Build Your Financial Team. Lead it.

Terminator fixing his own arm.

Besides the physical impossibilities and Physician College objections, I would not want to operate on myself or my family. I would want a qualified surgeon. Both for their higher skill level and their increased objectivity. Having a team of financial professionals involved in your financial planning has analogous considerations.

This post gives a quick overview of some of the professionals that you may interact with. It is important to know what they do and what you need to do. You are the common link and must ensure that you are delegating tasks rather than abdicating responsibility for your finances. You are the one who is ultimately responsible for the outcome and bears the consequences.

Like a patient, you will get better outcomes if you educate yourself and participate. You may even decide, after educating yourself, that there are tasks that you wish to delegate and tasks you want to take on yourself.

*

Who are the main advisors & brokers on your team?

Your financial team will have advisors. These are professionals with expert knowledge in a specific area that they can advise you on and they may also implement the associated tasks.

Lawyers:

Credit: Breaking Bad (Sony Pictures Television 2008)

A lawyer can ensure that you have the proper structure and legal documents related to your business and estate. For example, how to set up a small corporation and the shareholder structure. They can help you review contracts for work you take on. Similarly, they can advise on contracts and labor issues for your employees. A personal will, advice on whether a secondary corporate will is beneficial, and establishing a formal trust for your family are all within the realm of lawyers. Different lawyers may specialize in different areas.

Accountants:

Accountants are experts at analyzing financial data. That could be for preparing financial statements, setting up a payroll, or looking at where the revenues and expenses of your business come from. They are experts on taxes and can advise about appropriate expenses and deductions for tax planning.

We most commonly hire an accountant to take the financial information that we give them and prepare our taxes for filing. They sometimes advise on long-term tax strategies. However, the focus is usually on the near term. It is also important to note that accountants are not usually investment advisors. Long-term strategy is usually the realm of a financial planner and investment advice that of an investment advisor or portfolio manager.

Financial Advisors:

A variety of professionals such as financial planners, investment advisors, insurance brokers, mutual fund salespeople, and financial coaches call themselves financial advisors. There is a dizzying array of different certifications and professional designations with significant cross-over in knowledge and skillset. Despite some common considerations, they generally gravitate to either broader financial planning (making and implementing a financial plan) or the management of a specific aspect of a plan . Here are some of the big ones:

  • Certified Financial Planner (CFP): Focused on financial planning
  • Registered Financial Planner (RFP): Focused on financial planning
  • Chartered Financial Analyst (CFA): Focused on analyzing potential investments and portfolios
  • Charter Investment Manager (CIM): Focused on managing investment portfolios
  • Chartered Insurance Professional (CIP): Focused on insurance products

Bankers & Brokers:

There will also be people or companies that you work with for specific tasks. They are not focused on financial planning or investment advice. However, they may advise on their products specifically. For example, you may use a mortgage broker or a banker to obtain a loan or mortgage. A banker can help you open accounts, credit cards, or a line of credit for your business. You may use a brokerage to buy and sell stocks, bonds, or funds for your investment portfolio. While sometimes taking the angle of a financial advisor, most insurance advisors function more like brokers.

*

Fiduciary Duty & Due Professional Care

Fiduciary duty is the legal duty to advise what is best for a client out of the possible options. That includes acting in good faith, honestly, and with a high standard of competence. Regardless of the side benefits or loss to them or their organization. They also have a duty to broader society. It is a legal standard and a high expectation that few professionals are held to.

Lawyers & Accountants

Lawyers have a fiduciary duty to their clients. Accountants have also been found to have fiduciary duty in Canadian case law. This does not mean that they are expected to be perfect or guarantee success. It is the same as with doctors – they need to have exercised due professional care. That means doing their best, with regard to the circumstances, compared to what a reasonable competent professional would do. Errors can happen in law and accounting, just like medical errors. So, you still need to pay attention to what they are doing.

Financial Advisors

Very few financial advisors are held to the fiduciary standard. When you use the Canadian Securities Administration search engine about 4% come up as Advisory Representatives. Advisors with the advisory representative designation have fiduciary duty. Unfortunately, they can be hard to access as they are usually embedded in firms dealing only with very wealthy clients. They also come at a substantial cost. Most financial advisors are classified as Dealer Representatives. This designation has suitability as the standard.

