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The Truth Behind Financial Advisors | All Roads LTR Podcast | Ep. 38
19 Plays7 months ago
In this episode, Matt sheds light on the often misunderstood role of a financial advisor. Joined by special guest Peter Wilkinson, a seasoned independent financial advisor with three decades of experience, discover why not all financial advisors are created equal, how fee structures vary, and why an informed decision-making is crucial in safeguarding your financial well-being.
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Transcript
Role of a Financial Advisor
00:00:10
Speaker
Explain. So you're a financial advisor. So what does that mean exactly? My interpretation is to learn as much about each client and the set of circumstances and what's important to them as possible.
00:00:24
Speaker
and choosing from the market the vast array of products and different companies' versions of those products to put together plans that meet their needs.
Diversity in Financial Products
00:00:39
Speaker
And it's important to look at all of the different insurance companies and all of the different financial companies because no one company can be all things to all people. And some of them
00:00:51
Speaker
may have a particular focus for a certain industry, a certain age group. Others may charge more for that particular age group because they don't want them. And it's important not to choose from one company's products because you cannot be doing the best job for your client doing so.
00:01:10
Speaker
And how many years would you say you've been doing this line of work? Would
Career Path of an Advisor
00:01:15
Speaker
you say I know I'm putting on the spot here. January will be 30 30 years. OK, so you've seen some some of the different markets that we had over 30 years. And and so what company do you work for now?
00:01:27
Speaker
I'm an independent, and I have worked for certain companies. I started with a company called Prudential in England, and I worked at the Mass Mutual office in downtown Baltimore, which moved to Hunt Valley, and then I became independent simply because a lot of what they have are terrific in certain circumstances.
00:01:57
Speaker
But it's important to be looking at other insurance companies for all sorts of other different needs and therefore being independent is the better way for me to work. And for those of you listening that have experience hiring and working alongside financial advisors, they have different structures and they have different goals in terms of their business model and how they operate. And so I felt that was kind of interesting the way that you choose to
Focus on Impactful Advice
00:02:25
Speaker
operate your business. So
00:02:27
Speaker
What don't you do, should I say, and what do you do when it comes to assisting clients? What don't I do? Put another way, do you manage money for a fee? I do not. Okay. Yes, I do not. And a lot of your colleagues do that, correct? I mean, that's a major way. They do. And the reason I stopped doing that is simply because
00:02:50
Speaker
The knowledge gap between an advisor and a person seeking financial services is much smaller these days.
Impact of Fees on Investments
00:02:59
Speaker
If they have a 401k plan at work, they can go onto a website and look at their risk tolerance. And there's a pre-planned portfolio of funds. It's not that they're trying to guess that it's all programmed for them.
00:03:15
Speaker
I felt that I wanted to spend my time on the areas where I can make a big difference for them, rather than taking a fee for things that are not that hard to do if they simply look at the website on the benefits department at the employer. And what do those financial advisors typically earn for helping to place them in a bucket or into a predetermined
00:03:43
Speaker
You know mixture of stocks and bonds they i think they the typical is one percent on top of. The cost of the platform and the cost of the funds within that platform and when you add it all together fees matter cost matters over a long period of time they really matter.
00:04:07
Speaker
I found myself telling clients that if you're doing that yourself, it's not that difficult. You don't have to pick really, really fancy funds. If you're buying consistently the right things and they're diversified and allocated properly,
00:04:26
Speaker
You don't need to be paying 1% to an advisor and anything I can do for them, no matter how hard I look for high quality and low cost, it's always going to cost them more and more over a long period of time makes a big difference.
00:04:42
Speaker
And I've done the financial calculators, they're out there, they're online where you can put your fee associated with the amount of money you're investing and you can look over the compounded fees over time, that's what you mean. And so if you look over a 20 year period, 30 year period, it is dramatic. I mean, hundreds of thousands, and depending on how much money you're investing, it could be even more that you are having
00:05:08
Speaker
you know, go towards fees. And because all the money you're paying in fees, you're not reinvesting in your investments. I agree. And so, I just thought that was interesting. That is unique. I don't hear many advisors that don't also offer that service and for your reasons it
00:05:24
Speaker
It just it struck me as being a little different. So that's good. That's good advice for all of us to think about. And
Serving Diverse Clients
00:05:31
Speaker
so and so what products do you choose to? Well, I should also say, who are your typical clients these days?
