How To Choose A Financial Advisor And Seek Financial Advice From A Specialist?

If you needed heart surgery tomorrow, would you go to your primary care physician for the operation?  I doubt it.  If you are going to have your heart worked on, you want a specialist – someone who has spent a few years studying nothing but the circulatory system and who knows his way around the chest cavity. Do you concur?  I assure you that I am by no means casting aspersions on general practitioners or the role they play in keeping us healthy.  As a matter of fact, a general practitioner is trained to know a little bit about everything that goes on with our bodies.  You could even say that these doctors specialize in generality when it comes to the practice of medicine.  They are on the front lines, so to speak.  They are the first ones to spot it when something isn’t quite right.  As you would expect, when they detect some ailment that is beyond their scope of expertise, they will not hesitate to refer you to a specialist for further treatment.  It should work that way in the financial profession, but, unfortunately it usually doesn’t. There are many generalists in the financial advisory field who, for whatever reason, don’t always refer their clients to specialists when they should.  Take retirement income planning, for example, the area in which I specialize.  It is as intricate and delicate to your wealth as brain surgery could be to your health, as this and subsequent post in this blog will show.

The story is told about an old man who was a mechanic.   Because he lived near a seaport, he had become especially acquainted with the kind of large diesel engines that power ocean-going vessels. The man had all the work he wanted and he would have retired years earlier, but he enjoyed the work and was highly sought after for his skills.

A cruise ship limped into port one morning experiencing engine trouble.  The owners of the ocean liner, unaware of the old mechanic or his skills, had arranged for their own expert mechanics to be flown in by helicopter to repair the enormous engine, but they were unable to figure out the problem.  Another crew was flown in to repair the engine but they also failed.  Finally, someone told the owners about the old man and so they called him out of desperation, although they doubted he could help.  When he showed up at the dock, there was nothing in the old man’s appearance that made them think otherwise.  He was shabbily dressed and a bit stooped with age.  Saying little, the old man withdrew a hammer from his tool bag and set about listening to the idling engine, pausing here and there to study the workings of the giant motor.  After about an hour of this, one of the engineers, wishing to know what the old man was listening for, began to speak.  The old man held up a bony index finger, requesting silence.

A few minutes later the old man went over to a large flywheel and gave it one solid lick with his ball peen hammer.  The flywheel began to move.  Listening a few minutes more for sounds that only he could understand, the old man nodded, satisfied that the engine was in good working order, replaced the hammer in his tool bag, and left the ship.

A week later, the owners of the ship received a bill from the old man for $5,000.  They were shocked.

“But he was only here an hour, and all he did was tap the engine with a hammer,” protested one of the owners.

“Send the bill back and tell him to give us an itemized statement,” said the other owner.

The old man complied with the request, submitting a second bill which read:

Tapping with hammer – $100

Knowing where to tap with hammer – $4,900

The old man knew, and he knew that he knew.  He did not need to consult books and diagrams, pore over pages from the manufacturer’s operations manual, ask consultants or seek solutions from some outside source.  He had experience and he possessed a unique understanding of his craft that was the product of years of learning the nuances of his trade and filing away those findings until he needed to retrieve them.  That’s what makes a specialist.  They focus their knowledge like a laser beam and apply it to the problem at hand.

Ed Slott is a specialist in the field of Individual Retirement Accounts.  He has written several books on the subject, including Stay Rich for Life and The Retirement Savings Time Bomb…and How to Diffuse It, and has become a national television celebrity because of his expertise in this one subject.  He knows IRAs and 401(k)s the way a skilled carpenter knows wood. With 10,000 baby boomers retiring every day, Slott’s expertise couldn’t have come along at a better time.  According to data collected by the Investment Company Institute, retirement savings accounted for 36% of all household financial assets in the United States in 2012 with the bulk of that money, around $9 trillion, sitting in IRAs and defined contribution plans, such as 401(k)s.  Most people who are approaching retirement know about as much about the actual workings of these financial instruments as they do about the plumbing inside the walls of their homes.  With so many Americans approaching retirement, the time has come to make some decisions about what to do with those accounts, and knowledge about the inner workings of tax-deferred savings plans is more and more in demand.