Suitability Standard

financial team

The suitability standard means an advisor can only recommend investment products that are “suitable” to your risk tolerance and goals. It does not mean that they must recommend the best products for you. That is an important distinction. A high-fee mutual fund may be suitable for you, but not the best option compared to a better performing low-fee fund.

Financial advisors with the Certified Financial Planner (CFP) designation still have a suitability standard rather than a fiduciary duty. However, they do have a code of ethics to provide objective advice that puts clients first. A complaint to their regulatory body can be filed if it is breached.

*

Why Fiduciary Standard Is Still No Guarantee

Your advisor will have incentives and biases that may differ from your own. Advisors are not evil. They are usually well-intentioned, but human, with human biases.

Given the subjective nature of planning and broad options that meet the suitability standard, it is important to be aware of potential bias. Most advisors will likely try to do the right thing. However, they are human and subject to incentives and biases.

That can be helpful to bring a different perspective that may differ from your own. However, it is also vital to educate yourself. That allows you to uncover and consider their biases. It also allows you to have your own informed opinions to weigh their advice against.

Most advisors genuinely believe that what they are offering is the best. They usually invest in a way that mirrors how they invest on their client’s behalf – even after they have left whatever firm they worked for. In a large Canadian study, advisors underperformed the market by 3%/yr – just like their clients.

Know how they get paid and by whom.

A dealer representative advisor may get commissions for sales of some products over others or experience pressure to sell the products of their employers. A study of mutual fund sales in Canada suggested that clients were steered towards funds that would generate more commissions.

Even advisors who get paid as a percentage of your assets instead of direct commissions may have some bias. For example, there could be bias to over-invest since that means more assets under management. There could also be a bias towards products included in their formula – like real estate for a real estate advisor/manager or towards stocks, bonds, funds for an investment advisor.

Financial advisors get the most internet flak, but all of your advisors or brokers are selling you something. Your lawyer gets paid to make you more complex legal structures like trusts, companies, and estate plans. Accountants get paid more to do corporate taxes than personal or sole proprietor taxes. The more you keep in the corporation and grow, the more capital dividends you will eventually take out later (for a fee). Bankers will lend you as much as they think you’ll pay back, regardless of the other sacrifices you’ll need to make to do so. Brokers make more money the more you use them to trade.

Understand how they have been trained.

A financial advisor may have been educated by the company whose products they sell. Even those with an independent education to achieve an advanced certification, like a CFA or CIM will have a potential for bias. If you learn all about analyzing investments to be an active manager, you are likely to favor active management using those tools. That, in the face of consistent evidence that trading less frequently and using a passive strategy generally yields better results. It is hard to accept that doing less is better when you have invested so much energy into learning to do more.

*

The default setting for your financial team is “Silos”

Your advisors can only give you advice using the information that they have. The only central repository for that is you.

financial team

Different team members will usually ask for common information that they need for their task and do their best with that. For example, your accountant will ask for information about your different types of investment income and use that to file your tax return. Similarly, your lawyer will ask for your different insurance policies and investment assets when they advise about estate planning. However, neither advise you on what investments you should buy, how you should organize them to be tax efficient, or how you should use them to fund your goals. They will simply do their best with what you hand them.

Your insurance, real estate, and investment advisors will commonly advise on their aspect of your portfolio and be biased towards it. However, it is uncommon for them to try and put all of those pieces together.

A good financial planner can help you put the different parts of your financial life together into a cohesive financial plan. This is one of the areas where a financial advisor can provide major value. The more that they are expected to do, the higher the cost will be. A strong financial knowledge-base helps you to determine if that is good value for the money you are paying. You are then deliberately delegating the work, not abdicating it. Still, even a good financial planner is limited by the information that you provide them.

Why You Must Be The Link

No advisor knows your situation and goals like you do.

Similar to a medical problem, where there are often many different viable approaches to treatment, there are many ways to approach a financial plan. Just like a patient making health decisions, it is important to be an informed client when dealing with financial experts. It is the only way to get the best possible plan for your situation, your values, and your preferences.