00:05:39
Speaker
Typical clients over a long period of time have been physicians, simply because my wife's a physician. And when I came to a new country, I would get to know other physicians through her and then other physicians through them and lots and lots and lots over time. And so not necessarily anything different about physicians,
00:06:06
Speaker
But I found working with a certain profession, their needs often quite similar, particularly if they're similar age, getting started in finishing their training, getting their first proper jobs.
00:06:24
Speaker
So it wasn't relearning an entire different industry every single time. But as the years went on, as well as physicians, I work with all sorts of people and actually really enjoy getting to know different industries and different people in different types of jobs and with different needs. And I find it a little bit more challenging, which is a good thing.
00:06:51
Speaker
One of the things that I realized years ago, it's that even when someone has a great education, they could potentially have a great job. Their financial education, when I speak to them, I mean, what's your experience?
Financial Literacy Gaps
00:07:04
Speaker
Is it typically better than you would anticipate, or is it sometimes on the other side? It's a little bit shocking how much they still need to learn when it comes to finances.
00:07:14
Speaker
And this isn't a criticism because particularly with physicians, all of the time, the long hours they put in, there's only so many hours in the day. So it's not that I'm shocked that they didn't know what I told them.
00:07:31
Speaker
I think it really drives home that an advisor who is trustworthy is important to these people because they don't have time to be looking this stuff up themselves. So no criticism for them not knowing all of this. They had enough to do in their long days.
00:07:51
Speaker
Yeah, and it's every walk of life, every occupation, not just physicians, but I serve a lot of physicians because our proximity to so many great medical centers. Yes. And so I have a lot of clients that do that for a living and they are just like the rest of us. And so it's not taught in school. I have a finance degree and I think what I learned in my business school
00:08:15
Speaker
Pales in comparison to what I've learned once since I've been out and so learning about The corporate structure and learning about what they do I can read a return and I can read Statements that companies put out but I don't know the first thing about investing in real estate I didn't know the first thing about the insurance products and the annuities and all the different options that you sell and so it's like piecing them together as you're an adult out there in the real world and and
00:08:41
Speaker
And what I've learned is that the earlier you get this understanding, the better because you have time on your side. Learning about this when you're later in life, you're at a big disadvantage. And so I'm grateful for what you shared with me to help educate myself and my family and protect us.
00:09:00
Speaker
And so one of the things I wanted to start with, it would be related to just the type of products and why. So if I was just listening to this, if I just started speaking to you, how do you describe not just physicians, but just all of us, right? So what are the options that we should be aware of and be educating ourselves on and learning about?
Income as an Asset
00:09:23
Speaker
I think the first things that I deal with from bottom moving forward simply is the fact that we have a certain amount of money coming in. At some point, it would be nice to have saved sufficiently enough where we're working because we want to and not because we have to.
00:09:47
Speaker
Well, we decide to stop working simply because we can. But in the meantime, most people think that the most valuable asset they own is the house. In my opinion, I think it's correct to say it's not. It's their income, because income drives everything.
00:10:09
Speaker
And so we need to be paying for things that we borrowed yesterday. We need to be paying for living expenses today. And we need to be putting money away for the future. And therefore, before we start saving, my focus is to make sure that the protection side of things are in place. The foundation is built. And the first step, most people would think, well, that's life insurance. It's actually disability insurance.
00:10:39
Speaker
Simply because when you look at the cost of term insurance, a lot of people think, gosh, it's really, really cheap. It's not. I'll come to that in a second. And they think disability insurance, that's much more expensive. Again, it's not.
00:10:54
Speaker
their appropriate rates or prices or premiums to pay for the different risks the insurance company is taking on board. And so a perfectly healthy 35-year-old for a 20-year term insurance policy, it's going to be very little because the risk is minuscule for the insurance company.
00:11:18
Speaker
a doctor who is performing surgery on a day-to-day basis, the risk of them becoming sick or injured, particularly injured in such a way that they cannot do that with their hands, is far, far greater and therefore the price is not expensive, it's appropriate for the risk they're taking on.
00:11:41
Speaker
So disability insurance number one, because it's the thing that is most likely to take away what people can least afford to lose. But how
Group Disability Insurance Limits
00:11:51
Speaker
do someone, I guess it's challenging because how many people out there have disability insurance that aren't earning significant income? Does the average working Joe out there, do they typically have this type of insurance or is this really reserved in your experience for people that are high income earners?
