Before you can choose your advisors, delegate responsibilities to team members or begin to benefit from the Leverage of advisors, you need to understand the types of advisors you need. In this chapter, we provide a list that covers the team members that 90% of situations require. Some advisors, like mortgage brokers, are not discussed because they typically play a transactional role at different points in the client’s lifetime. The other advisors may review mortgages, but the mortgage broker typically is looking for the lowest price and isn’t changing loan offers based on the other pieces of the comprehensive financial plan. In addition, unique circumstances may call for some teams to require additional advisors with very unique skills.
Below is the list of the most common advisors:
· Asset Protection Attorneys
· Estate Planning Attorneys
· Tax Attorneys
· Insurance Professionals
· Investment Advisors
· Financial Planners
The term accountant will be used to generically describe an accountant, Certified Public Accountant (CPA), or Enrolled Agent (EA).
What They Do: Accountants (and CPAs and EAs) are trained and licensed to prepare tax returns for submission to the Internal Revenue Service. Each state has its own licensing and accreditation procedures for accountants and CPAs. California is no exception. The CPA has a multi-part exam that is required to earn the CPA accreditation. Enrolled Agents complete a federal licensing process. In all situations, these advisors primarily prepare tax returns. In the most desirable client-advisor relationship, the accountants also provide clients with advice on tax matters.
Limitations of an Accountant:
1. The U.S. tax law is potentially the most complex set of rules created by human-kind, and significant changes are made to these rules every year. Therefore, it is impossible for any accountant to be well versed in all areas of tax policy. More likely, the accountant may only know one or two areas (of 20 or more potential areas) intimately. Tax planning is like medicine—each area has become so complex that one can’t possibly expect to become an expert in many disciplines. In the medical arena, most patients and physicians realize that one Doctor can’t do everything. They both readily accept being referred to, or referring patients to, other physicians. A gastroenterologist would no sooner make diagnoses for skin conditions than a dermatologist would try and diagnose and treat an intestinal issue. Unfortunately, this is what happens all the time in the tax arena.
2. Some accountants are comfortable acknowledging what they know and don’t know. Some accountants feel responsible for answering all tax questions and resist referring clients to other accountants for specific needs for fear of losing the client altogether. This is more of a limitation of an individual than it is a limitation of the profession as a whole, but it should be recognized.
3. Conflicts of interest may arise. Many accountants are beginning to look for additional revenue opportunities by getting licensed in life insurance and securities. They will then recommend their clients particular investment and insurance products. This can create significant conflicts of interest with clients who are looking for tax advice, but who are getting financial suggestions. Clients should be concerned how accountants who deal with very complex tax issues find time to become experts in insurance and investments. In revisiting our Doctor analogy—how could a practicing dermatologist find the time to learn oncology on the side and offer high-quality consultation to the dermatology clients who develop cancer? Savvy patients would prefer a full-time oncologist in that situation. Despite the conflict and impracticality, many CPAs with years of accounting experience are now trying to increase revenue by advising clients on investments and insurance, despite having little or no practical experience in these areas.
Asset Protection Attorneys
The term asset protection attorney describes an attorney who has a strong working knowledge of and experience in the area of creditor protection. There is no state-specific accreditation for asset protection. All attorneys must be admitted to the Bar Association in the state(s) in which they wish to practice. To see if an attorney is licensed and in good standing in California, you can go to www.calbar.org.
What They Do: Asset protection attorneys specialize in the field of asset protection. They help clients arrange their personal and business affairs in a manner that protects their wealth from potential future lawsuits and other creditor risks. Because many of the tools used in asset protection are the same tools used in estate planning and business planning, it is common for asset protection attorneys to also have a strong working knowledge in those areas as well.
Limitations of Asset Protection Attorneys:
1. Because asset protection is a relatively new field of law and most attorneys are overwhelmed in their primary fields of interest (litigation, business law, estate planning, etc.), few attorneys have found the time or had the interest to study this important field of law. As a result, there are very few attorneys who are experts in this area. Though one of the co-authors (Mr. Mandell) specializes in this area, he is one of fewer than 50 attorneys in the country whose focus is exclusively in this area.
2. Asset protection attorneys are NOT estate planning or tax attorneys—or any other type of attorney, for that matter. Do not expect that you will get estate planning or tax advice from these attorneys unless they also have specific training in these areas. However, your asset protection attorney should be willing to interact with attorneys from the other fields who will be necessary to help you complete your planning.
Estate Planning Attorneys
The term estate planning attorney describes an attorney who has a strong working knowledge of and experience in the area of trusts, probate, and estate planning. There is a state-specific accreditation for estate planning in many states. All attorneys must be admitted to the Bar Association in the state(s) they wish to practice.