Most of personal finance is not something that someone else can do for you.

Much of financial planning focuses on the procedures, like investing or buying insurance. However, like in medicine, success is greatly affected by lifestyle and behaviour. Only you can live your lifestyle and make the day to day decisions that impact it. You can’t invest if you don’t earn enough and spend within your means enough to set money aside. Further, good financial health isn’t something that you obtain through one action. It is built and adjusted throughout your life.

You are ultimately responsible for the outcome.

If your accountant makes a mistake filing your taxes, who is responsible for paying the difference plus the penalties? You are. Accountants usually have liability insurance, but this is still going to be a pain in the butt. If your portfolio doesn’t perform as you hoped, your advisor still gets paid no matter what. If you buy whole life insurance that you don’t really need, you still bought it and have to pay for it or the penalties to get out of it.

*

Summary: Build Your Team & Lead It

You will need input and work to be done by financial professionals.

Learn how to choose an accountant and lawyer. They are vital and not something that you want to DIY. Financial advisors cover a wide range of professionals, ranging from financial planners to portfolio managers to insurance salespeople. You need to learn enough about what they do to be able to delegate effectively and know if you are getting value for your money. With that knowledge base, you may decide that there are some aspects you will manage yourself and others that you will delegate.

Every professional you deal with will have their biases and incentives.

To choose an advisor, you need to consider how these align with your beliefs and interests. Even a fiduciary duty standard does not protect against that as most advisors truly believe they are giving the best advice. You need to learn enough to recognize where there may be biases and what the best evidence-informed options are for your situation.

Bankers and brokers will also do transactions for you, but you need to give direction.

What you want is responsiveness, competitive rates, and convenience. You need to know what you want to buy what you want and avoid being oversold things that you don’t need.

You can delegate tasks to the different members of your team, but you need to lead it.

Only you can provide all of the information needed to ensure your financial plan is cohesive. You are the common link for information flow.

A full-service financial planner can help you with the co-ordination, for a higher cost. However, you still need to bring enough basic knowledge to the table to ensure that they are putting together the best plan for you.

You will ultimately be responsible for the outcomes.

So, it is vital that you learn enough and invest the effort to delegate effectively. If you do not, then you are abdicating the responsibility. One of the psychological benefits of a financial advisor is that if things turn out poorly, you can blame them. However, that is ultimately unproductive as it was your responsibility and you will live with the outcome.

This does not mean that you need to become an expert in all financial realms.

That is why we have experts to delegate to. However, as you learn more, then you may decide you know enough to handle some aspects of your financial plan and to delegate others where you feel there is the best value for money. Regardless of the team that you build, you will need to understand how money works to use it as a tool on a daily basis for you to live a rich life. You need to operationalize it, but I built this basic curriculum to help you.

2 comments

  1. Wow, so much good stuff in this post, LD! When it comes to financial advisors, most doctors use one so it is extremely important that we understand how the industry works. The bottom line is that their timeframes are often not aligned with ours because they are measured against quarterly and/or annual metrics, and their financial interests are not aligned with ours because of their fee and profit structures.

    By advising that we need to think of OURSELVES as the leader of the team, you really get to the core of how we can best use the professionals who are available to us. Don’t be optimistic and assume that they’ll always do what’s right for you. But don’t be too pessimistic by dismissing their utility. Healthy skepticism is the key, I think – which is the topic of the piece I just posted this morning, in fact!

    https://moneysmartmd.com/optimists-pessimists-and-realists-in-life-and-investing/

    1. Thanks Matt,

      I agree. I have used multiple advisors over the years, and still do. In recent years, I have had excellent experiences and delegated effectively. However, when I think back on it, some of my early sub-optimal experiences were partially my own fault. I didn’t really know what to bring to the table. I assumed they were thinking of a long-term co-ordinated plan or would automatically use the best options. Some basic knowledge was also helpful because even the best-intentioned advisors have their biases. Often influenced by training from their employer/product-provider. Only we know what our goals are, financial beliefs are, and have a good view of the whole picture.
      -LD

Leave a Reply

Your email address will not be published.