I have the privilege of serving as a member of Ed Slott’s Master Elite IRA Advisor Group, which is an elite corps of financial advisors specially trained in the kind of retirement planning that involves qualified accounts, such as IRAs and 401(k)s.  To use a military analogy, they are to retirement planning what Navy Seals are to rescue missions.  When I was asked in 2011 to submit a guest article for Ed Slott’s monthly newsletter, I didn’t realize what an honor it was until I learned that he only publishes guest articles three or four times a year.  The article I submitted was entitled “Coordinating Social Security with IRAs.”  I chose that topic because (a) it is an area in which I have received much training and acquired much experience, and (b) I am passionate about keeping this part of retirement mistake free.  Asking me to give you my opinions about this area of retirement planning is like asking Smoky the Bear to give a talk on fire prevention.  I have a lot to say.  Why?  Because making prudent choices in this area can mean thousands of additional dollars in retirement, and because this turf can be treacherous if you don’t know what you’re doing; you need a good guide – someone who has a “map to the mine field,” so to speak.

The big decision is when to take your Social Security when you have an IRA.  An associate of mine here in the Lady Lake, Florida office likes to call it “pulling the trigger” on Social Security income.  You have the option to begin your social security payments as early as age 62, wait until you are age 66, or delay taking Social Security until age 70.  I was quoted in the April 2012 issue of Financial Planning magazine as urging retirees not to make an impulsive decision regarding this and to please see a specialist for advice.  Why?  Consider the following example:

Specialists See Things Generalists Don’t

A client came into the office one afternoon faced with a choice.  She was 66 years old and was still working as a professor at a local university.  She loved her work and did not plan on retiring until she turned 70.   The woman had attended one of my workshops and had filled out one-page pre-appointment form.  The form is akin to the kind you fill out in the doctor’s office, letting the doctor know details regarding your medical history and what medication you may be taking.  The doctor needs this kind of information in order to effectively treat or examine you.  How can she fix you if she doesn’t know what’s broken?  It’s the same way with financial planning. The questionnaire asks the basic questions you would expect before a financial planning appointment.  On the day of the appointment, I was looking over the form and I noticed that this woman had filled every section but the one having to do with her marital status.  I decided that perhaps it was a touchy subject, and that I would approach it gingerly in my initial interview.  For obvious reasons, marital status is basic information a financial planner needs in order to effectively help a client.  But it is on the personal side.

I decided I would approach it gingerly in case it was a delicate topic.  But there was no real reason for my caution.  The woman had inadvertently skipped over that section of the form.  As it turned out, the she didn’t mind sharing the information at all.  She told me she was a widow and that her husband had died in 2000 after 33 years of marriage.  Upon hearing that, I asked her if she knew that she was entitled to survivor benefits.

The woman related how she had made a personal visit to the local Social Security Office where she was told that she was not eligible for her husband’s survivor benefit, but the reason was not explained to her.  She was ineligible merely because she was only 54 at the time. At 60 she could have received 71.5% of his survivor benefit

It has been my experience with professionals, especially educators that they sometimes become so wrapped up in their work that it’s hard for them to focus on such mundane things as what they are entitled to in the way of Social Security benefits after a spouse dies.  She apologized for “not knowing how those things worked.”  I told her that it was quite all right, because it gave people like me a job to do.