00:12:09
Speaker
so most companies will provide some sort of group policy and the things that an awful lot of people don't understand about it is they think my incomes covered because i have my work takes care of that is often what people think.
00:12:26
Speaker
The problem is group disability insurance provided by a company, it's not cheap and they're looking to keep the cost as low as possible. And that type of coverage usually has a coverage cap. So if someone has relatively low income, the percentage that group coverage normally covers is 60%, 60%.
00:12:52
Speaker
Um, but for people who are earning more in that company, 60% of their income of their income. Yes. So if someone is earning in the same company, 50,000, and someone is earning 250,000.
00:13:08
Speaker
If the coverage cap is $10,000 per month, which is quite typical, then the person earning 50,000, 60% of their income is less than 10,000. So all of their income is covered, but at a rate of 60%, and then they'd owe taxes if applicable on that money.
00:13:29
Speaker
The person earning 250,000, 60% of 200,000 is 120,000 a year, which is $10,000 a month, and therefore they've got 50,000 that is not covered. So not only is it only 60% of their income, it's only 60% of 200,000 of the 250,000.
00:13:52
Speaker
And this is what people don't quite realize. Plus they owe taxes on the benefit because the employer has written off that cost as an expense for tax purposes. So the insured pays the taxes. So sadly, a lot of people realize how little they have in place when they go to make a claim.
00:14:15
Speaker
So, part of my job is to point out how all of this works and let people make informed decisions based on, you know, in a position of knowledge. Right. And I mean, it reminds me that sometimes we don't know until we need to know, and then it's oftentimes too late. Yes. And I can say in my world, I am the sole income provider in my home.
00:14:38
Speaker
And i'm a high income producer and to be honest even these conversations are having i'm thinking i do not have this coverage and it's something you've mentioned before and it's not inexpensive either. And i'm just a realtor so i think you've mentioned that that i fall into a category that's a little unusual. Right compared to others high income earners.
00:15:01
Speaker
It's unusual simply because insurance companies like people with set salaries where this is what they earn and that's what they earn and it's not variable and it's not based on market conditions and that kind of thing.
00:15:16
Speaker
So insurance companies, they don't want to over-insure someone. And I suppose in industries where market conditions change, like I suppose they are a little at the moment. That's an understatement.
00:15:32
Speaker
Yeah. Well, commissions change. If someone has a really outstanding year and they have put the coverage in place based on that really high income, but then things fall off in later years, then suddenly that person is in a situation where if they go on disability claim, they might actually earn more than they were actually at work. In an industry, they're not really enjoying as much because they're not earning as much. And that's what they want to try and avoid.
00:15:58
Speaker
So that makes a track record in in your industry is really important a certain amount of years of track record and Interestingly enough is it's not just that they will issue more coverage, but they give you a much more preferred occupation class
00:16:16
Speaker
So, they have things like the lower the number, the more risk it is to the insurance company and the higher the premium, the higher the cost to the insured. Something I mentioned earlier about no one insurance company or financial institution is all things to all people.
00:16:33
Speaker
There are certain insurance companies that we don't want realtors as policy holders, but if they insist on paying our high premiums, we'll gladly accept them, but they're charging an awful lot more. Other insurance companies will offer an occupation class commensurate with an accountant.
00:16:55
Speaker
for a realtor which is the opposite end of the spectrum is a very much lower cost occupation class and one of them does. So what you're getting at it's a benefit that you don't have a specific company that you're attached to is that
00:17:13
Speaker
your clients are able to understand their needs, their occupation, their income, what they need to cover. So they have to understand if they have children, when they intend to retire, all these things. So there's not a one-size-fits-all
00:17:28
Speaker
option. And you can search and determine where is most appropriate. So I like that about what you offer and the way that you do it. And so the other side, so disability you mentioned first. So what's the next thing? So I want to have a conversation about disability and the event that something happens to me. What's the next conversation I have to have with my financial advisor?
00:17:53
Speaker
One of the questions I ask, one of the first questions I ask new clients is who are you responsible for?
00:18:01
Speaker
And it's usually a question that provokes some thought, and they say, well, gosh, my family. And then they start thinking about it a little bit more, and then there might be their parents less so. But it's usually the family, the spouse and their children first. So other questions to ask that seem, everything is common sense, but yet not everybody does it this way.
00:18:31
Speaker
You know, one of the next questions would be, we've talked about the income that they earn. If you weren't here to earn that income, how much of that income would you need replaced for your family?