What they do: Estate planning attorneys focus on helping families address the financial needs that arise at death or as death approaches. Estate planning attorneys are required to draft estate planning documents such as wills, limited partnerships, and various types of trusts. They have a strong working knowledge of gift, estate, and generation-skipping tax issues. Though many estate planning issues are federal issues, there are some state-specific issues that require a local attorney. For very complex issues, the most savvy affluent families will often use the best estate planning attorney they can find (anywhere in the US) and have a local attorney co-counsel the case so state specific issues can be addressed.
1. We have seen many estate planning attorneys who almost exclusively create estate plans using legal tools they can be paid to create. They have little experience or knowledge of important financial vehicles that can play a significant role in the estate planning of wealthy families. By excluding entire categories of planning tools (most often cash value life insurance), these attorneys often fail to help their clients create the liquidity necessary to handle the financial obligations that arise at death. Sometimes attorneys shy away from recommending financial and insurance tools because they do not properly understand these tools and they fear the potential liability of recommending things they don’t understand. The proper solution to this limitation is to do what the savvy affluent do—make sure there are attorneys and insurance experts on the financial planning team, so that the clients can get the best combination of planning tools to most efficiently meet their needs.
2. Estate planning attorneys generally are not asset protection or (income) tax attorneys either. While attorneys in these different fields may use similar legal tools from time to time, that is not enough. A scalpel in the hands of a surgeon can be an important tool to help save a life. A scalpel in the hands of a mugger is a knife that can kill someone. We are not suggesting that one type of attorney is an angel and one is a devil (readers are encouraged to insert their own joke here). We are merely saying that tools used differently can have very different outcomes and can offer varying benefits. For this reason, it is best to involve specialists in asset protection and income tax to work with the estate planning attorney, if needed.
The term tax attorney describes an attorney who has a strong working knowledge of and experience in the area of income tax and possibly estate tax. There is a state-specific accreditation for tax attorneys in many states. Most tax attorneys have added another year of education beyond law school to earn a degree in taxation, called an LLM (short for Master of Laws). All attorneys must be admitted to the Bar Association in the state(s) in which they wish to practice.
What they do: Tax planning attorneys are required to give advice on the tax ramifications of certain transactions (i.e., selling an appreciated asset) or strategies, and to assist with the creation of the legal documents used in these transactions. These specialized attorneys have a strong working knowledge of income and capital gains tax issues, as well as taxation of corporations, partnerships, and other entities. All attorneys must be admitted to the Bar Association in the state(s) in which they wish to practice. Since most states’ tax laws are built upon federal tax code, many national tax attorneys can handle all of a client’s tax issues.
1. Tax attorneys do not generally prepare tax returns. Though they have a very
strong working knowledge of tax, the preparation is a specialty that is generally left to the accountant (as mentioned earlier).
2. Though some of these attorneys are also experts in estate planning, most do not work in this area regularly. This results in two limitations:
a. Tax attorneys may not be as aware of potential estate planning solutions that are more appropriate for very affluent clients
b. They are likely to have very limited knowledge of financial and insurance vehicles and their place within an estate plan, because they are tax attorneys first and estate planning attorneys second. If full-time estate planning attorneys don’t have time to fully understand financial vehicles, how could you expect part-time estate planning attorneys with another full-time focus to have time?
3. In addition, tax planning attorneys generally are not asset protection attorneys. While they may know a bit about this area, the same comparison of the surgeon and the mugger needs to be revisited here—a little knowledge can be dangerous. It is best to involve specialists in asset protection and estate planning to work with the tax planning attorney.
Insurance Professional is a term used to describe life and health (life) or property and casualty (P&C) insurance agents. Life and P&C agents must have a resident agent license in the state in which they reside. In states like California, a week-long course and a state-sponsored exam are required to earn a license. They can apply for non-resident licenses in the other states to provide insurance to clients in those states as well. Certified Financial Planners, accountants, investment advisors and attorneys can all secure life insurance licenses. Many of their regulatory agencies require those advisors to disclose the potential conflict of interest to clients in instances where the advisor could benefit from multiple income sources (e.g., professional fees and insurance commissions).
