Money Rehab with Nicole Lapin

Episode: When You Need a Financial Advisor and How to Find the Right One with Peter Mallouk (CEO of Creative Planning)

Release Date: January 15, 2025

Introduction

In this episode of Money Rehab, host Nicole Lapin is joined by Peter Mallouk, CEO of the award-winning wealth management and investment advisory firm, Creative Planning. Together, they delve into the critical topic of when to hire a financial advisor and the essential steps to finding the right one for your financial goals.

When to Hire a Financial Advisor

Peter Mallouk emphasizes the importance of recognizing the right time to seek professional financial advice. He outlines specific financial thresholds that indicate when hiring a financial advisor becomes beneficial.

• Financial Thresholds:
  • Under $50,000: "If you have less than $50,000, you should be putting everything in the S&P 500." (05:01)
  • Over $100,000: Reaching this milestone is a strong indicator to consider an advisor, as they can introduce diverse investment options and strategies tailored to a growing portfolio.

Mallouk explains that as your financial situation evolves, so do the complexities of managing it. An advisor can assist in diversifying investments, optimizing tax strategies, and integrating advanced financial instruments like private equity and lending.

Vetting Process: The Three Cs

Finding the right financial advisor involves a thorough vetting process, which Mallouk categorizes into the "Three Cs":

1. Custody

   • Definition: Ensuring that an advisor does not take direct control of your funds.
   • Key Point: "You never want to work with an advisor that takes custody of your money." (06:03)
   • Example: At Creative Planning, client assets are held with reputable custodians like Charles Schwab or Fidelity, ensuring safety and separation from the advisor’s personal accounts.

2. Credentials

   • Definition: Verifying the professional qualifications and certifications of the advisor and their team.
   • Key Point: "Financial planning team should always include someone with a certified financial planner designation." (06:43)
   • Additional Credentials: Certified Public Accountants (CPA) for tax advice and Juris Doctors (JD) for legal advice are essential for comprehensive financial planning.

3. Credibility and Cost

   • Credibility: Assessing the advisor’s experience and track record with clients of similar financial profiles.
     • Quote: "Do they work with a lot of people that have $250,000 or $10 million?" (07:06)
   • Cost: Understanding the fee structure to ensure value for services rendered.
     • Key Point: "Make sure you're working with a fiduciary. They have to act in your best interest all the time." (08:06)

Mallouk stresses that working with a fiduciary advisor who operates independently without ties to commission-based products is crucial for unbiased financial guidance.

Questions to Ask Potential Advisors

When interviewing potential financial advisors, it is vital to ask targeted questions to ensure they meet the Three Cs criteria and align with your financial goals.

• Client Experience:
  • "How many clients do you have that have my net worth?" (09:50)
• Investment Philosophy:
  • "What type of investments are we going to buy to get me from here to there?" (10:38)
  • Mallouk cautions against advisors who promise to "beat the market" or engage in market timing, as these strategies often reduce the likelihood of achieving long-term financial goals.
• Services Offered:
  • "Do you provide tax advice, legal advice, insurance advice, and comprehensive financial planning?" (10:38)

These questions help establish whether the advisor has the necessary expertise and experience to manage your specific financial situation effectively.

First Meeting with an Advisor

Preparing for the initial consultation with a financial advisor sets the foundation for a productive relationship.

• What to Bring:
  • "Bring your investment statements to create a dialogue about what you're doing and how they might approach things differently." (11:35)
• Overcoming Anxiety:
  • Mallouk encourages clients to be honest and open, likening financial honesty to transparency with a doctor. "Just be as open as you can with them." (14:00)
• Client Empowerment:
  • "You're the client. The financial advisor needs to impress you, not the other way around." (11:59)

This approach ensures that clients feel in control and comfortable during discussions about their financial lives.

Fees and Payment Models

Understanding how financial advisors charge for their services is essential to avoid conflicts of interest and ensure you receive value.

• Commission-Based Model:
  • Drawbacks: Creates inherent conflicts as advisors may push products that yield higher commissions. "If an advisor gets a 5% commission, they're going to recommend things where they get bigger commissions." (22:42)
• Fee-Based Model:
  • Advantages: Advisors charge a percentage of assets under management, aligning their incentives with the client’s portfolio growth. "Their goal is to go look for whatever investments can make your account grow." (23:05)
  • Structure: Typically, the fee decreases as the account balance increases, e.g., 1% for $500,000 and 0.9% for $2 million. (24:13)
• Flat Fee Model:
  • Description: Some advisors may charge a fixed annual fee regardless of account size, though this is less common. (23:57)

Mallouk advises avoiding advisors who charge high percentage fees, deeming rates above 1.2% as excessive. Transparency in all fee layers, including investment-related fees, is crucial.

What to Expect from an Advisor

A competent financial advisor should offer comprehensive services and maintain consistent communication to ensure your financial plan remains aligned with your goals.

• Service Scope:
  • Develop personalized financial plans tailored to specific needs and timelines.
  • Implement investment strategies and conduct trades based on agreed-upon plans.
  • Provide ongoing account maintenance, including rebalancing investments as necessary.
  • Conduct annual reviews to assess progress and adjust strategies as life circumstances change. (21:53)
• Communication:
  • "If they're not calling you back or you're not getting in touch, it’s not working." (20:12)
• Performance Tracking:
  • Compare portfolio performance against relevant benchmarks (e.g., S&P 500 for large-cap stocks).
  • Ensure that after-tax returns meet or exceed market indices. (21:18)

Advisors should act as a hub, coordinating with other financial experts such as CPAs and estate planners to provide holistic financial management.

Selecting Creative Planning

Peter Mallouk highlights what sets Creative Planning apart from other firms:

• Comprehensive Services:
  • Integration of legal, tax, investment, and planning services under one roof for streamlined client experiences. (26:02)
• Investment Approach:
  • Focus on needs-based investing tailored to when and how clients need their funds, rather than traditional methods based solely on age or risk tolerance. (26:25)
• Client-Centric Philosophy:
  • Commitment to optimizing after-fee, after-tax returns, ensuring that client portfolios are aligned with their specific financial goals. (26:28)

Creative Planning’s holistic and personalized approach ensures clients receive tailored advice that evolves with their financial landscape.

Conclusion

This episode of Money Rehab equips listeners with the knowledge to determine when to hire a financial advisor and how to select the right one. By understanding the Three Cs—custody, credentials, and credibility/cost—asking the right questions, and knowing what to expect from the advisor-client relationship, individuals can make informed decisions to secure their financial future.

Notable Quote: Peter Mallouk wisely advises, “The most important thing is that you like and trust your advisor. You have to be comfortable with this person because you're going to be seeing them a lot.” (16:47)

Additional Resources

• Set Up a Free Consultation: Interested listeners can schedule a free 15-minute consultation with Creative Planning at creativeplanning.com.
• Contact Money Rehab: Email money questions to moneyrehab@moneynewsnetwork.com for potential features on the show or one-on-one interventions.

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