Nonqualified Deferred Compensation Plans

A deferred compensation plan is a retirement plan that allows employees to defer some of their compensation to a later date. Common types you may already be familiar with are 401(k) and 403(b) plans. If you are a key employee, however, your employer may offer one or more nonqualified deferred compensation plans (NQDC’s).

NQDC plans are governed by section 409A of the U.S. tax code and differ from most other employer-sponsored retirement plans. Whether or not you should participate in an NQDC requires some careful consideration. In this article, we explain nonqualified deferred compensation plans and whether one is right for you.

What are Deferred Compensation Plans?

First, it’s important to understand the differences between qualified and nonqualified deferred compensation plans. The Employee Retirement Income Security Act (ERISA) governs qualified plans. This legislation sets standards for health and retirement plans offered by employers to protect employees.

An NQDC plan is exempt from ERISA law’s strict rules, making them more flexible and customizable for employees. The primary purpose is to attract and retain highly compensated key employees and executives.

Qualified Deferred Compensation Plans

ERISA law ensures that qualified plans have minimum standards for vesting, eligibility, benefit accrual, funding, and the overall administration of plans. It also guarantees certain benefits for participants through the Pension Benefit Guaranty Corporation (PBGC).

Participants in a qualified plan are also subject to strict parameters that govern the plan. Required minimum distributions, annual contribution limits, and penalties for early withdrawal apply in most scenarios. The complex rules of qualified plans position the employer as a fiduciary on behalf of the plan participants.

The table below lists other common characteristics along with the different types of qualified plans.

Common types and characteristics of qualified plans

The single most important trait of qualified plans is that employee and vested employer contributions are assets belonging to the participant. This is the significant distinguishing characteristic between qualified and nonqualified deferred compensation plans.

Nonqualified Deferred Compensation Plans

A nonqualified deferred compensation plan or 409A plan, allows participants to defer some of their compensation into the future. For key employees and executives, this can be a very attractive benefit. Top-heavy and non-discrimination requirements limit key employees’ participation in qualified plans.

Additionally, highly compensated employees are subject to annual contribution limits of only $19,500 in a qualified plan. The ability to defer larger amounts of compensation into a nonqualified plan is a very attractive benefit to high-income earners.

Like most endeavors involving money, these plans do not come without risk. The compensation you defer into future years is considered an asset of the employer. This means that your NQDC plan would be at substantial risk if the company you work for becomes financially unstable.

The Benefits of Nonqualified Deferred Compensation Plans

As we just mentioned, the primary reason to participate in an NQDC is to minimize tax liabilities. Reducing compensation in the current year helps keep you out of higher marginal tax brackets.

And taking distributions in retirement years when tax rates are lower is the objective with retirement planning.

A Great Tool to Retain and Attract Key Employees

Employers want to attract and retain highly skilled executive talent. A nonqualified deferred compensation plan can be a key component of an executive benefits package. Even when the company has a qualified plan in place like a 401(k), an executive’s contribution amount faces more hurdles.

Percent of Fortune 1000 companies that provide non-qualified deferred compensation plans to key employees

The annual contribution limit for employee deferrals to a qualified deferred compensation plan is $19,500 in 2021.

There are rules in place to prevent a plan from benefiting higher-income employees over rank and file employees.

These rules limit contributions of high-income earning employees to a lesser amount.

The qualified annual contribution limit of $19,500 is less than ideal for top earners. NQDC plans don’t have contribution limits, allowing employees the option to defer a large percentage of their salary.

For example, let’s say you accept a job offer that pays a salary of $450,000. Even without any other household income, this would place you in a 32% federal marginal tax bracket.

In reviewing your benefits package, you find out that you can defer $100,000 of your salary every year. This would save you $32,000 of tax liability!

Tax-advantaged Compound Growth

There are different types of nonqualified deferred compensation plans offering various investment options (more on that later). Most plans offer stocks, bonds, and mutual funds. This can provide substantial long-term growth in addition to tax savings.

Let’s look at an example of how powerful compound tax-deferred growth is in accumulating wealth. Following our previous example, let’s assume an employee in a 32% marginal tax bracket defers $100,000 into their NQDC. The tax savings in year one would be $32,000.

Assuming the plan’s investments grow at a rate of 7% over 10 years, the $32,000 grows into $62,949! So instead of paying $32,000 to the IRS, you created nearly $100,000 of additional wealth in retirement.

Spreading Income Tax Liability into Retirement Years

Once retirement begins, household income usually decreases, which means that tax liabilities decrease as well. So it’s extremely important to have a good idea of what your income tax situation looks like upon retirement.

Coordinating distributions with other sources of retirement income is crucial for achieving tax efficiency. Deciding when to take Social Security and pension benefits should be coordinated with scheduled distributions.

The same goes for coordinating retirement dates with your spouse and accounting for Required Minimum Distributions (RMD’s). Most of us are in the highest tax brackets in our working years. So deferring taxable income to your retirement years can make a ton of sense.

The Risks of Nonqualified Deferred Compensation Plans

Funds are Assets of the Employer

Unlike ERISA plans, salary deferrals into an NQDC plan are not assets of the employee, but assets of the company. In a nutshell, your deferrals become a promissory note between you (the borrower) and your company (the lender).

