Should clients be concerned when advisors don’t want to talk about their own personal finances?
“I would say it’s a red flag,” says author and certified financial therapist Rick Kahler. “You want a planner that’s transparent.”
Kahler, president of Kahler Financial Group in Rapid City, S.D., says advisors might be surprised if clients start probing into their wealth, but an outright refusal to answer and say things like “That’s my private business” or “I don’t know” is problematic. “I think it’s definitely good if you have a planner that’s going to appropriately share some of their information.”
Quoting what he refers to as one of the most profound Bible scriptures, “But be ye doers of the word and not hearers only,” Kahler says that this is something that clients expect when they hire an advisor—because advisors are supposed to follow the advice they give to clients. “I don’t think I would want a financial planner that says, ‘Do as I say and not as I do.’”
Kahler’s views echo those of other advisors who spoke with Financial Advisor.
“If a client really wants to know that information, while it might be a little uncomfortable, it is an opportunity for advisors to demonstrate that they put their money where their mouth is,” says Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary in San Diego. A good practitioner, Barse adds, knows “every single dollar sign-related detail, from tax returns to estate planning documents to liquid total net worth about our clients. So, it’s only fair for [clients] to ask questions.”
“Honesty and transparency are imperatives in the relationship between advisor and client, and frankly in most relationships,” adds Paul Karger, co-founder and managing partner at TwinFocus, a Boston-based wealth advisory firm for ultra-high-net-worth individuals and families. “We have fiduciary duties to our clients to act in their best interests.”
Kahler recalls an investing and financial planning workshop he gave several months ago at the gym he attends. One of the topics was how people could begin saving to become millionaires by age 65. He said if someone in their early 20s invested $6,000 a year in stocks in an IRA for the next seven years and then stopped, there is a reasonable probability they would have $1 million at age 65, taking into account stocks’ historical return of 8%.
As he explained the math, Kahler says, a 20-something gym coach paused and said, “Well, Rick, are you a millionaire?”
Kahler was initially taken aback by the question, but later thought it was a great one. “She’s got every right in the world to know if the guy who just told her, ‘Hey, I’ll show you how to be a millionaire’ followed his own advice,” he says, noting that it didn’t take him long to say, “Yes, I am.”
One pair of clients, a couple his age who had many millions of dollars in net worth, put it another way: “You know everything about our net worth, but we don’t know anything about yours.” He says his net worth was similar to theirs. But he wondered how they would have felt if he had only $500,000 in his 401(k)s and was not totally funding them.
“What type of trust would that build with somebody?” Kahler asks. He says being able to respond in a relatable way to a client “can bring confidence that the planner is a doer and that they have applied the advice that they are giving to the clients.”
But even if advisors are transparent about their finances, and the finances are healthy, their net worth won’t necessarily be germane to the clients’ financial lives, says Lori Van Dusen. “There should be some correlation between the success of an advisor and the success of clients, and that doesn’t necessarily mean that my net worth and a client’s net worth match each other. It just means that my investments philosophy and my discipline and how that translates into my own personal success should be somewhat transferable to clients,” says Van Dusen, the founder and CEO of LVW Advisors in Rochester, N.Y.
Karger agrees. Clients should focus on someone who understands and subscribes to their values and goals, not the net worth of the advisor, he says. For instance, it’s good to have youth on the advisory team, people who can grow with the assets. Would it matter if the young advisors on the team were offering good advice but hadn’t built their own wealth yet? Karger notes that he and his brother, Wesley, were young when they started out. “But we were ambitious and smart, and that was enough for many of our initial clients,” whom he describes as founders and hard-working entrepreneurs.
“People want to work with people like themselves,” Karger says. “Our success is also something that is also really important to our clients, as they know that the only way we have achieved success is by making our clients successful.”
Even if most clients don’t openly inquire about their advisors’ financial health, it does not mean that they are unaware, Van Dusen notes. “It’s an interesting and important question and I think people get at it in different ways, just not that blunt.”
Advisors, she believes, should provide client references. “The clients should be able to speak to the advisor’s success in advising them and in reaching their goals.” She adds that clients can also get information from public data.
Barse says he always tells clients that it is important to conduct the appropriate due diligence before they hire a financial advisor. “And that’s not asking your best friend or most trusted friend from church who they use as an advisor because they might lack the appropriate expertise to understand whether or not the financial advisor is truly doing what is in their best interest,” he says. Part of that means going to the Financial Industry Regulatory Authority’s BrokerCheck site “to make sure that you have the insight into whether or not this person has any cause for pause or reasons to be concerned,” he adds.
One question Kahler suggests clients ask their advisors is, have you ever made financial mistakes and what have you learned from them? He says he rarely gets asked that question, but he told one client that his job is to make every financial mistake possible so that he can help the client not to make them.
“And yes, I have made financial mistakes,” Kahler says. Though he has never filed for bankruptcy, he says he was once staring it in the face. Speaking openly about those mistakes, whether they are about business or real estate or something else, helps to build trust, he says. “Most clients come to us thinking that we are flawless and that we are experts in their lives, and we are not. So I think it’s important that we can reiterate mistakes we made and what we’ve learned from them.”
Even someone who has filed for bankruptcy is not necessarily a bad advisor, he says. “It could actually mean that they are very good if they have learned a ton from those experiences. That’s a great resource for them to say, ‘Yeah, I have been on that side. I have faced what you have faced.’”
Karger adds, “As long as the advisor turned a negative event into a positive, there is no reason to hide an experience.” He argues that “most of the world’s most successful entrepreneurs have had many failures, including bankruptcy. They would probably tell you that they wouldn’t have been so successful had they not gone through those failures first.”
As Barse says, “Life happens,” whether it’s a bankruptcy or a lien on a house. However, he adds, “if you stand up in front of a group of people and profess the positives of long-term sobriety but then you are a closet alcoholic, I think that you really have to impugn the validity of the source.”
Nor is it true that having a big net worth makes someone a great advisor, Kahler says. “How did they get that money and how is it invested?” he asks. He notes that there is a money script that says: If a person has money, they have great financial knowledge. “Well, that’s crazy thinking. What about a celebrity that made great money and died broke?”
The bottom line, says Kahler, is that if an advisor “is currently in a mess and headed for disaster, that’s the train you don’t want to get on as a client. And the question is, how do you find that out?” Inquiring clients could do research on the advisor, or they could simply ask questions, he says.
In addition to querying advisors about their financial mistakes and asking for references, as Van Dusen suggests, Kahler says clients should also consider asking advisors the following questions to make sure they are a good fit:
• Do you follow the advice that you give your clients?
• Do you have an emergency fund to cover six months’ living expenses?
• If I ran a credit card report on you, what would it tell me?
• Do you use the same investment managers you tell me to use?
• Does your company have a succession and an emergency plan?
• Do you have an umbrella insurance policy?
• Do you have a will?
And while these questions could trigger a lot of emotional reactions, both for the planner and the clients, Kahler says they are appropriate if clients want to determine that advisors are “walking the walk and talking the talk.”
He adds that he would encourage planners to be proactive in providing some transparency. “I just think it strengthens the trust of the planner if they can be instantaneously open and answer difficult questions,” he says.