Finding Advice with John DeGoey | E072
What to look for when hiring a financial advisor.
In today’s episode Jason Pereira talks to his friend and colleague John DeGoey. Together they are going to discuss “What to look for when hiring financial advisor? John is a well-known pundit in the industry and author of several books, specifically - The Professional Financial Advisor.
Episode Highlights:
00.56: John has been an advisor for 28 years. He has written a couple of books and articles. He is a proponent of professional, transparent financial advice in a way that is consumer centric.
1.46: Jason asks, “Consumers looking to hire an advisor, what should be their first steps? What they should be doing and how that can go in and out.“
2.01: John says, the first thing that consumers should think about hiring an advisor is what your expectations are from that advisor and find an advisor who works in your snack bracket with the specialization that might respond to whatever specific concerns you have.
3.18: Many people tell you that they deal with business owners or executives or people with money. Jason recommends you go further and ask questions about specific services that are tailored to those people. Ask the advisors to prove it by telling you what you do for me that is different than others.
3.44: John says, you can't ask questions if you don't know what questions you should be asking.
4.19: Jason always recommends, “Don't just take your friend's word for it because your friend could be happy with someone terrible.”
4.52: John says, if the advisor is only giving product recommendations without thinking about strategy or fit or planning and specifically if those recommendations are being made without doing anything to really determine what your circumstances are in the first place, then people might assume, well, this is a person who is just fresh out of university and starting out and needs to do some work with budgeting.
6.39: The conversation or the desire for advice is driven typically by the perceived need around a product or solution.
7.26: Many people when the penny drops, and they realize they need something. They rush out to find someone to help them deal with that one thing they have determined they need help with.
9.27: John suggests, “Look for a person who when start asking you questions, asked to follow up questions first derivative questions that the next question is not on their pre-existing list of questions to ask but close directly out of the answer that you gave and because you said something that triggered something in their mind, they then went back to you and said so tell me more about this to make sure that they are understanding the situation and determining whether or not you might need more help with that thing.”
10.18: Jason inquires, “Can you speak to the kind of credentials individuals should be looking for when they go and seek advice?”
10.23: John says, “The first thing that I would say is you might want to look at licensure. About 85 or 90% of the people who give advice are not licensed to sell individual stocks and bonds. They only have a mutual fund license and or a mutual fund insurance license.”
11.59: Everyone has to be fiduciary, but if you are working with a portfolio manager, all portfolio managers are also fiduciary by virtue of being a portfolio manager are also fiduciary and that's one thing that provides comfort to many people.
12.49: Jason asks, “When it comes time to ask what is all costs? Where are the red flags? Or what should people expect?”
15.02: John says Industry has not been consumer friendly because there are certain lobby groups within the industry. The total cost for the client is the sum of the product, the advice and those additional transaction charges in custody fees.
16.32: If an advisor is telling you verbally and they don't have like a fee schedule spelled out in front of you then it's another issue here that a lot of people don't think about it.
17.11: Jason points out that, “You can't be assured that you are getting as good a deal as everybody else that this person is dealing with and that's something if you don't have someone who's got a clearly defined fee schedule that they can lay out in front of you, you are a danger to that.”
20.15: The saying that we all have heard that price is what you pay value is what you get, says John
21.22: If you are getting good advice and paying for it and but you are also using expensive products and paying for that and those products are not adding value, then the sum total of the value add or subtract is going to be convoluted because it will take more than one factor into it.
23.33: We don't know how good a job we can do for someone until we actually start doing the plan and that's the reality of the real estate industry, says Jason.
26.25: John says, a lot of implementation revolves around trade-offs, because there is only one course of action and that is fine. But almost always you have to decide about whether we will travel less or work longer, but we don't retire early and still travel as much as we wanted to.
29.49: As per Jason another red flag that comes up quite often is the telling – “You need to do something with your investments before they even understand you.”
30.53: Jason says, it is really easy to score a bullseye when you paint the circle around the arrow wherever it landed. But the reality is that short of being able to prove they would do that, those comparisons are nonsense, and no one should ever take him to credibility with them.
33.09: There is a book that came out about two months ago called noise. The concept of noise is one of the main concepts something called decision hygiene, which is basically being clear, inconsistent and purposeful in your decision making.
33.25: If you are going to interview multiple candidates for the job of being your advisor, it might be worthwhile to at the outset at the beginning of the process before you interview any of them. Think deeply about what you hope to accomplish, think about the questions that you heard us talk about, write them down, and make sure that you asked all the candidates you are interviewing the same questions so that you can compare them.
36.15: If the client wants a comprehensive service and all you care about is investing their money in mutual funds, that is a relationship doomed to failure.
3 Key Points:
Find an advisor who will step back and encourage you to do a holistic assessment of your actual needs so that the response you're given can be as fulsome as necessary.