In the professor’s case, it turned out to be one of those “all’s well that ends well” situations.  Had she taken her survivor benefits as soon as she was eligible for them, she would have only received 71.5% of the full amount.  Because she waited until age 66 to take them, she stands to receive the full amount.  It’s that way with Social Security benefits.  Uncle Sam makes a deal with you.  Go ahead and take the money now, and receive 30% less, or wait until you are age 66 and receive the full amount.  I’m sure they have actuaries on staff who can accurately predict what percentage of people are eligible for benefits, but choose to wait until they can receive the full amount…and then die while waiting.  My knowledge of how the movement of stars and planets affects our lives is limited to the lyrics of the rock musical Hair, and an occasional glimpse at the horoscope in the Sunday newspaper.  But in the professor’s case it was as if all the planets and stars were perfectly aligned for her in this respect.  She wasn’t aware of her benefits to begin with, and by waiting she was able to receive more than she otherwise would have.  She was entitled to receive $2,131 every month for the next four years.  That’s a total of $102,288 that she may have passed up.  Needless to say, she was excited to have discovered what she considered to be a windfall, but was actually money hiding in plain sight.    She told me that it was comforting for her to know that now she could retire if she wanted to.  We discussed when she should take her Social Security. She was also not aware of the fact that if she waited until she was age 70 to begin taking her Social Security benefits, her payout would increase by 32% – considerably more.

Do I want vanilla or chocolate?  Either way, you’re still getting ice cream. “Nice to have such decisions to make,” she said. She decided to continue working until age 70.  I don’t blame her. Had she been miserable in her job, she may have made a different decision. We figured it up.  By earning the delayed credits and COLAs between the ages of 70 and 88 she will have collected $200,000 more, in addition to her survivor benefit, by waiting.

Thinking Outside the Box

“Think outside the box” is one of those catchphrases that gain traction (oops, there’s another one) in the workplace of professionals.  Others are “bottom line” (an old one) and “at the end of the day” (a more recent cliché).  “Think outside the box” came along in the 1970’s and was an expression that means to think creatively, unimpeded by orthodox or conventional constraints.  The obvious implication is that the “box” is square  and rigid, thus an apt symbol for unimaginative thinking.  By contrast, to have ideas that are outside the “box” is to remove the mental fetters that bind us to traditional patterns and to engage in (here’s another one) “blue sky” thinking.  Pushing the limits of our creativity enables us to see solutions we might not otherwise catch sight of.

I am continually amazed at how so many traditional planners are unwilling to do this.  Personally, I scan the retirement products daily and peruse the media on a regular basis looking for solutions.  The professional financial planning landscape is ever changing, just like the economic environment.  The financial advisor who comes to work and has a tool box that contains only three or four options for his clients cannot serve them well.  Those advisors, even if they do “think outside the box,” remain shackled if they can only represent one company or one financial planning concept.

I think it was Sam Loyd who first came up with the puzzle known as the “Nine Dots Puzzle,” which illustrates the concept of unconventional thinking.  In his 1914 book, Sam Loyd’s Cyclopedia of 5000 Puzzles, Tricks, and Conundrums (With Answers), there appeared nine dots similar to the ones below.  The challenge is to connect the dots using four straight strokes of the pen without lifting it from the paper.
Nine dots



Stumped?  Most folks who aren’t familiar with the puzzle try to draw their lines without extending them beyond the “walls” suggested by the placement of the dots. But the challenge said nothing about whether the lines could go (drum roll, please) outside the box!  Solved, the puzzle looks like this:
Nine dots solution



In retirement planning the “puzzle,” more often than not, is finding a way to help a client retire when they have finite resources and a specific income need.  Example:  “We have our Social Security of $2,300 per month, no pension, a paid for house, and a 401(k) worth $200,000.  We owe $15,000 in consumer debt and have no long term care insurance.  When can we retire?”

Thinking outside the box is the antithesis of trying to hammer a square solution peg into a round planning hole.  If an advisor is a captive representative of a large brokerage house with only limited concepts and products at his or her disposal, they wind up having to do just that most of the time.  I believe that proper planning – planning where the solution matches the problem, calls for a holistic approach.  Once you understand how holistic problem solving works, you wonder how anyone could operate a financial planning practice without it.