What They Do: At the most basic level, insurance professionals provide various types of insurance policies to clients. Some insurance professionals also offer financial planning or investment solutions. The life insurance professional works closely with the estate planning attorney to help clients meet their estate planning needs. If you are interested in purchasing any type of insurance, it is imperative that you consult with a licensed insurance professional experienced in the insurance area at issue. Typically, one person can only be an expert in one area of insurance. If you look at the list of types of insurance below, you can see why it is so important to work with a financial firm like O’Dell Jarvis Mandell (www.ojmgroup.com)— that has a number of insurance and investment experts on staff to help clients with their various insurance and investment needs. Despite their wide range of insurance expertise, 0 JM still needs the assistance of great attorneys like their co-authors to develop a comprehensive book for California Doctors and to bring the proper services to doctors in California.
In Lesson #8, you will learn why cash value life insurance is a fundamental building block of wealth planning for Doctors. By offering tax benefits, wealth accumulation, liquidity, and protection against financial disasters, life insurance should play a role in every Doctor’s financial plan.
Disability Income Insurance
In Lesson #4, you will learn how to protect your family and practice from financial disasters. For Doctors, the single greatest asset may be your earning potential. Disability income insurance is required for every Doctor whose income is needed for the family to pay bills or meet other financial needs. Disability income insurance should be handled by a life and health insurance agent who specializes in disability insurance.
Long-Term Care Insurance
Also in Lesson #4, you will learn that long-term care insurance (LTCI) is an important tool for Doctors who want to avoid losing their hard-earned wealth to a Medicaid spend-down to pay for nursing home, home care, hospice, and a host of other services most of us will need in our final years. Long-term care insurance covers health related expenses that will not be covered by social or private insurance in retirement. In addition, some families use long-term care insurance to protect retirement savings for their heirs (as an inheritance). LTCI can be handled by life insurance agents who have completed the additional LTCI-specific training (that most states—California included—require).
Property and Casualty Insurance
Property and Casualty (P&C) insurance is a separate set of insurances that require a different training course and license than the license needed for the aforementioned types of insurance. P&C insurances are quite common, even though you may not have previously run across the acronym “P&G.” These coverages include homeowners, personal auto, commercial auto, professional liability insurance, worker’s compensation, umbrella, premises, product liability, flood, hurricane, and many other policies. To protect wealth, Doctors need to address P&C concerns by adding an insurance agent who is an expert in these areas.
Limitations of Insurance Professionals:
1. Some are working for the insurance company or themselves, rather than working for you. Some insurance agents have “career agent” contracts with certain insurance companies. These agents are highly motivated to sell a specific company’s products, because they must hit their sales goals or risk losing their health and financial benefits. Other insurance companies, like Northwestern Mutual, have “captive” agents who, due to contract terms, can only offer you products from a single company. They can’t shop for the best policy, realistically provide an unbiased position, or ultimately have your best interest in mind. Many insurance agents are neither career nor captive agents. Even independent agents will have a personal preference toward certain companies or products. Doctors should always work with independent insurance professionals who have a range of options they can offer and can display a track record of using different companies for their clients’ best interest. Doctors should also look for agents of the highest moral character, who are experienced and successful enough not to be influenced by slightly higher commissions or other incentives that competing insurance companies may offer. One client said about his choice of an agent, “I wanted an agent who wanted my business, but not one who needed my business.” Another client said, “I feel comfortable knowing that my agent is interested in a long term relationship and doesn’t need to sell me anything to pay the bills.”
2. Many agents work only for commissions. Doctors should realize that insurance professionals, like all of us, need to make a living. They do not begrudge the insurance professional for earning a commission that is inherent in the insurance product (or the real estate agent or any other commission-compensated person). However, when asking for advice and recommendations on how to address a financial need, you have to expect a commission-based advisor to suggest only commission-based products. You may get the best commission-based solution, but are not likely to receive a recommendation of the best possible solution if that solution doesn’t involve a commission. This is the converse limitation to the estate planning attorney that only recommends legal solutions. Doctors should want independence. This is much more important for certain products like life insurance, than for less expensive products such as homeowner’s, or even disability, insurance.
Unfortunately, it is true that many advisors in the financial planning and insurance industries allow commissions to bias their view of insurance products. The authors insist that they be compensated on a fee basis for any advising, planning or product consultation that they provide. If an insurance professional works like this, he or she is much less likely to be biased towards lucrative com¬missions or to “sell” a product at all. Insurance agents who are “commission only” need the sale or commission to stay in business and their business model is shaped accordingly. Therefore, Doctors should work with fee-based advisors when evaluating insurance products and wealth planning involving insurance.
3. Few have significant training in other areas. To obtain a license in most states for any of these types of insurance, an individual typically only needs to attend a weeklong class and then pass an exam. Contrast this to earning an MBA (2 years), law license (3 years law school, plus bar exam), or medical license (4 years medical school, 4-8 years internship/residency, plus board exams).
