Chapter 18
Professionals You Hire
IN THIS CHAPTER
Working with financial advisors
Getting tax help
Navigating real-estate deals
Assessing reviews and researching whom you may hire
One of the benefits of living in a country with a relatively high standard of living is that many service providers are available for hire. Professionals can help with an array of services, but at a cost, and they aren’t for everyone. When you’re young and have a limited income, you probably can’t afford to hire a fleet of financial, tax, legal, and other advisors.
Or perhaps you choose not to hire an army of professional advisors because you enjoy doing certain tasks yourself or you simply aren’t comfortable delegating a task to someone you hire. Doing certain tasks yourself helps you broaden and enrich your hands-on knowledge, which can pay off down the road.
Whether or not you choose to hire a professional, having a firm understanding of a professional’s role can help you make a wise choice. In this chapter, I discuss making the decision to hire help and the common advisors you may consider hiring. For each of these professionals, I offer tips on finding competent and ethical advice at a reasonable price.
Seeing the Value of Professional Advice
Making the best personal financial decisions requires knowledge, research, and good judgment. Don’t expect perfection — you can do just about everything right, but things may not work the way you hoped for reasons beyond your control. That doesn’t mean, however, that you shouldn’t bother working to maximize your chances of making the best decisions given a reasonable input of time and energy on your part.
I was pleasantly surprised when I read Steven Scott’s book, The Richest Man Who Ever Lived: King Solomon’s Secrets to Success, Wealth, and Happiness (Crown Business). Books with a title such as this give me cause to pause. But, the book had some practical and powerful information.
In discussing how to make wise decisions, Scott cites the timeless wisdom from Solomon’s book of Proverbs. Throughout Proverbs, Scott says, Solomon highlights the value of seeking outside counsel:
“Where no counsel is, the people fall. But in a multitude of counselors, there is safety.”
Solomon also discussed the value in finding wise counsel and sidestepping the rest:
“He that walks with wise men shall become wise. But a companion of fools shall be destroyed.”
Because I write financial advice books and columns, some people erroneously think that I’m a so-called “do-it-yourself” advocate. I am not. People who read my books and columns are seeking wisdom and information, and I do my best to meet their needs and expectations.
At critical junctures, hiring competent and ethical help pays off. Too often, though, people fail to hire the right expert and fail to do enough homework before making the hiring decision.
Considering Financial Advisors
I worked for more than a decade as an hourly based financial advisor. During and since that time, I’ve fielded many questions from readers about their ups and downs with financial advisors. The main question you have to ask yourself is whether you even want to use a financial advisor. The following sections help you answer that question, locate quality professionals, and figure out what to ask before you hire.
Preparing to hire a financial advisor
I firmly believe that you’re your own best financial advisor. However, some people don’t want to make financial decisions without getting assistance. Perhaps you’re busy or you simply can’t stand making money decisions. And if you shy away from numbers, a good planner can help you.
Because I hear from many readers about problems with hiring incompetent and unethical financial advisors, before you hire a financial advisor, you need to understand the following points:
- Educate yourself. You need to know enough about the topic so you can at least tell whether the financial advisor you may hire knows his stuff. For starters, how can you possibly hope to evaluate the expertise of a particular financial advisor if you’re not at least modestly educated on the topic yourself? Most personal financial decisions aren’t that complex, so the more you know, the more responsibility you can take for making the best decisions for your situation.
- Understand how compensation creates conflicts of interest. When financial consultants/advisors sell products that earn them sales commissions (for example, investments, insurance, and so on), that arrangement can easily bias their recommendations. Financial planners who perform ongoing money management have a conflict of interest as well, because anything that takes away money for them to manage (for example, paying down debt, buying a home or other real estate, and so on) is of less interest to them.
- Ask questions before hiring an advisor. Take referrals as leads to check on. Never take a referral from anyone as gospel. Do your homework before hiring any advisor.
A quality financial planner doesn’t come cheaply, so make sure you want and need to hire an advisor before searching for a competent one. If you have a specific tax or legal matter, you may be better off hiring a good professional who specializes in that specific field rather than hiring a financial planner.
Recognize that you have a lot at stake when you hire a financial advisor. You’re placing a lot of trust in his recommendations. The more you know, the better the advisor you end up working with, and the fewer services you need to buy.