The Best Specialists are Holistic Specialists

A 70-year old man who owned his own repair business come into the office one morning for a consultation but said that there was probably little we could to help him because he had no real retirement savings, only $30,000 he had socked away.  But I believe in doing what one can with what one has, so our interview proceeded.  As I looked at the man’s earnings statements over the previous ten years, I noticed something puzzling.  For the last seven years prior to his walking into my office, he had earned between $9,000 and $14,600 per year.  Immediately prior to that, however, his income was in the $60,000 range, and had been for approximately 20 years.  He explained that eight years or so ago, he went to an accountant who suggested that he set up a Limited Liability Corporation (LLC).  The accountant also suggested that he claim between $9,000 and $14,600 as income, and receive the rest as dividends. The accountant meant well.  He was trying to reduce the man’s taxes.   But the accountant had failed to realize that Social Security income is based on the highest 35 years of one’s income. Those seven years where the man’s income was adjusted artificially lower may have saved him some in taxes, but it would also negatively affect how much he would receive in Social Security benefits when he retired and for the rest of his life.

This is a perfect example of how solving one problem can, if you aren’t careful, create another.  I recommend that when seeking professional financial help of any kind that you try to obtain the services of someone who can look at the entire picture and make holistic recommendations.  Just as holistic medicine involves treating the whole body with a remedy that acknowledges the interdependence of each of the body’s individual parts, a holistic financial advisor will take into account the entire financial landscape so as not to create one problem while solving another.

I am reminded of the children’s song entitled: “There Was an Old Woman Who Swallowed a Fly.”  The lyrics tell the absurd tale of a woman who swallowed increasingly larger animals to swallow the one she had just ingested, until she finally dies.  I always thought it was rather dark humor for children, but the humor behind the lyrics lies in the idea that the woman clearly should have died after swallowing the bird, which she swallowed to swallow the fly.  But the old woman miraculously endures swallowing several quadrupeds, such as cows and even a horse, before the bizarre behavior comes to a fateful end.

Solving one problem and causing another is sometimes seen in nature, where we hear about well-meaning but misguided scientists introducing one species to curb the growth of another species.  Up until 1935, Australia had no native toads.  But in that year they began importing toads to eat the beetles that were damaging sugar cane crops.  Before long, the toads were out of control.  They were multiplying so fast that they entered the natural habitats of Australia’s rare freshwater crocodiles.  The crocs didn’t know that the cane toad’s skin was lethally poisonous.  According to The Guardian, a Sydney, Australia newspaper, the population of the rare freshwater crocodile was soon decimated as a result.

A holistic financial planner is able to see the entire picture and is trained to understand how one piece of the financial puzzle connects with another.  In football, for example, the quarterback and the offensive lineman are both football players, but by the very nature of the positions they play, they approach the game much differently. The quarterback’s job is more holistic in nature.  He must pay attention to the entire field and makes decisions based on what the defense is doing thirty and forty yards away, while the lineman’s job is limited in scope to what’s right in front of him.  He isn’t supposed to see the play developing forty yards away.  His job is to block the defensive lineman who is looking him in the eye. By the very definition of his role on the field, his field of vision will be of necessity a limited one.

Unfortunately some financial professionals, because they lack the training to “see the entire field” will advise clients from their limited field of vision.  There’s an old expression which has various attributions and wording, but the thought is valid: “When all you have is a hammer, everything looks like a nail.”  If an accountant, for example, is merely focusing on lowering taxes, he may advise a client to make a move that will indeed lower taxes, as was in the case of the man who formed an LLC to reduce his reportable earnings, but will cause the forfeiture of some other advantage in another area of his financial landscape.