There are multiple levels of fees, and if the advisor is not clear about the multiple levels of fees, then there is a concern. What you should ask is a breakdown in writing. This should not be a surprise if the advisor doesn't have an answer ready for you and in writing right there because it's a basic question.
If you have a question about, what kind of return should I expect? You should speak to multiple advisors. In most instances it's a reverse indicator, and the advisor who sets the expectation the lowest is likely the most credible.
Tweetable Quotes:
“Don't presume and don't work with advisors that are quick to person.” - John
“If the client wants to negotiate, that would be a red flag for the advisor, because the client wants someone who is less than professional and more sales.” – John
“The media is largely beating up on fees because cost is a simple story to tell people that gets people enraged and gets clicks. Media, in general, is a terrible job of explaining to people the value of money in this industry.” - Jason
“The competency of a planner is very difficult to gauge in advance, and that requires a lot of conversation and questioning as well that people may not be ready for.” – Jason
“Somewhere in the spending or the goals there is a malleable goal that is not important, and that thing can be shifted around for the sacrifice of everything else.”
“Having a purposeful process is a good way of imposing discipline on your decision-making.” - John
Resources Mentioned
Facebook – Jason Pereira’s Facebook
LinkedIn – Jason Pereira’s LinkedIn
Woodgate.com – Sponsor
LinkedIn – Jason Pereira’s LinkedIn
John DeGoey - https://standup.today/ | https://advisor.wellington-altus.ca/standupadvisors/
Transcript:
Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Today on the show, I brought my friend and colleague on John DeGoey, to talk about what to look for when hiring a financial advisor. John is a well-known pundit in the industry and author of several books, specifically around the personalizations of financial advice. And with that, here's my interview with John. John, thanks for taking the time.
John DeGoey: My pleasure, thanks Jason.
Jason Pereira: So John DeGoey, out of Wellington office, Tell us a little bit about yourself.
John DeGoey: I've been an advisor for 28 years, and I did an undergraduate degree in political studies and a master's in public administration. And I sort of became a bit of a consumer advocate was what I was before I got into the business. And I've been with a few firms, I've written a couple of books. I've written many, many articles, and I think your summary is pretty good, that I am a proponent of professional, transparent financial advice in a way that is consumer centered.
Jason Pereira: Excellent. So basically the topic of the day is what to look for when hiring a financial advisor. Part of this podcast has largely been based on simply educating business owners on what is possible out there when it comes to financial advice. But I had someone reach out and say, okay, thanks, I'm not quite a fit for you, but what should I be looking for?
Jason Pereira: So in your mind, let's start with the consumer standpoint, consumers looking to hire an advisor, what should be their first steps? Because traditionally, if I may, it's usually go to the nearest financial institution you're dealing with or ask your friends. So let's talk about what they should be doing and how those two options can go very wrong.
John DeGoey: I think the first thing that you should think about is what your expectations are from that advisor and find an advisor who works in your snack bracket with the specialization that might respond to whatever specific concerns you have. So if you're a business owner, look for an advisor who works with business owners as one example, but maybe you're retired and you want to work with an advisor who has more retirees in their practice, or what have you.
John DeGoey: Now obviously there are a number of strong generalists out there so that doesn't necessarily have to be a deal breaker, but in most of the things that we're going to discuss today, I think what we're talking about is a continuum, where more is better than less, and you want to find someone who ticks as many boxes as possible. So I think the first thing you look for is someone who you can relate to, that understands you. That is obviously listening when you're speaking and is trying to give you a customized response to the things that you want and need as opposed to a cookie cutter response based on what his employer might be trying to get him or her to recommend.
Jason Pereira: Yeah. And I'll add one thing on the specialization piece. You ask most advisors in this country, or even in the US too, you ask them, who do you deal with? The answer is almost universally, well I deal with business owners, executives, and high net worth families. Which I always typically say, "wow, you would deal with people with money, what a surprise." So a lot of people will tell you they deal with business owners or executives or people with money, I would suggest go further and ask questions about specific services, that are tailoring to those people. So it's not just take their word for it, prove it by telling you what you do for me, that's different than others.
John DeGoey: Strongly agree. And I think a lot of those things, unfortunately those are the sorts of questions that would be difficult for most clients to ask because you can't ask questions. If you don't know what questions you should be asking. So ironically in my last book, Stand Up To The Financial Services Industry, I have like three dozen questions or four dozen questions that you can actually ask to do some of that kind of proactive due diligence.
Jason Pereira: Excellent. Yeah. So I mean, either buy John's book or... And then, to their credit, The Globe and Mail, other places have published questions on what you should be asking. And I would say, that's a great starting point, but also go in there specific as to what your challenges are in particular. So that's kind of the... Get yourself educated, get some questions together. I always say, don't just take your friend's word for it, because your friend to be happy with someone who's terrible, but you just don't know, they just can't tell.
Jason Pereira: And if you going into the bank, or whatever institution randomly, it's just roulette, god knows if you end up with anyone good. But let's talk about red flags. To me, this is where you really can detect or smell the BS in the air, but what should people be looking out for when they go in?