Determining Life Insurance Needs
00:18:46
Speaker
And most people actually say, well, all of it.
00:18:49
Speaker
Um, so then we can reverse engineer into the correct amount of, of life insurance that they need. So we can determine. We asked the question, well, how long would that coverage be needed for? It's not something to assume it's important because every family is different. Every situation is different. So to clarify, we have jumped from disability to life insurance. Yes. Got it. Yes. Um,
00:19:15
Speaker
So life insurance wise, if a person is earning $100,000 a year, for example, and they said, well, we'd need $80,000.
00:19:30
Speaker
of that. Then, and we need it for, you know, the children are really young. We have a long time until we will be at the point where we're working because we want to and not because we have to. And therefore we need that coverage in place for a long time. Then picking the picking the amount of life insurance that they need is quite simple.
00:19:52
Speaker
A reasonable rate of return for if the life insurance pays out, it has to be turned into income from this lump sum, otherwise it'll get fritted away. So if 4% was used, perhaps that's appropriate, perhaps it should be lower. I don't think it should be higher though.
00:20:13
Speaker
But if 4% is going to be dripped from this life insurance amount, and it needs to equal 80,000, it means we need four into 100 is 25. We need 25 times 80. We need $2 million. Well, I think you've gone, because you do this every day, I think you've gone three steps ahead of me. I think I have. Because I think the average person listening to this is exactly like I was.
00:20:42
Speaker
that doesn't understand what an insurance policy can do, what the tools are that they, because I just assumed, okay, I'm just gonna get some term insurance. If I die while I'm young, it gets paid out to the folks that I have that are gonna be the beneficiaries and that's it, right? That's the purpose. And so one of the things you first explained to me is that,
00:21:05
Speaker
that insurance comes in different shades. And so we have term that, correct me if I'm wrong, it's exactly as I described, I think you've signed me up with a 20-year policy, which is very affordable, it's a few hundred dollars, and it's a million or two million dollars, it's something, it's very reasonable, and so that's very affordable. So then the other side is whole life.
00:21:30
Speaker
and whole life insurance, I believe, is what you were just referencing. And from what I understand, if you do a Google search, everyone that's listening is gonna agree, oh my Lord, this makes no sense. Why would I do it? It's a scam and no one needs it and it's a joke. Just get term and invest the rest.
00:21:49
Speaker
That's what I've always been told until a couple financial advisors that I trusted, that I thought were just sales people, and I consider you one of them, explained to me the value of those type of policies and why very smart, wise, wealthy people choose them for tax purposes, for planning, estate purposes, all these reasons. So let's start there. So let's explain what whole life is and why in the world it gets a bad rap.
00:22:18
Speaker
Very good questions. Yeah. Just backing up slightly, what I was talking about is how the proceeds of life insurance in general would be used to produce income if the person had died. Okay. So we hadn't got quite to the point where... So my point is when determining life insurance, it's not getting to which type yet, it's getting to the correct amount. Oh, you're
Whole Life Insurance Debate
00:22:43
Speaker
just talking about the face amount. Yes.
00:22:44
Speaker
correct amount for this particular family and their situation. So that's the first criteria is understanding if in the event, well, I guess not in the event, we're all going to die. So it's just at the time what the face amount of that benefit would be. Yes.
00:23:03
Speaker
And then we will get to the composition of that death benefit, how it should be structured within different types of policies, whether it should be all term insurance. And so you're right, it does have a bad rap and for good reason in some ways, but in many ways, it's a shame because the people who should have it don't have enough and the people who shouldn't have it have too much.
00:23:29
Speaker
Interesting. And I think I have a few reasons. Can't wait for you to explain that further. In my in previously in my career as a financial advisor, I also taught a class every two weeks, Wednesday mornings. And most of the people who attended the class were younger. And I was a little surprised at some of the cases they brought to me for advice on that they were pushing
00:23:57
Speaker
for want of a better word, whole life insurance. And I advise them not to. And I think that maybe younger advisors are trying to make it in the business and they think by selling the whole life policy, it means they're going to make it. I don't think that's the correct way. They're going to make it because it's more profitable for them. Is that the purpose? Yes.
00:24:27
Speaker
And what happens is the person has a hundred thousand dollar whole life insurance policy, a lower income family, for example, that they can ill afford at the expense of having the correct amount of death benefit in place. And that's unforgivable in this industry, but it happens.