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Knowing When You've Outgrown Your Financial Advisor

Updated: Jul 9

Indicators That It’s Time to Change Your Financial Advisor


Front of New York Stock Exchange

 

We have an advisor who has made money for us, but we’re not sure if he can answer our questions now that we’re about to retire.

This comes up a lot when I meet with folks who already have an advisor. They almost always feel loyalty to their advisor because they have a long history, but they still have concerns about their current advisor’s ability to provide the advice they need, now that their situation has changed.


This is one of the growing pains that arises from change. The advisor who helped you build wealth isn’t always the best option for the next chapter. That’s not a judgment call, just an observation from a decade in the field.


Most advisors are good at helping clients build wealth during the accumulation phase. They’re able to answer questions like whether you should contribute to a Traditional IRA or Roth, or how to invest your 401k.


When things get more complicated, the quality of advice can suffer. For example, most advisors aren’t comfortable getting in the weeds of detailed tax projections or guiding clients through the process of selling a business.


Personally, I know my limits. If a potential client with $50,000,000 walked through the door and wanted planning advice, I would have to refer them elsewhere. That’s not my niche and I don’t have the knowledge or experience to give them the advice they would need.


What do I do well?


Integrating tax and investment planning.


This integration is particularly valuable for high-net worth clients with portfolios between $1 and $10 million, as there are typically more strategies available at that level.


Unless an advisor has taken the time to really learn and become a practitioner, they’re likely unfamiliar with the optimal ways of building a tax-efficient retirement plan. That’s why it can be beneficial to find an advisor who can handle your specific situation. Knowing when it’s time to upgrade your financial advisor can make all the difference in effectively managing your wealth.


In the rest of this post, I’m going to break down the big picture items you should be looking for when deciding it’s time to seek an advisor with a different skillset.

 

Your Net Worth Has Increased Significantly

 

As your net worth grows, the complexity of managing your assets increases. High-net-worth individuals often require different, more sophisticated strategies for investment management, tax planning, and estate planning.


To my earlier point of most advisors being generalists, if your current advisor specializes in more straightforward financial planning and is not experienced in handling larger, more complicated portfolios, it may be time to consider an upgrade.


Let’s put some numbers behind this. If your current advisor’s average client has $250,000 and your portfolio is $2,500,000, you likely need a different set of solutions than their average client. That’s in no way diminishing the client with $250,000, it’s just a fact that the planning questions are a bit different.


Instead of talking about how much income to take while preserving the portfolio, the conversation is likely centered on building a tax-efficient withdrawal plan. On the investment side, there should be conversation about asset location within the portfolio for tax-efficient growth. There’s also a conversation to be had about alternative investment options and if they’re a fit for the portfolio.

 

Signs to Look For:


- Your advisor is not proactively suggesting advanced investment strategies and bringing up asset location within the portfolio.

- Your advisor is not fully addressing the tax implications of your investments or planning ahead for future taxes.

- Your tax planning needs are becoming more complicated, and your advisor seems out of their depth.

 

You're Interested in Alternative Investments

 

Early in your investment journey, a simple portfolio is perfectly fine. You can build a great portfolio with individual stocks, ETFs, or mutual funds. Once your wealth grows to a certain level though, it’s time to consider adding other options that might lower your portfolio’s risk, increase the income, or potentially provide better returns.

 

These alternatives can include investments like private equity, venture capital, hedge funds, or direct real estate. These investments aren’t for everyone, but they can be in certain situations. Having an advisor familiar with the options can help you decide if they’re a good fit for you or not.


The other consideration here is that you want an advisor who has the flexibility to recommend a wide range of alternative investments. Some firms only offer investments that pay for “shelf-space” or offer a revenue share. These type agreements typically ensure the investment options are those best for the company’s bottom line, not for your portfolio. You want an advisor who can wade through the mess of alternative investments (there are more than 16,000 hedge funds in the United States!) and help you choose the ones best for your specific situation.  

 

Signs to Look For:


- Your advisor is unfamiliar with or avoids discussing alternative investments.

- You are not receiving comprehensive risk management strategies for your diverse portfolio.

- You feel that your investment opportunities are being limited by your advisor’s lack of options.

 

Your Tax Situation Is More Complex

 

You’re probably tired of hearing me talk about taxes, but they really are that important. The difference between advisors here can be pretty apparent.


I see this come up in a number of ways.


The first is when dealing with a liquidity event, such as the sale of a business. Many advisors are content to say, bring me the check when the sales closes and I’ll get it invested. The problem is that many opportunities are missed by the time the sale closes.