Finding good financial advisors
So where and how can you find the best financial advisors? Here are three places to start searching:
- The American Institute of Certified Public Accountants Personal Financial Specialists: The AICPA (888-777-7077;
www.aicpa.org/ForThePublic/Pages/financial-planning-resources.aspx) is a professional association of CPAs. The organization compiles a list of its members who have completed its Personal Financial Specialist (PFS) program, many of whom provide financial advice on a fee basis. Competent CPAs understand the tax consequences of different choices, which are important components of any financial plan. On the other hand, keeping current in two broad fields can be hard for some professionals. - The National Association of Personal Financial Advisors: The NAPFA (888-333-6659;
www.napfa.org) consists of fee-only planners. Its members aren’t supposed to earn commissions from products they sell or recommend. However, most planners in this association earn their living by providing money-management services and charging a fee that’s a percentage of assets under management. Most have minimums, which can put them out of reach for some people. - Personal referrals: Getting a personal referral from a satisfied customer you trust is one of the best ways to find a good financial planner. Obtaining a referral from an accountant or attorney whose judgment you’ve tested can help as well. Remember, though, that regardless of who makes the referral, you should do your own investigation. Ask the planner the questions I list in the next section, “Interviewing advisors.” Remember that the person who makes the recommendation is (probably) not a financial expert, and the person may simply be returning the favor of business referrals from the financial advisor.
Interviewing advisors
Take your time and fully interview any prospective advisor you may hire with the following important questions:
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What percentage of your income comes from commissions, hourly client fees, and client money-management fees? If you want objective and specific financial planning recommendations, give preference to advisors who derive their income from hourly fees. Many counselors and advisors call themselves fee-based, which usually means that they make their living managing money for a percentage. If you want a money manager, you can hire the best quite inexpensively through mutual and exchange-traded funds. If you have substantial assets, you can hire an established money manager.
Advisors who provide investment advice and manage at least $100 million must register with the U.S. Securities and Exchange Commission (SEC). (Advisors who manage smaller amounts are often required to register at the state level.) You can find out whether the advisor is registered and whether he has a track record of problems by calling the SEC at 800-732-0330 or by visiting its website at www.adviserinfo.sec.gov. Otherwise, advisors generally must register with the state in which they make their principal place of business. They must file Form ADV, otherwise known as the Uniform Application for Investment Adviser Registration. You can ask the advisor to send you a copy of Form ADV, which includes such juicy details as a breakdown of where the advisor’s income comes from, the advisor’s relationships and affiliations with other companies, the advisor’s education and employment history, and the advisor’s fee schedule. - What work and educational experience qualify you to be a financial planner? A planner should have experience in the business or financial services field and should also be good with numbers, speak in plain English, and have good interpersonal skills. Common designations of educational training among professional money managers are MBA (master of business administration) and CFA (chartered financial analyst). Some tax advisors who work on an hourly basis have the PFS (personal financial specialist) credential. The CFP (certified financial planning) degree is common among those focusing their practice on financial planning.
- What is your hourly fee? The rates for financial advisors range from as low as $75 per hour all the way up to several hundred dollars per hour. If you shop around, you can find fine planners who charge around $100 to $150 per hour. Focus on the total cost you can expect to pay for the services you’re seeking.
- In addition to financial advisory services, what other services do you perform (such as tax or legal services)? Tread carefully with someone who claims to be an expert beyond one area. The tax, legal, and financial fields are vast in and of themselves, and they’re difficult for even the best and brightest advisor to cover simultaneously. An exception is the tax advisor/preparer who performs basic financial planning by the hour. Likewise, a good financial advisor should have a solid grounding in the basic tax and legal issues that relate to your personal finances. Large firms may have specialists available in different areas.
- Do you carry professional liability insurance? If the advisor doesn’t have liability insurance, she has missed one of the fundamental concepts of planning: Insure against risk. After all, you want an advisor who carries protection in case she makes a major mistake for which she’s liable.
- Can you provide references from clients with needs similar to mine? Interview others who’ve used the planner. Ask what the planner did for them, and find out what the advisor’s strengths and weaknesses are. You can find out a bit about the planner’s track record and style.
- Will you provide specific strategies and product recommendations that I can implement if I choose? This question is crucial because some advisors may indicate that you can hire them by the hour but provide only generic advice. Ideally, find an advisor who lets you choose whether you want to hire her to help implement her recommendations after she presents them. If you know you’re going to follow through on the advice and you can do so without further discussions and questions, don’t hire the planner to help you implement her recommendations. On the other hand, if you hire the counselor because you lack the time, desire, and/or expertise to manage your financial life, building implementation into the planning work makes good sense.
Taming Your Taxes with Help
Taxes are likely one of your biggest expenses. No one enjoys paying so much in taxes, complying with seemingly endless tax rules and regulations, and completing federal- and state-mandated tax returns. So it should come as no surprise that an army of tax preparers and advisors is standing ready to help you.
Do you need to use a tax professional? Good tax preparers and advisors can save you money by identifying tax-reduction strategies you may overlook. And they may reduce the likelihood of your being audited, which can be triggered by mistakes. Tax advisors can be of greater use to folks whose financial lives have changed significantly (those who are starting a small business, for instance) and to people who are unwilling to learn tax strategies to reduce their tax burden.