The Value of “What-If” Tax Returns

A specialist will know where to look to find things a generalist won’t know to look for.  About a year ago at the time of this writing, a woman came into our Lady Lake, Florida office for a financial checkup.  In reviewing her taxes, we found something interesting.  We are CFPs (Certified Financial Planners) and not CPAs (Certified Public Accountants), but as CFPs we do have some training on taxes and how they interact with other aspects of the entire financial picture.  As a matter of fact, we often work with CPAs, especially the ones who wish to help the client holistically, and not just fill out a tax return.

The woman had $300,000 in a traditional IRA.  On line 60 of her tax return, she was paying zero taxes, but because her money was in a traditional IRA, that would soon change.   According to Internal Revenue Service regulations, when you have your money in an IRA, you pay no taxes on the gains until you reach 70 ½.  Then on April 1 the year after the year you turn 70 ½, you must start taking Required Minimum Distributions, whether you need the money or not, and pay the IRS its fair share of the tax on the money withdrawn.  The amount you must take is predicated on IRS life expectancy tables.  The woman said she had seen the same CPA and the same financial advisor for the past 10 years.

“Have they recommended that you do a ‘what-if’ return?”  I asked her.  She said no.  The purpose of a “what-if” return is to see if there is a way to re-position money in such a way as to enhance either the tax picture or the income picture or both.  In the “what-if” return that we did, I was able to show her how she could move $16,250 from her traditional IRA to a Roth IRA.  With a Roth IRA, there are no RMDs. For the last 10 years, if someone had only advised her, she could have been removing $16,250 every year, for the last 10 years, and putting it into a Roth IRA.  It would’ve cost her zero dollars to move the money every year.  The Roth would continue to grow tax-deferred and she can get it out tax-free and she does not have RMDs.

On top of that, we did a second “what-if” return.  She could have also done an extra $14,000 and this time in a 10% bracket that $14,000 would’ve cost her $1400 in taxes. So what does all of that total? $16,250 +$14,000 =$30,250. In 10 years she could have moved the entire $300,000 and it would have cost her $14,000 to do that – $1,400 each year for those 10 years.  So for the cost of only $14,000 all of her money could have been inside a Roth IRA, which would have enabled her to have her money growing tax-deferred and tax-free upon withdrawal, with no RMDs.

Needless to say the woman was very upset that no one had pointed out these strategies to her before, and I don’t blame her.  Those were things that one would not expect her to know.  But you would expect that knowledge to be possessed by someone who chosen the giving of financial advice as a profession.

Like everyone else, I expect my experts to know what they are doing.  When I go to the doctor, I expect good science and a straight answer, even if it’s not what I want to hear.  When I take my automobile in for service, I expect it to receive the proper adjustments from technicians with adequate training and proper tools.  I expect them to understand my make and model of automobile.  I expect the shop to own the proper equipment that will diagnose any mechanical problems and set my automobile in good working order.  When I fly, I don’t really care so much what in-flight movie is playing, but I do expect the pilot to be sober and know the meaning of every dial and switch in the cockpit.  I also expect them to possess the skill to take off and land without incident. Is that asking too much?  No. It is not asking too much of any paid professional to know his or her business.

There is no one-size-fits-all in the world of financial planning.  Every case is different.  In the decades during which I have been involved in financial planning, I have seen many scenarios and it has been my observation that no two are identical.  This is altogether appropriate.  No two people are exactly alike.  No, not even identical twins.  And just when you think you can’t be surprised, you will be.  

You Won the What?

Not too long ago, a couple who had made an appointment came in with a healthy stack of statements and documents for me to review, including the last three years tax returns.  I usually only ask for the last two years tax returns, but they explained that there was a special reason why they needed to bring the one from three years ago.  It seems that three years ago, they had won the lottery.  The husband had put down a dollar into a group ticket, thinking nothing would ever come of it.  But when the numbers were called, the seven people who wrote their names on the ticket had won $16 million.  These lucky seven had already agreed to share any winnings equally among themselves.  By taking the lump sum and paying the taxes, their cut was approximately $1.4 million each.