Another common situation is building a tax-efficient withdrawal strategy. High Net Worth individuals typically have significant pre-tax savings in Traditional IRAs or 401(k)’s, as well as taxable savings in brokerage accounts, often with large, accumulated capital gains. This is a great opportunity, but the advisor has to be proactive in planning to take advantage of it. If they’re not comfortable giving tax planning advice, you’re the one who will miss out.


Finally, estate planning can be a differentiator as well. Right now, the estate tax exemption is $27.2 million for a married couple, so it isn’t an issue for most folks. There’s a decent likelihood that it will change on December 31st of next year though, as the current exemption is set to expire, which will reduce the estate tax exemption by half. Again, you might be thinking that you don’t have that much, so you don’t need to think about it.


Consider this situation:


A married couple sold their business for $4,000,000 (after-tax). The husband and wife are both 60 and in good health. With a family history of longevity, they could each live another 30+ years.


If they invest $4,000,000 and make 7% per year, that $4,000,000 would grow to over $30,000,000 in 30 years. They’re going to be well above the estate tax exemption unless they plan ahead.


The takeaway here is that advanced tax planning becomes significantly more important, and valuable, as your wealth grows. If your advisor isn’t proactively having conversations about tax planning, you need to look around a bit.

 

Signs to Look For:


- Your advisor isn’t offering proactive tax planning or discussing tax-efficient strategies.

- You experience frequent surprises during tax season due to poor planning.

- You are not receiving advice on advanced tax strategies such as charitable giving, trust structures, or estate planning.

- Your advisor has limited knowledge of trusts, wills, and other estate planning tools.

 

 

Your Business Interests Are Expanding

 

If you are a business owner or an investor in active business, your financial advisor should understand the complexities of business finance, including business succession planning and the various tax implications. An advisor with the right skillset can offer valuable insights and strategies aligning your personal and business interests.

 

Signs to Look For:


- Your advisor does not have experience working with business owners.

- You are not receiving guidance on business succession planning or exit strategies.

 

You Require Specialized Financial Services


Specialized Financial Services is a bit of a catch-all, as it covers a wide range of needs. The most common issue here is specialized lending needs, particularly for business owners. This isn’t my area of expertise, but for some business owners, it can be extremely valuable to have an advisor who can offer different lending options. Sometimes this can mean lines of credit, asset backed loans, or lower rates on business loans. Business owners sometimes have trouble with traditional income requirements, as their income is structured differently, or their cash flow doesn’t match what loan committees expect. Having an advisor with experience here can make a difference.


Another specialized service is philanthropic planning. This goes into tax planning as well. Once you get past Qualified Charitable Distributions and Donor Advised Funds, you enter the world of charitable lead trusts and charitable remainder trusts, among the myriad ways to structure each based on the goal and type of asset involved. This is an area that can be incredibly valuable for those who are both charitably inclined and facing potential estate taxes. Having these planning tools in the toolbox can be of huge value.

 

Signs to Look For:


- Your advisor does not offer specialized lending.

- You need assistance with setting up a charitable foundation or charitable trust but your advisor cannot provide adequate support.

- You require more personalized and high-touch services that your current advisor cannot offer.

 

Lack of Proactive Communication and Planning

 

As your financial situation becomes more complex, you need an advisor who is proactive and regularly communicates with you about your financial plan. This includes frequent reviews of your portfolio, updates on financial market changes, and adjustments to your financial strategy. This can also be proactive communication about potential tax changes, whether that's income taxes, potential wealth taxes, or estate tax exemption changes.

 

Signs to Look For:


- Your advisor does not initiate regular meetings or reviews of your financial plan.

- You rarely receive updates or proactive advice on market changes or new opportunities.

- You feel that you are always the one initiating contact with your advisor.

 

Conclusion


If you’ve worked with an advisor for years, you’re likely comfortable. It’s hard to shake things up when you’re comfortable and especially when almost all advisors have made money for their clients in the last decade.


If you decide to change, here’s my personal advice. Send a note or email to your current advisor and thank them for their help over the years. If you prefer a call, do that. You don’t have to explain why you left, just that you found an option which better fits your situation. Advisors understand that situations change and sometimes a client can be a better fit elsewhere. All advisors, including me, have lost clients. It’s a business decision and doesn’t require hard feelings.


Change can be hard, but it’s often worth it. If you find yourself nodding while reading the signs above, you owe it to yourself to get a second opinion. You might find that you’re already getting the services you need, and no changes are necessary. Or you might find a new strategy that your current advisor can implement for you.


Finally, you might decide that the change is worth it.

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