John DeGoey: The things that I would say, it would be the inability to give you a precise answer when you ask about what other services you offer, if you can't articulate what else you're doing, the odds are pretty high that you're not doing very much. If the advisor is only giving product recommendations without thinking about strategy or fit or planning. And specifically if those recommendations are being made without doing anything to really determine what your circumstances are in the first place. You might walk in and be young and people might assume, well this is a person who's just fresh out of university and starting out and needs to do some work with budgeting. But in fact, that person might already have gotten a six digit amount of money in a stock option that he or she did at an early age and is looking to diversify that money and actually has a good head start and a good head on their shoulders.
John DeGoey: But if you start jumping into just say $500 a month without actually realizing the person's already got a quarter of a million dollars, you're probably getting someone who's presuming too much. So don't presume and don't work with advisors that are quick to [inaudible 00:05:48].
Jason Pereira: Yeah. I've had some clients we landed, their experience going to other people. The meetings basically started off with them talking for five minutes and then the advisor pulling out a sheet saying, "okay, this is what I would invest you in, and if you don't like it, don't worry we can change it." I'm sitting there going like, five minutes of conversation, really? They get anything more than your name? So I mean, those are some obvious red flags, it's the intent to sell without the intent to understand, I think is pretty much what we're looking for that.
John DeGoey: That would be a good summary. The carpenter's rule is measure twice, cut once. So you should look for someone who is going to do as much as they can to size you up and to understand your circumstances and the more time and energy they spend in truly understanding what you're all about, the more confidence you would have that the person is going to be able to make recommendations that are truly appropriate for you.
Jason Pereira: Absolutely. Now, I think also part of it is more often than not the conversation or the desire for advice is driven typically by a perceived need around a product or solution, right? So I think I need to start investing, so I'm going to go talk to someone. Or I built up this investment account, or I have this money I need to do something with, I need to talk to someone, or I maybe need insurance because I just got married or had a kid. That typically leads people to go meet with advisors specifically for a purpose. Can you speak to the mindset they should have beyond that purpose and the other services that they should be looking for that the industry can provide them.
John DeGoey: Sure. All of those things could be legitimate and most people need to do all of them eventually. So why not find someone who can look at the entire picture to discern whether or not you need insurance right now? And if so, how much and how that would fit in with your savings plan and so forth? I think a lot of people, when the penny drops and they realize they need something, they rush out to find someone to help them deal with that. One thing that they have are that they've determined they need help with. And they might be two or three other things that might've even escaped their sort of ambit. Of where they're looking that they might need as much or more, but because they never contemplated it, they never looked for someone to actually address that problem.
John DeGoey:So I guess what I'm saying is, find an advisor who will step back and try to encourage you to do a holistic assessment of what your actual needs are, so that the response that you're given can be as fulsome as is necessary.
Jason Pereira: Yeah. There was a debate on Twitter a while back. I think you may have seen it. It was someone saying that if you're looking for a new advisor and you're not speaking at least half the time, then something's wrong. And my response was, what do you mean in the first meeting the advisor should speak half the time? I mean, honestly, if it's more than 25% it's probably too much, because at the end of the day we need to be learning about what their situation is. I mean, there's been countless times in those meetings where someone comes in thinking about X, but you uncover things like, oh, you're an American citizen? Have you been filing your taxes? No, I haven't, why do I have to do that?
Jason Pereira: Well, you got an issue. And a number of times, I'm sure you've had it to John, where your first meeting with someone. It's like, they came to you because they have problem X, but there's the zone of unknown unknowns. They don't know what they don't know. And anyone who knows the landscape of this world can identify those pretty quickly with the right series of questions.
John DeGoey: That's correct. And I think that would be, often by itself that's a good test, is your advisor asking more questions? And it's sort of like the Colombo thing, oh one more before you walk away. And being perpetually curious, genuinely curious, not because they have a laundry list of questions that they have to get through so that they can say, okay well I've now met my minimum compliance obligations and ask you these six questions. But peel back the layers of the onion think about so, well what does that mean?
John DeGoey: Those are the sorts of things that I can't think of an example off the top of my head, but I think what I would say is that, look for a person who, when they start asking you questions asks follow-up questions. First derivative questions, that the next question is not on their preexisting list of questions to ask, but flows directly out of the answer that you gave. And because you said something that triggered something in their mind, they then went back to you and said, so tell me more about this to make sure that they're understanding the situation and determining whether or not you might need more help with that thing.
Jason Pereira: Yeah, absolutely. I think one of the traps people fall into is, we'll call it the satisfaction of basically assuming that, or satisficing by assuming that the person you meet is basically working in that industry, so therefore credible, right? Whereas unfortunately John, as we know, the minimum bar for entry into this industry is not very high. And their requirements for training beyond the bare minimum are pretty much next to non-existent. So in regards to that, can you speak to the kind of credentials that an individual should be looking for when they go and seek advice?
