Should clients be concerned if their advisor shies away from questions about their own finances?
“I would say it’s a red flag,” said 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., said an advisor may be surprised at the client’s probing of his or her finances, but to outright refuse 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,” he said.
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 said that is what 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 recalled an investing and financial planning workshop he gave several months ago at the gym he attends that in part focused on how to begin saving to become a millionaire by age 65. He relayed to the group that 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, assuming a historical return of 8% on stocks.
As he explained the math, Kahler said, his 20-something gym coach paused and said, “Well, Rick, are you a millionaire?”
Kahler said he was initially taken aback by the question, but soon after thought it was a great question. “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 said, noting that it didn’t take him long to say, “Yes, I am.”
Then there was the multimillion-dollar-net-worth client couple who told Kahler, “you know everything about our net worth, but we don’t know anything about yours.” Kahler said he did tell the clients, who were the same age as he was, that his net worth is similar to theirs. But he wondered how they would have felt if he only had $500,000 in his 401(k)s and was not totally funding them.
“What type of trust would that build with somebody?” Kahler asked. He said 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.”
One question Kahler suggests clients ask their advisors is, have you ever made financial mistakes and what have you learned from them? He noted that he rarely gets asked that question but once told a client that his job is to make every financial mistake possible so that he could help the client not to make them.
“And yes, I have made financial mistakes,” Kahler said, noting that he stared bankruptcy in the face once. But he said he has never filed for bankruptcy or gone bankrupt. Kahler said he speaks openly about his financial mistakes, whether they are typical business or real estate related, because it helps to build trust. “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.”
Kahler said that an advisor who has made mistakes and even filed for bankruptcy is not necessarily a bad advisor. “It could actually mean that they are very good if they have learned a ton from those experiences,” he said. “That’s a great resource for them to say, ‘Yeah, I have been on that side. I have faced what you have faced’.”
At the same time, just because an advisor has a high net worth does not mean he is a great advisor, Kahler noted. “How did they get that money and how is it invested?” he asked. Kahler noted 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?”
But the bottom line is, “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,” Kahler said. “And the question is, how do you find that out?” For one, the clients could do research on the advisor, or they could simply ask questions, he said.
In addition to querying an advisor about his financial mistakes, the following is a sampling of questions Kahler said advisors should prepared to answer to help clients decide whether they are a good fit:
• Do you follow the advice that you give your clients?
• 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?
• Do you have an emergency fund to cover six months’ living expenses?
• 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 said they are appropriate “to determine if they are walking the walk and talking the talk.”
He added 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 said.
