or whatnot, right? They all have their own fancy names for it, but they are driven by the typical quote unquote method of, uh, selling in [00:12:00] a cost effective way.

But that's not necessarily the case for everyone. For instance, someone who is in a more modest income tax situation in a year may actually want to sell something with gain because they may be paying tax at a 0% long-term capital gains rate. Those algorithms usually don't sell things with gain. They usually prioritize selling things with losses.

So unless you were really up to speed on these things, not only about the tax rules, but the way the financial institutions work with their algorithms, you might not know that you might end up selling things at a loss when you don't need losses and end up losing out on opportunities to pay tax at 0%.

But you wouldn't know that if you didn't know it. Right. There are all these, you just don't know what you don't know. Right. So I thought that was a good example where people think, oh, I saw I've got the account with the optimizer. Yeah. She can't get better than Optimum. Yeah. Optimum for who though. [00:13:00] That's the problem.

Right, right, right. And that's, and that's really again, the value of an advisor is to apply everything that's out there, all the knowledge and the the facts to your specific. Circumstances and your specific goals. Two people who walk into the same advisor's office with the exact same account balances and the exact same amount of, uh, you know, investments and stocks and the exact same income may ultimately be, uh, receive two different sets of recommendations because they have different sets of goals and objectives.

You can't just, you know, I mean, yes, technology is great and it could do a lot more than it could in the past, but there is no system, to my, uh, knowledge that today can replace a human advisor to walk you through some of these more difficult situations and to help raise issues that you may not have even thought about.

Right. And I thought the other part that you said is very important, even do it yourselfers, eventually die or get sick. [00:14:00] Who's going to carry the ball? Who's going to tell the spouse, who's going to deal with the kids? You want somebody to talk to that knows your situation that, that you've been working with for a few years that has been giving advice.

You know, I have, you know, my plans. I say, go see this one and that one. The advisors a place to go. But if you are a do it yourself, where do the kids go? Where did they even find everything? Yeah, I, you know, I, that's, well, that's, that's a, a, a, an issue in and of itself today is where do you find everything, especially in today's digital world.

Right? Right. It used to be very easy. Someone would, you know, take the physical key to mom or dad's house, open the physical door, walk in, go to the physical office, open the physical file drawer, and look, and there would be all the files. With the accounts today. A lot of that is online. If you haven't provided the right access to people, people, that's all true for me.

I have it right. The files here. You're a little old school still. That's a I know where to go in your office if something happens. Yeah. Right, [00:15:00] right. But that's another reason, the other reason on the taxing angle, oh, go ahead. You wanna say something? Yeah, I wanna, I wanna, I wanna just add one more thought there and that's, you know, there, there are a lot of people say, well, I've got this.

I'm good. You know, uh, when, when I'm, well, if you are that good, right? If you think you have a handle on that, don't you wanna be the one who's involved in the process of selecting the person who's going to help? Yes, your significant other, your spouse, your children, your grandchildren for the future. You know, if you feel that strongly that you're a good financial decision maker.

Then don't you want to help identify that person now who's going to continue your legacy of making good decisions? To me, that's one of the biggest areas where people are sometimes a little bit shortsighted. They say, well, they'll do it. They'll figure it out when they're gone. And I can't tell you, and you've probably, I know you have seen, I don't have to tell you like Right.

The the people who come into your office and go, I don't know what to do. I'm frozen. Right. A, a difficult situation in my life. My spouse or my, my parent has [00:16:00] just either died or is incapacitated and now I'm forced into making these decisions. 'cause I don't know enough about these things like that. That is not a great time.

Again, emotional times are not great times to be making big decisions and who is going to help you make your big decisions is a big decision in and of itself, right? Like the idea of choosing that trusted professional or group of professionals is a huge, huge choice for a lot of people. And if you are good with money, if you're good with the finances.

Don't you want to have the ability to help vet that next person who's going to help and work together with them so that there's a good relationship and rapport there, so that when the time comes that you potentially can't do this yourself, or can't be as involved in those decisions. It's an easy transition and a seamless transition to other people in your life who you care about.

And back to your other, uh, comment there about, you know, [00:17:00] in the theme of why don't people use financial advisors, you use the word shortsighted. I think that's a key item. They look at, oh, I'm saving this money now, not seeing the benefits that they'll never get later. And that assumes, again, we're assuming here, the financial advisors we're talking about are doing more than just the minimum.

They're not commoditized. Like the average tax preparer. Yes, you can get that for zero. The average investor, you know, many people think I can invest, I can do my taxes. Yeah. There's something to that. If that's all the advisor is doing, then that's not the right advisor you have to use, you know, go to somebody that has some value behind them where they've.