John DeGoey: The first thing that I would say is you might want to look at licensure. So what are you licensed to sell? The three main product lines are mutual funds, stocks and bonds and insurance. And about 85% or 90% of the people who give advice are not licensed to sell individual stocks and bonds, they only have a mutual fund license and/or a mutual fund with insurance license. So if you are going to need... If you have individual securities that you want to hold, or if you want to buy ETFs, although that's starting to change, you might not be able to get all the things that you need just on the basis of what kind of a license that the advisor you're talking to has. So that's licensure, but from there we go into designations, the main designations I would say are CFP CLU and CFA.
John DeGoey: CFP is a certified financial planner. A CLU is a life underwriter who has specialization with regard to insurance, and a CFA, which you are, is a specialization, in analysis for securities and more hardcore portfolio management. Most people who are credible and have been in the business for a while would have at least one of them. And I would hope that whoever you deal with would have at least one, there are other things that are sort of secondary. For instance, I'm a CIM, that's a certified investment manager. It's one of the things that you can do to use the path to become a portfolio manager. And that would be the final thing that I would say is, in addition to the three questions of licensure, you might want to give some thought to whether or not the person you're working with will have discretion. And whether they do or not, whether or not they will act as a fiduciary.
John DeGoey: And you know, we talk about the organization that you chair, everyone has to be a fiduciary, but if you were working with the portfolio manager, all portfolio managers, by virtue of being a portfolio manager are also fiduciaries. And I think that is the sort of thing that should provide comfort to many people as well.
Jason Pereira: Absolutely. Yeah, and a fiduciary standard is one where you're held to the highest legal standard of care, where you have to put the client's interests at heart. At first, at all times above your own. I wrote an article for The Globe and Mail about that, and I'll link that in the notes. But the reality is there's only a couple of instances or ways in which you're legally bound as fiduciary in this country, in this industry. And there's a handful of ways in which you're held to that standard by third-party organizations, which aren't legal standards, but there's still ramifications for it. So I'll link that in the show notes.
Jason Pereira: So absolutely. And now let's get onto everybody's favorite topic: fees. When it comes time to ask, what is this all cost? Where are the red flags or what should people expect?
John DeGoey: Anything that is not clear, and to me clear means it's in writing. And the first thing that I will point out is that there are multiple levels of fees. And if the advisor is not clear about the multiple levels of fees, then there's a concern. So you've got product costs, how much do these product costs me? You've got advisor compensation, how much is the advisory going to charge me? And that may or may not be included in the product cost, so you have to ask about that. And then are there any additional costs? Custody fees for registered accounts, trading charges, what have you?
John DeGoey: So those three things in aggregate make up the sum total of what a client would typically pay. And so what you should ask is a breakdown, clearly in writing, this should not be a surprise. If the advisor doesn't have an answer ready for you and in writing right there, because it's a basic question, you wouldn't buy a car without asking how much it costs. So the advisor should have an answer ready for you right there in writing. Here, read this, this is my fee schedule, this is the products I use. These are the products I use, this is what they cost. And these are the additional costs for trustee fees and what have you. And that in aggregate should make it very clear to you exactly how much you should expect to pay if you're working with this advisor.
Jason Pereira: Yeah. So, you and I have both experienced so I'm sure you'll agree with this, that the number one area of shenanigans in this industry I see with advisors on fees is basically not full and transparent. So specifically like, "Hey, here's my fee, you're only going to pay me 1%." But then they turn around and they buy funds with MERs that are one and a half percent. And next thing you know, you're a 2.5% all in, but they don't tell you that. And what people need to understand is that in Canada, whatever's charged in the account directly to you shows up on your statements. So the custody fees you mentioned John, the advisor fee, transaction costs the trustee fees. But the embedded fee within any investment products, with almost no exception, ETF, mutual fund, whatever it is, is not showing up on that statement.
Jason Pereira: So you need to have an understanding for what that is too, before you understand what it is you're fully being charged.
John DeGoey: And I would add to that, Jason, that the industry has not been the consumer's friend. Because there are certain lobby groups within the industry, and I would say primarily the mutual fund people, that are being deliberately opaque in the way they do things. So the total cost to the client is the sum of the product, the advice and those additional transaction charges and custody fees that we talked about. At the end of the day, and I would say now as a result of legislation that changed now four or five years ago. At the end of the year, in January for the previous year end, CRM too, has mandated that firms send their clients an accounting of the fees that they paid. But that's just the fees they paid to the advisor and his, or her firm, it does not take into account the product costs.
John DeGoey: And as you say, products can be costing as little as zero with direct securities, stocks and bonds, and all the way up to F class mutual funds that might cost in many instances over 1.5%. So that's anywhere from zero to probably one and three quarters percent that you're paying. And that's not showing up on any statement. And if you don't ask and the advisor doesn't say so proactively, you might never know.