Tax advisors and preparers come with varying backgrounds, training, and credentials. Here are the three main types, with some info that can help you determine which one is right for you:
- Preparers: The appeal of preparers, who generally are unlicensed, is that they’re comparatively less costly (their rate works out to less than $100 per hour) than other tax professionals. Preparers make the most sense for folks who have relatively simple financial lives, who are budget-minded, and who dislike doing their own taxes.
- Enrolled agents: A person must pass IRS licensing requirements to be called an enrolled agent (EA), which enables the agent to represent you before the IRS. Continuing education is also required; EAs generally go through more training than preparers. EAs are best for people who have moderately complex returns and don’t necessarily need complicated tax-planning advice throughout the year (although some EAs provide this service as well). You can find contact information for EAs in your area by calling the National Association of Enrolled Agents at 202-822-6232 or visiting its website at
www.naea.org. - Certified public accountants: CPAs go through significant training and examination before receiving the CPA credential. And to maintain the designation, CPAs also must complete continuing education classes annually. Most CPAs charge $100+ per hour. CPAs at larger firms and in high-cost-of-living areas tend to charge more. CPAs make the most sense for the self-employed and/or for folks who file lots of schedules with their tax returns.
Working with Real-Estate Agents
When you buy or sell a property such as a condominium, town home, or single family home, if you’re like most people, you’ll likely work with a real-estate agent who’s paid on commission. Although the best real-estate agents can help you find a home that meets your needs, the commission arrangement can create conflicts of interest. Because agents get a percentage of your property’s sales price, they want you to complete a deal quickly and at the highest price possible. When you’re a seller, the agent’s incentives can be good, but when you’re a buyer, they can be in conflict with what’s best for you.
Some buyers’ agents say they can better represent your interests as a property buyer and will sign a contract with you to represent you as a buyer’s agent. However, agents working as buyers’ brokers to represent you still have conflicts of interest in that they get paid only when you buy and earn a commission as a percentage of the purchase price.
To find a good real-estate agent, begin by interviewing at least three agents. Ask the agents for references from at least three clients they worked with in the past six months in the geographical area in which you’re looking. Look for agents with the following traits:
- Local market knowledge: Investigating communities, school systems, neighborhoods, and financing options can be a huge undertaking. Good agents can help you tap into various information sources as well as share their contacts with you.
- Full time and experienced: Ask how many years the agent has been working full time. The best agents work at their profession full time so they can stay on top of everything. Many of the best agents come into the field from other occupations, such as business or teaching. Some sales, marketing, negotiation, and communication skills can certainly be picked up in other fields, but experience in buying and selling real estate does count.
- Honesty and patience: A real-estate purchase or sale is typically a large-dollar transaction from the perspective of your overall personal finances. So you need an agent who always answers your questions truthfully and who always goes out of his way to disclose anything that could affect properties you’re considering. You also need a patient agent who’s willing to allow you the necessary time to get educated and make your best decision.
- Negotiation and interpersonal skills: Putting a deal together involves lots of negotiation. Ask the agent’s references how well the agent negotiated for them. Also, your agent needs to represent your interests and get along with other agents, property sellers, inspectors, mortgage lenders, and so on.
- High-quality standards: Sloppy work can lead to big legal or logistical problems down the road. If an agent neglects to recommend thorough and complete inspections, for example, you may be stuck with undiscovered problems after the deal.
Using Online Resources to Find Service Providers
Finding quality, affordable professional service providers can be a challenge. As can finding the myriad other service providers you may seek, such as an auto repair shop or a plumber. All of us have the battle scars from the school of hard knocks and making bad hiring decisions.
Getting referrals from folks you know often doesn’t pan out — and for good reason. Just because your friend or neighbor has had good experiences with a given contractor doesn’t mean you will or that you value the same things in a provider.
The Internet has long held the promise of being an information source and exchange for consumers interested in hearing the straight scoop about service providers, but message boards rarely have a critical mass of comments about locally focused companies. Firms such as Kudzu, which is owned by media conglomerate Cox Enterprises, provides consumers free reviews on companies, but here’s a case where you may well get less than you paid for. Anyone can complete a simple registration by providing an email address, name, and zip code, and many service providers have just one or a few reviews. Due to the anonymity of the reviews and lack of screening, company owners, employees, and friends can easily post puffed-up reviews while competitors can easily criticize their peers.
After reviewing numerous websites that purport to help consumers separate the best service providers from the rest, the sections that follow highlight those that I’ve found are doing the best job.