Taken additional education in certain areas, they have specialties or they know people that have specialized education beyond the baseline services. I think a lot of people think if, if all they're doing is the baseline services, maybe I could do that myself, but then they're missing out, especially in the tax area.

And [00:18:00] I, I like the tax area well 'cause I come from that, but you could really create. Tax savings and what I love about the tax savings, it's quantifiable, it's tangible. You could see the amount, you could save people, uh, just in good long-term tax and estate planning and retirement planning. So I think if you have somebody that has of an advisor, if you can find an advisor that has expertise in those areas, then the value is there and you shouldn't focus on the cost.

That's right. You gotta focus on what it brings in, in the whole Right. In the, in the net at the end. Yeah. I, I, I think all of that's really important. And look, not everyone needs a fin. I I very much look at the, should you have a financial advisor discussion, almost like the, should you take social security at 70 discussion, right?

In the sense that not everyone should wait until 70 to take Social Security, but I know looking at statistics that far few people like, not that there's way too few people who wait [00:19:00] until 70. A lot more people should be waiting until later on. Not everybody, but a lot more than do today. And it's the same thing with financial advisors.

Everyone needs to have a financial professional, but a lot more people who don't currently work with financial advisors would benefit. And I'll, I'll just add one more thing, ed here, and that's, I think. In many respects, the, um, the financial industry still has a ways to go to help get more people access to financial advisors.

Today, the way a lot of financial advisors work, it, it, it's hard to work. With them, unless you have already done a great job accumulating funds, they're, we're going to need as an industry, the financial industry to come up with more creative ways to help people who are still in that accumulation phase of life.

And there's been progress there. There are more advisors who we either work on an hourly basis or are subscription method, uh, than did in years past. But [00:20:00] as an industry, we still do have a ways to go. There are a lot of people who are in there. Twenties, thirties, forties, even fifties and sixties, who are still accumulating assets who might benefit from working with a knowledgeable professional, but they may not understand or have a way in which to afford, uh, like a, I shouldn't even say to afford, but a, a seamless way to work with them, uh, uh, on the advisory side.

And that's an area where as an industry, we've been making some improvements, but we could stand to do better as well. I think also as an industry for people on the other side, in the second half of the game, in the distribution phase, they have to, uh, step up their game in the knowledge in that area. Most advisors just don't have the knowledge you, you know, have to have somebody with a million dollar IRA or half a million.

They're not that well versed. I know that because we train more advisors in that area than anyone in the country. And even at our training programs, we see people come up at our two day program for exact, uh, for example, there's always [00:21:00] somebody, uh, a lot of people after the first or second session as you know, you've been there, they say, I didn't know how much.

I didn't know. I've been doing this for 20 years, and I never heard of any of this. Yeah. That goes back to the, the consumer, not like if a, if a financial professional. Who's been doing this for 20 years. And by the way, totally agree. Most common, uh, bit of feedback probably at your program. Certainly when I know when I'm out on the road, that's the number one thing.

I didn't realize how much their web was. It's a lot deeper than I thought. You know, it's like, yeah, it's it. Well, if a financial professional who's been doing this for 20, 25, 30 years can say that going to one of these programs. What about something I always say like, I don't, like if I didn't do this every day of my, I, I don't know how I would keep track of this stuff.

There's so much there. So how a typical individual could, you know, uh, an individual who's not doing this as a profession could keep track of? I have no idea. Good. Good for them if they can do it. 'cause I source couldn't. That's for sure. Right, right. Uh, and that's an important factor [00:22:00] and that's another reason people probably should use financial advisors in that phase, but they have to know that their advisors know.

Yes. Absolutely. Well look at the very least, ed, hopefully they know, right? Because that's the purpose of this show is to inform consumers. Ed and I argue, we debate. We raise these issues in the hopes that there's a winner of every one of our debates. You the consumer who has a more informed or who can make more informed decisions and who has more knowledge.

And better knowledge leads to better decisions. Better decisions lead to better outcomes, and that's what Ed and I are on a mission to help you do come up with better outcomes, make better decisions for you and your family. Ed, thanks so much for joining us for this episode is a great retirement debate.

We'll see you all real soon. Jeffrey Levine is Chief Planning Officer at Focus Partners. This podcast is for informational and educational purposes only, and should not be construed as specific investment accounting, legal or tax advice. Certain information mentioned may be based on third party information, which may become outdated or otherwise superseded [00:23:00] without notice.

Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The topic discussed and corresponding arguments are those of the speakers and may not accurately reflect those of focus partners.