Jason Pereira: Yeah. It is the nefarious advisor's favorite shenanigan is to only quote their fee and not everything else in my opinion. I've seen that pulled more times than I can count. I'm going to go back to what you said about the in writing disclosure of fees, okay. So here's the thing, personal experience. We have this on our onboarding presentation. So we have our slide decks where we put it up there, we have disclosures we sign off on, this is consistently applied. If an advisor is telling you verbally, they don't have a fee schedule spelled out in front of you. I think there's another issue here that a lot of people don't think about. I've had this happen before where clients or prospects would come back to me and said, are your fees negotiable? And you know, you can have a different opinion than me on this, but my response is always no.
Jason Pereira: And it's simple, I apply one fee schedule across the board to my clients, full stop. Because it's not fair to do anything else, unless I'm segmenting for levels of service, right? If I was providing a more comprehensive service to one group than another, the fee should be concurrent. It should be related to that. But I think too often people think of it as, I'm okay, I'm going to go negotiate the best deal I possibly can for myself. But you can't be assured that you're getting as good a deal as everybody else that this person is dealing with.
Jason Pereira: And that's something that, if you don't have someone who's got a clearly defined fee schedule that they can lay out in front of you, you're a danger to that. Maybe they're sitting back and thinking, I'm going to quote them this, because I think they're not that fee sensitive.
John DeGoey: And think back if you were going to buy a flat screen TV, imagine if you had to deal with a sales representative and you ask them, "is the cost of that TV negotiable?" I guess it still happens with regard to automobiles, if you're going to deal with... Although it's less of a concern than it was say 15 or 20 years ago. My point would be, if you honestly think you can negotiate a better fee, the question that it begs immediately is what does that say about the kind of person that you'd be hiring?
John DeGoey: Because if he or she is prepared to negotiate, then it sounds to me like what you're dealing with is a person who is salesy. Professionals have fee schedules, and that's just standard. If you want to talk to a lawyer or an account, they'll tell you what a tax return costs or a corporate return or a will, or a power of attorney, or what have you, marriage contract, whatever. You'll know what it will cost. Sometimes it's by the hour, sometimes it's by deliverable, but it's clear. It's almost always in writing and it's not negotiable. And if you want to negotiate, I would think that would actually be... I would actually go so far as to say that if the client wanted to negotiate, that would be a red flag for the advisor because the client wants someone who is less than professional and more sales.
Jason Pereira: Well, I mean, I get that. It's interesting, it goes back to one conversation I had with a client on this specifically where they came back and asked about that. And I said, look, I hope you respect the fact that I'm not going to because of X, Y, Z, I'm treating everybody the same way. But I would also suggest that you contemplate, if anyone else is going to negotiate with you on this, what that says about them. The only thing you care about is the price, then there's another issue altogether. But at the end of the day, that is something that honestly, it was one of those things where if the client doesn't respect the fact that I am doing that, it is a concern. Now that said, switching from fees, I'm going to go, let's talk about one of my personal gripes.
Jason Pereira: And I was just talking to mutual colleague of ours and writer for The Globe and Mail, [Rob Kerrick 00:19:11] about the exact same thing and he agreed with me on this. Maybe you've encountered this. I feel like, unfortunately the media is largely just beamed up on fees, because you're getting screwed on costs is a simple story to tell people that gets people enraged and gets clicks. But at the end of the day, I think that the industry and the... I'll get to the industry and reason why in a second, and media in general has done a terrible job of explaining to people value for money in this industry, right? And in general, you could pay two advisors the exact same amount of money, but end up with radically different value propositions. One that may not even have a value proposition to one that handles every comprehensive aspect of your life.
Jason Pereira: Have you encountered any people who are in my experience, I find a especially the millennials who've come into money really struggle with this. Because they've grown up their entire lives, worrying about not paying for stuff in our industry. And then suddenly they need real help and they struggle because they recognize the need for value. So have you noticed this trade-off at all? Or how do you address people who push back on fees and basically get them to focus on value?
John DeGoey: The saying that we've all heard is, price is what you pay value is what you get. And so you have to go back to what you mentioned earlier Jason, is talk about the services that you offer and if someone is offering a lower price ask them, well what about the services that I'm offering here? Does the other person offer those services? Well, that's worth something. And I suppose if the client feels they don't need those services, then maybe it's better value to go to someone who's going at a lower price.
John DeGoey: But as long as you're comparing apples to apples, you're getting these services at a 1.5X with one person, then you're getting reduced services that one, one X for someone else. And then you can decide whether or not you need the additional marginal service, and if you're prepared to pay the marginal price. But that's the sort of thing that most people aren't used to. Again, it's because they don't know the industry very well, so it's difficult. In fairness to clients, those are questions that are not necessarily intuitive. And again, the questions about the products that you're using. You can be also offering better services, but they're marginally better, but the products cost 1.5% More. Well, now there's a, trade-off not only between what you're paying for the advice, but also what you're paying for the product.