On some ratings sites, companies are solicited to buy enhanced listings, and this disguised advertising may make them more appealing to prospective customers. For example, Kudzu’s “Enhanced Profile” service promises the paying company “Higher placement in search” as well as the ability to add photos and video and a marketing description.
Angie’s List
Angie’s List subscribers get access to data and customer feedback on a wide range of service providers in their local market area. The service boasts more than 3 million members in hundreds of markets around the United States.
Angie’s List, which began operations in 1995, uses proprietary technology to process reports, and one of a team of thirty people employed by Angie’s List reads every report before it gets posted. Reports praising your own business or dissing a competitor’s are ferreted out and removed. As happens on eBay, customers and businesses can respond to one another. When Angie’s List receives a report on an unregistered company, that company is allowed to register for free. By registering, the company can then respond by posting to each customer’s report. Consumers may not report anonymously, but their identity is only disclosed to the companies they rate. Angie’s List also offers conflict resolution when a customer and company are at odds over their interaction.
Angie’s List says that they have a “zero-tolerance policy” about companies hassling a customer over the posting of negative comments. The report is posted live for all members to see, which obviously offers an incentive for the service company to resolve the issue quickly. If the service company resolves the complaint to the customer’s satisfaction, the dispute is considered “resolved” and the negative report is removed from the service company’s record. That’s the leverage Angie’s List uses to get complaints resolved. The member can then choose to file a new report, but if they do, they must grade the company at a B or above. However, the member is not obligated to file another report.
Co-founder Angie Hicks never really considered the advertising-only model so often used online when she started her company. “We offer a premium service with high-quality information. Consumers are willing to pay for good information. Consumers are looking for trusted filters,” says Hicks.
Angie’s List has not totally forsaken ads. The company offers coupons from highly rated service companies. Companies pay to run coupons and must have an A or B rating. Like a school report card, grades range from A (best) to F (worst). If a company has any unresolved complaints, it can’t advertise, regardless of its overall grade.
(Note: At the time that this book goes to press in late 2017, Angie’s List may merge into the parent company that owns HomeAdvisor [see the next section].)
HomeAdvisor
HomeAdvisor (formerly Service Magic), another large online provider of service-company referrals, is the best firm I reviewed that doesn’t rely on member subscriptions. With HomeAdvisor, you register for free and provide personal information, including your home address and details of what you’re looking for, and several companies, which have paid HomeAdvisor an annual membership (advertising) fee of about $300, will contact you offering their services. Home-Advisor argues that such fees weed out people who may be operating as a sideline or on a short-term basis and lead to higher-quality, committed contractors being listed on their site.
HomeAdvisor, which is focused on home improvement, repair, and maintenance firms, also has a ratings and review feature where customers can rate the company. To prevent bogus reviews, HomeAdvisor only allows consumers who have found contractors through their service to rate and evaluate those contractors.
Here’s how their service works: Suppose you’re seeking a contractor to build you a wooden deck. After completing background information on the HomeAdvisor site about your planned project, your information would be sent to three contractors in your area who would contact you, arrange a meeting to discuss your project, and give you a proposal (with some contractors, you can actually schedule these appointments through the HomeAdvisor site).
Unlike other services, including Angie’s List, HomeAdvisor screens all contractors, who must meet numerous criteria including being properly licensed within their state, carrying general liability insurance coverage, and passing a criminal and financial background check (which uncovers negatives such as liens, bankruptcies, and judgments), among other items.
In addition to paying HomeAdvisor an annual membership fee of $300, contractors pay HomeAdvisor a lead fee, depending upon the type of work and ranging from $10 to $50, for each lead they are sent. HomeAdvisor’s model allows contractors to target clients by zip code and task, which allows them to be more focused in their prospecting and spend less time driving long distances.
Other resources
Another resource worth checking out is Consumers Checkbook (www.checkbook.org), which compiles service-provider data in the following metro areas: Boston, Chicago, Delaware Valley (Philadelphia area), Puget Sound (Seattle area), San Francisco/Oakland/San Jose, Twin Cities, and Washington, D.C. Checkbook is a nonprofit founded in 1974. Like Consumer Reports, it doesn’t accept any advertising or money from companies it reviews. In addition to its website, it publishes Consumer’s Checkbook magazine in seven local versions for each of the metro areas.
Another option for checking out service providers is to access the Better Business Bureau (BBB) website in your area, which you can locate through their national site (www.bbb.org). BBB information, which is available without a fee to you the consumer, may tell you if the company you’re considering has any recent black marks but will hardly give you a thorough review of many customers’ experiences like those you will find on sites like HomeAdvisor or Angie’s List. BBBs are non-profits that collect fees from member companies. Thus, they have similar conflicts of interest that Angie’s List and Home Advisor have in being “pro” business.