Because of this limited training, many insurance “professionals” are simply salespeople without the sophistication or training to do more than sell. Doctors would be wise to look for more from their insurance advisors. This “more” they seek should be education, training, years of experience and the professional’s “team.” Again, as an example, our firm has 3 MBAs, 2 attorneys, and a CPA among its team’s designations. Our firm is certainly not the only firm with very highly qualified professionals. We just believe it is a good example of what you should seek out in a firm if you are looking for well-educated professionals who can help you with many facets of your planning.
We use the term investment advisor to include money managers and stockbrokers. These advisors have to study and pass a 3-hour securities exam and a 90-minute ethics exam or file as an independent Registered Investment Advisor directly with the SEC.
What They Do: Investment advisors essentially handle investments for clients. They typically charge a fee based on the amount of assets they manage. Stockbrokers may also be paid based on the number and size of the trades they make.
1. Most fail to adequately manage taxes. The overwhelming majority of money managers primarily handle pension or corporate (institutional) assets, which are not as sensitive to taxes as are the non-pension assets of Doctors. As a result, these advisors focus on their gross, pre-tax investment returns. This gross number is what they publish in their marketing material, how they are measured against their peers and how they are compensated. This is obviously what they care about most. This is understandable, except that this is exactly what Doctors should be trying to avoid. Doctors should be interested in the post-tax return of the investment. We will discuss this in greater detail in Lessons #7 and #8.
2. Most have very little knowledge or interest in any kind of “planning.” Like most specialists, investment managers have to focus on their craft. Since the world markets are now integrated, investment management is practically a 24-hour per day job. When Japan is closing, London is opening. When London is winding down, New York is ramping up. It isn’t easy for investment advisors to be well versed in other planning areas and it is basically impossible for these advisors
to act as the team’s quarterback because of their limited knowledge of the areas outside of the markets.
We use the term financial planner to describe someone who charges a fee to create a financial plan for a client. Sometimes, this is a Certified Financial Planner who has taken six courses and passed an exam. Other times, this person is an accountant who has financial training and may have passed an exam in addition to the training as an accountant and possibly passing the CPA exam. Still other times, this could be someone with an MBA, with a concentration in Finance, who has professional experience and has spent two years learning about business, business law, economics and finance.
What They Do: Ideally, a financial planner is someone who uses a planning process to help the client Leverage the other planning areas above. The planner integrates all of the focused planning efforts of the other advisors into one comprehensive plan to help the client’s family meet its objectives. They should have a strong working knowledge of many of the disciplines. Their level of proficiency should be enough to allow them to interact at a high level with the various specialists and add some value in each area from time to time. More often than not, this advisor will also act as the “coordinator” or “quarterback” for all of the specialists (like the primary care Doctor analogy used earlier). The financial planner provides motivation, under-standing and a disciplined periodic review to make sure all of the various planning areas stay “on track.” We will develop the discussion of a quarterback for your financial plan at the end of this Lesson and in Lesson #10.
1. Can be a Disguised Salesperson. It can hard to decipher between the true planner and the disguised salesperson that is, in actuality, focused on selling some¬thing. It is okay for a planner to be used in the implementation of a plan, but you must focus on the plan itself first. Be wary of financial plans offered for free. You should know that anything you get for free is not worth much. Further, the business model of such a “planner” is simply to use the “plan” just to sell you something—how else could they recoup whatever little time they spent on creating such a plan?
2. Weak Knowledge of Disciplines. This could be the biggest potential problem. If your financial planner is supposed to be acting as the quarterback of your planning team, they have to understand what the other advisors can and will do and be able to spot important issues within each of the disciplines. In working with hundreds of insurance agents and financial planners, we have only encountered a handful that have a strong working knowledge of asset protection and tax planning. Bringing only insurance and investment knowledge (the products that they typically sell) is insufficient to make a good financial planner. The top four planners at O’Dell Jarvis Mandell have 3 MBAs, a law degree, and a CPA between them.
In addition to the list of advisors already provided, there are other advisors who may be valuable to help increase your Leverage. These include business or corporate attorneys, real estate attorneys, private bankers, charitable planners, Medicaid attorneys, and family law attorneys. Each of these experts may have a specific role to play in your planning at some point.
You now have an understanding of what types of advisors you could add to your financial planning team. You may even foresee some of the benefits you and your family may achieve from working with the specialists on your team. Before you jump into hiring team members, it is important to learn from the mistakes of thousands of people before you. Read the next chapter on the seven mistakes to avoid when building and working with your team. Avoiding these mistakes can save you a lot of time, money and aggravation in the long run.