John DeGoey: And if you're getting good advice and paying for it, but you're also using expensive products and paying for that, and those products are not adding value. Then the sum total of the value add or subtract is going to be convoluted because it will take more than one factor into account.
Jason Pereira: So I like what you have to say there in particular about the contemplate, if you really need those services, right? There are at the very high end of the spectrum, there are family office services that will organize your gardeners for you, but that's something you don't feel like paying a third party for, because you don't want to pay for that, that's fine. But if the only thing you value is basically investing your money and you don't want to talk to anyone, then go set up a robo-advisor account. That's what it comes down to, it's what do you actually value? But I would also say, you're still subject to the problem of unknown unknowns.
Jason Pereira: And I'm sure John you've had this, like I have. People like, but I've got a simple case, right? My case is simple. Everybody likes to think they're simple, but I'm like... I remember one woman who said this to me in particular, I'm like, wait a sec. What do you mean simple? Your husband's an American citizen, your son is disabled and you have this giant commuted value pension decision to make in the next three months. What part of that do you think is simple? And they kind of laughed and they're just like, yeah well, you're right. There was no easy in that person's world, but it's normal to her is what she's saying, I don't think it's complicated.
John DeGoey: It's an unknown unknown. So I think we're all sort of quoting Donald Rumsfeld here. So it's the sort of thing where you don't know what you don't know because you don't know what you don't know. And it's very difficult for people who have no real capacity to truly introspectively, think about what it is they truly need, to interview someone who can solve those needs problems if they can identify the problems in the first place, it's a real challenge.
Jason Pereira: I've even dealt with people, or prospects who've actually hired a third-party consultant to help them find an advisor. And someone who was in the industry knew the questions to ask. And that was kind of a very refreshing conversation, because it was very black and white, very much of a discussion around where the value was, which was they were well-educated on it. But this is all to say that, have a deep conversation about the value. And I will say, the other issue too is that there's claiming you do something and then there's doing it at a high level of proficiency in this industry. So for example, it's very difficult in the financial planning world. We don't know how good a job we can do for someone until we actually start doing the plan, that's the reality of it. Until I get my hands in someone's situation, I don't know what the end outcome is going to be.
Jason Pereira: I can get a general sense before, but people are still like, well if I do this plan, what am I going to get out of it? I'm like, you're going to get organized and you get all this as a baseline. But beyond that, I don't know if it's, hey, you're doing the right stuff, or hey, I just got you this ridiculous amount of money tax free. Those are two very opposite ends of the spectrum, but they're real. And unfortunately John, I'm sure you'll attest to this. A financial plan is just a stack of paper, right? Someone can do a wonderful job or a terrible job for the same price. So I think the competency of a planner is very difficult to gauge in advance. And I think that requires a lot of conversation and questioning as well that people might not be ready for.
John DeGoey: And then from there, even once the plan is written, the plan is only as good as the implementation. So to the extent that you can actually do the behavioral coaching to get the client to follow through on the plan, if it's an excellent plan and it sits on the shelf and no one reads it and no one acts on it, it may as well have had no plan whatsoever. And I do some work with the FP Canada research foundation board, and we've done a lot of research with regard to what did we do to get people to actually make the plan a living, breathing document that you refer to, that you act upon and that you actually see the tangible benefits of what the planning work is rather than just...
John DeGoey: Because what happens is people actually say, "oh I've got a plan, I'm fine." And they don't actually act on this plan. Well, you're not fine because the value is in the implementation, not in writing.
Jason Pereira: Well, exactly. And I always say, one of my favorite topics, I'm sure you see me lose it on this on Twitter. It's like a plan without implementation is basically nothing but expensive toilet paper and at the end of the day, that's all it's good for, right? I mean, it's a bad joke, but all at the same time it's true. I will also at this point, turn the lens back on the industry in general and say that a big part of the blame falls on the industry altogether, for two reasons. A, did you make a series of recommendations that the clients were even willing or emotionally able to take?
Jason Pereira: Making a bunch of recommendations, saying, hey you need to sell and downsize your house or get rid of the family cottage, in order to make this work. Maybe that is the final solution or the only solution that's going to work. But those types of things that they're not emotionally ready for, if you don't work with them are doomed to failure. So that's part of it is, did we make recommendations that are not just quantitatively viable, but also viable to the client's situation?
Jason Pereira: And the second piece of that is, did the person in the industry actually, who provided this plan, actually do it with the purpose of actually providing and implementing a plan, or was it a checkbox to shut up the client? And I saw this at a major brokerage firm I used to work at all the time. It was like, oh they got the plan. Drawer, plan, drawer. It was just to give them that checkbox. And there's a very big difference, so if I'm going to encourage people to do anything it's to specifically have conversations around the implementation of how a plan gets brought to life. Because otherwise just go buy some Charmin, extra soft, because it's basically the same thing, it's a better feel.