I noticed that the couple’s earnings for the previous year were zero.  I suppose winning the lottery can have that affect on you. His interest and income dividends totaled $1,000, so that was his adjusted gross income for the year.  They had the standard deductions, and two exemptions, which, when totaled up, amounted to $19,000.  Line 43 on his 1040 (taxable income) appropriately read “zero.”  But I explained that because he wasn’t using the $18,000 in deductions and exemptions, it was as if he were just wasting $18,000.  I showed him where he could move $18,000 from a traditional IRA, where a good chunk of his money sat, over to a Roth IRA and it would cost nothing.  When the picture became clear, I saw a big grin form on his face.  But taking it a step further, he could move $83,000 from the traditional IRA to a Roth IRA and it would only cost him around $10,000 to do it.  But I also figured that he can move $83,000 from the traditional IRA to the Roth, and it would only cost him around $10,000 to do it.  If she were to do that over the next several years before he turns 70, then he is going to be able to move his traditional IRA into a Roth IRA and at age 70 his Social Security is going to be nearly doubled because of the Cost of Living Adjustments and the delayed credits.  So we could increase his income and reduce taxes at the same time. Both their smiles couldn’t have been bigger.

As opposed to generalists, specialists are able to spot movements such as this because they are constantly updating their fund of knowledge with reports such as the NBER report discussed here, reports from the Wharton School, which is one of the most respected business schools in the country, and reports from the federal government, such as the U.S. General Accounting Office report.  Keeping up to date on all that is current in the financial field is necessary in order to maintain such designations and titles as Certified Financial Planner, Retirement Management Analyst, Master Elite IRA Advisor, Chartered Financial Consultant, Certified Advisor for Senior Living and Circle of Wealth Master Mentor.  A June, 2011 GAO report, for example, published a report that contained information vital for anyone entering retirement.  The heading of the report read: “RETIREMENT INCOME – Ensuring Income throughout Retirement Requires Difficult Choices.”  In this government report the admonition was clearly spelled out that it is wise to (a) delay taking your Social Security and (b) to add an annuity to your retirement portfolio to make sure that you do not outlive your income.  Just as a surgeon keeps track of medical journals and reports so as to remain competent in his field of expertise, a financial specialist keeps up to date with reports such as the GAO report mentioned above.  If one is to advise clients on matters having to do with their finances, one must keep up with the times.

There Are No Cookie Cutter Solutions

Every time I read a headline that says “78 Million Baby Boomers Set to Retire,” I can’t help but think of the movie March of the Penguins that came out in 2005 and was narrated by Morgan Freeman.  Inerasable from my mind is the sight of thousands of Emperor penguins as they march as one huddled, tuxedoed mass across the ice deserts of Antarctica, traversing some of the most inhospitable terrain on Earth, to reach their traditional breeding ground.  There’s one scene where an endless stream of penguins is shown waddling single file across the ice, guided by instinct, I suppose, to their goal of propagating the penguin species. Each penguin is in lock step, following the movements of the penguin in front without looking up.

That may be just fine for penguins, but when it comes to plotting and charting our course into retirement, we humans will require strategies that match our individual needs.  No lock-step march and no cookie-cutter retirement plan can get the job done. There is no one-size-fits-all in this endeavor.   Much of what goes into an effective retirement plan will depend on your dreams, goals, objectives, risk tolerance, family life and health.  The myths of investing and money management that have impeded the progress of many who tend to follow the herd.  If you are in the “red zone” of retirement (10 years on either side) it is critical that you keep your focus and play smart.



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One thought on “How To Choose A Financial Advisor And Seek Financial Advice From A Specialist?

  1. Although I had discussed in depth with Mark the above scenarios for my situation, I was immediately impressed by his level of knowledge on the topic and his ability to answer every question I had. He very patiently answered everything that I asked and made sure I understood his responses to my questions. His ability to compare different avenues for my investments on a laypersons’ level was exceptional.

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