John DeGoey: And a lot of implementation revolves around trade-offs. Because if it's really obvious and there's only one course of action, that's fine. But almost always you have to decide about, we'll travel less or we will work longer, but we can't retire early and still travel as much as we wanted to. So now we can model this out for you, Mr. And Mrs. Jones, we can do it one way, we can do it the other. Here's what it looks like under both scenarios, which do you prefer? But don't pretend that you can retire early and continue to travel the way you have indefinitely without running out of money, because that's not viable.
Jason Pereira: Yeah, that's what I was warned, when we get started. It's like look, I'm going to start this plan, and if it works out fine and you have to change nothing in your life, I'm just going to go over how to make it better. But if this thing hits a brick wall, you're going to get a phone call from me, basically saying we need the chat. Because, where are the trade-offs that you're willing to accept? As opposed to me telling you your trade-offs. That okay, guess what? You have to work for five years longer. Well I don't want to do that, why do I need to cut this, why'd I want to do that? It's like the old saying, if everything's important, nothing's important. Somewhere in the spending or the goals, there's a malleable goal that's not important, and that thing can be shifted around and for the sacrifice of everything else.
John DeGoey: Now, one thing that you haven't asked about, but I think it might be relevant to this discussion on this point is return expectations. One of the things that we've talked about in the past is that a lot of... I think if you want to start talking about the question that you asked at the very beginning about the red flag. Any advisor that a will just say, oh yeah, we can get you a double digit return, don't worry. That's a serious red flag, return expectations have been dropping. Most people use expectations that are far too high to begin with. And then further still, even those that use more reasonable, relatively reasonable expectations don't take into account the costs that we talked about 10 minutes ago and actually lower those returns further to account for those costs for advice and products.
John DeGoey: And so as a result, I think actually in many instances, if you have a question about what kind of returns should I expect and you're speaking to multiple advisors. In most instances it's a reverse indicator, and the advisor who sets the expectation the lowest is likely the most credible.
Jason Pereira: I would agree. And also when they set those expectations, and I know there is no perfect series of guidelines in this industry. The reality is EPI Canada publishes their return guidelines, Vanguard, BlackRock, the major bags. In the day, being able to point to something and say, I utilize X, or I came up to the conclusion based off of the reports, X, Y, and Z, and took the average or whatever it is. The fact that they're actually able to show some sort of framework for how those were arrived at. Versus, oh I just looked at the last 10 years returns or, this is what I think is going to do.
Jason Pereira: My favorite one, oh god I love this one. We just do everything at flat 5%, as long as you get 5% you're fine. The real reason that's an issue for various reasons, the big one, zero consideration for risk tolerance. You should not be using 5% all the time when someone's got a equity portfolio that's 90% equities versus a portfolio that's 90% bonds. and only that when. And here's the math geek part of me, is that if you're doing that, then you can't run a Monte Carlo analysis, because you do not have a Monte Carlo analysis that's geared towards the actual risk of the portfolio. Anyway, such is life.
Jason Pereira:
So yeah, absolutely. I also think that another red flag that comes up quite often, is the telling you, you need to do something with your investments before they even understand you. So perfect example, we had a client call that said, I was at the bank doing a mortgage and the advisor took one look at my statements, said oh my God, you're holding way too much in bonds. And the response, my business partner who answered the phone gave was, okay did this person speak to you for longer than five minutes about your portfolio? Do a risk tolerance assessment and do a financial plan to identify both your capacity for risk and your need for risk? They're like, no they just looked at the statement.
Jason Pereira: Or I had one of the other day that was like, oh I was at RBC and they were telling me, pick on the bank, they were telling me I'm paying way too much in fees. I'm like, okay great, what should you be paying in fees? I don't know. Well, anyone who wants to try to compete is just going to undercut me by five basis points. So the reality is, and my favorite comparison one is the, "here's the return graph for your fund that you were in, but this other line is the one I would have had you in for the last 10 years." And it's like, it's really easy to basically score a bullseye when you paint the circle around the arrow, wherever it landed. The reality is that short of being able to prove they would do that, those comparisons are nonsense and no one should ever take credibility with them.
John DeGoey: And the thing is that every mutual fund in particular, because what we're talking about really is the return of an actively managed fund relative to a benchmark. Because if you're buying something that tracks the benchmark, your return would have been the benchmark. Mutual funds, all carry a disclaimer, saying that past performance may not be repeated and should not be relied upon. As soon as someone is making a recommendation based on past performance, that to me is a clear sign of charlatanism because they either know better and they're pulling your leg because they know better, but they figure you don't, or they're foolish enough to not even know better, and this is basic. And that's a real red flag.
Jason Pereira: Well, more often than not, I find it's just simply that they're trying to win the business by basically saying, okay you can easily go on Morningstar and see, okay that was the top performing fund in that category that's what I would have had you hold. And I've said, that's fantastic that guy told you that. Can you go get their chief compliance officer to sign off on a letter confirming that? And it's like, why would I do that? Well, they're making a claim, they should have no problem validating it with someone who's going to basically say it's true, not so much.
Jason Pereira: So, I think some of our worst stories and gripes come into this, but I think we've given people a pretty effective conversation around discussions on costs, on value, on red flags, on the charlatanism that they may encounter. End of the day, I think it comes down to, if I'm going to sum this up, someone who's transparent, someone who clearly demonstrates a concern to learn about you, someone who basically has a value proposition, that is one that you are, A looking for, and B willing to pay for. All things need to come into play.
Jason Pereira: Now as for where to start, besides asking all your friends for advice, there's a couple of resources online that people can look to. John, care to share?
John DeGoey: You've mentioned [FPAC 00:32:54] and certainly FP Canada. So those would be the two main groups that I would look at. The other thing that I should mention very quickly though, before we go into that. And I don't know the websites off the top of my head, so you can either add them on or if you know them off the top of your head.
Jason Pereira: We'll link them in the show notes.
John DeGoey: But the other thing that I would say is, there's a book that came out about two months ago called Noise. And the concept of noise, one of the main concepts is something called decision hygiene, which is basically being clear and consistent and purposeful in your decision-making. So if you're going to interview multiple candidates for the job of being your advisor, it might be worthwhile to, at the outset, at the beginning of the process before you interview any of them, think deeply about what it is that you hope to accomplish. Think about the questions that you heard us talk about other directly or implicitly in this podcast, write them down and make sure that you ask all of the candidates that you're interviewing the same questions, and then write down their answers so that you can compare them and contrast them.
John DeGoey: Because I think, having a purposeful process is a good way of actually imposing a discipline on your decision-making that otherwise you're just winging it. And it would be a bit unfair to criticize the advisor for just winging it or being salesy in a meeting, if you're just going to wing it and be salesy wannabe prospective client in the meeting as well. You're guilty of what it is that you're criticizing. So you've got to do your work on the front end too.
Jason Pereira: Yep. And I would always say, further than that, you're right about the interviewing multiple people. We've had plenty of cases where people have come to us first, has some other method. And they will basically say, oh this is fantastic, let's get started. And my response will be like, well you've spoken to no one else yet, you owe it to yourself to basically go out there and speak to at least two other candidates that come highly recommended and have all the credentials. And make sure that we're the right fit for you. Because at the end of the day, part of the problem, one of the issues a lot of advisors have, is trying to close every bloody deal that comes across their desk.
Jason Pereira: I mean, there's such a scarcity mindset to advisors, they got to close everyone. Whereas I've always been of the belief that you do this right, this is one of maybe two people you deal with in your adult life, if you get it right. And if you do that right, you should take the time to do that. And that's only going to work if the value proposition matches with the life requirements of the client. And whenever there's a mismatch to that, you're just creating friction. If you're all about planning, comprehensive service and all this other stuff, and the client just says to you, look I've got three advisors and if you return more I'm going to give you more money and they return more, I'm going to give them more money. I mean, first of all, they set up the worst possible bet because the only who wins is the one who takes the most risk with that. And either blows up in their face or it doesn't.
John DeGoey: Unless the market goes down and the person who takes the least risk wins.
Jason Pereira: Yeah, exactly right. So this other person was the least, so you're just hoping that in that... So sadly you may lose one third of that investment or a big chunk of it in order to figure out who the charlatan is. But if the market continues to go up in a long bull market, then you're giving money to exactly the wrong person. So never do that people, so that's the first thing. But in general, if that's the kind of mismatch, if you're looking for just someone to shoot the lights out, which by the way, you're already thinking wrong about this. And you're trying to basically provide service and vice versa. The client wants a comprehensive service and all you care about is investing their money in mutual funds? That's a relationship doomed to failure. It's just like a bad relationship in real life where you're like, those people have nothing in common, why are they together?
Jason Pereira: All right. Well John, thank you very much for taking the time. I hope people took a lot away from this and will keep this in mind when they go shopping for an advisor. Where can people find you and seek out more information?
John DeGoey: I've got two websites, one for the work that I do as an advisor and one for my writing. So www.standupadvisors.ca, standup advisors is my advisory website. And then for my book and my writing and other things that I do, including podcasts like this, I sometimes put them on. You can go to standup.today and poke around there as well.
Jason Pereira: Excellent. John, thank you so much.
John DeGoey: Thanks Jason. Pleasure for being with you today.
Jason Pereira: So that was my conversation with John DeGoey about what to look for when hiring a financial advisor, hope you enjoyed that. Please take everything we said to heart if you can. Seek out some of the resources we talked about. And like I said, if you get this right, odds are twice in your adult life and probably twice, because the advisor is going to retire at some point, that's the reality of it. So as always, if you enjoyed this podcast, please leave a review on Apple podcast, Stitcher, Spotify, or wherever you listen to podcast. And until next time, take care.
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