Since your deferrals are assets of the company, should they become financially insolvent, your funds would be at risk. This is by far the most important consideration when choosing how much to defer into your deferred compensation NQDC plan.

There May Be Limitations of Investment Options

Aside from stock option plans, most nonqualified deferred compensation plans will have an approved list of mutual funds to choose from. This mutual fund lineup is often the same as in the company’s qualified plan like a 401k.

In the case of a stock option plan, your deferrals purchase stock in the company. This creates additional risk if your company encounters financial trouble. Even if they remain solvent, a concentrated position in the company stock could experience large declines.

Distribution Options are Limited

The year prior to deferring money into your plan, you need to decide when distributions will begin. Plans can offer a lump sum or multi-year payout options, but 5-10 years is a common election. Distributions don’t start until a triggering event occurs. There are six triggering events:

  1. A fixed date
  2. Separation from service (usually retirement)
  3. A change in ownership of control of the company
  4. Disability
  5. Death
  6. An unforeseen emergency

Distributions are difficult to change once selected and require a five-year waiting period if allowed at all.

How Nonqualified Deferred Compensation Plans Work

In some cases, the triggers for deferred comp distribution are beyond your control. For example, death or disability will force you (or your heirs) to take distributions.

Choosing a fixed date can be useful when anticipating future income needs as well. A good example is having a child enter college around the same time you retire. Scheduling distributions when the child begins school can alleviate pressure to draw funds from other sources.

No Loans in Nonqualified Deferred Compensation Plans

If you really needed to access money from your 401(k) plan, many plans offer loans. This is not the case with an NQDC plan. Section 409A of the U.S. tax code governs these plans, subjecting withdrawals only to the six triggering events above.

This means that you should consider deferrals into the plan to be irreversible. So making sure you don’t overcontribute to the plan is important. It’s helpful to create a budget including annual income tax liability to avoid an income shortfall at end of the year.

Is a Nonqualified Deferred Compensation Plan Right for Me?

Do I Need Another Retirement Savings Account?

The first place to maximize retirement contributions is qualified plans like 401k’s and IRA’s. But few options reduce taxes and provide tax-deferred growth like an NQDC. Also, there aren’t any other types of deferred compensation plans with unlimited contribution limits.

Thus the biggest advantage of deferred compensation plans is a tax-advantaged way to save annual income surplus.

How Financially Secure is the Company I Work For?

Again, since NQDC plans are assets of the employer, the financial strength of your employer is of paramount importance. Your company needs to be around in the long run for you to receive distributions from the plan. The longer you are away from your triggering event, the more risk you carry.

Concentration risk

Another consideration you want to make is how much of your wealth you tie to your employer. Do you already have other types of nonqualified deferred compensation plans? Do you already own a high concentration in company stock?

Too much concentration can be dangerous, as we saw with big companies like Chrysler in 2008 and Hertz in 2020. Having a significant amount of your wealth AND income tied to your employer can be extremely risky. If you feel comfortable with a high concentration of company stock, there are ways to obtain third-party insurance.

Key Considerations in Participating to a NQDC Plan

How Will My Tax Rate Change in the Future?

Tax savings are amongst the primary benefits of a nonqualified plan. It’s important to weigh your future income needs and tax liability when electing to participate in your plan. Accounting for all your sources of income such as Social Security and RMD’s is vital upon retirement.

Remember that your contributions are invested into a portfolio with an expected rate of return. If you are ten years away from retirement, you should estimate your contributions’ value in year ten.

This is because all distributions are income taxable. You must be careful not to defer too much and create a future tax problem. It’s recommended to consult with a financial planner or tax advisor before you make your elections since they can’t be changed.

What are My Distribution Options?

We have discussed how important it is to coordinate your NQDC distributions with your other retirement income sources. The big challenge is choosing the distribution schedule at the same time as the deferral election.

Let’s go through an example of how this works. It’s September and you receive your enrollment package to make your deferral for the following year. Your salary is $300,000 and you anticipate your bonus will be $100,000 next year.

You can defer up to 50% of your salary and 100% of your bonus. You decide to defer 33% of salary and 100% of bonus to your retirement date 10 years down the road. Your distribution options are to take a lump sum or payment over 10 years.

You must decide on which distribution to take, even though it won’t start for 10 years. To make a good decision, you will need to coordinate distributions with your future income sources. This takes some serious financial planning.

The final step is to choose how your deferral will be invested. The performance of the investments you choose will determine what the final amount will be upon retirement. As you can see, there are a lot of variables to consider when making this decision.

Key Takewaways

Nonqualified deferred compensation NQDC plans are a great tool for both employers and employees. Employers have added ways to enhance benefits packages for employees. And employees have another way to save in addition to their qualified retirement plan.

Employees need to weigh the benefits, risks, and whether an NQDC fits into their financial plan. They are a great way to reduce taxes and boost tax-deferred growth for retirement. But remember that the funds in these plans belong to the employer until the employee actually receives them.

These plans are very complex and should be discussed with your financial advisor prior to participating.

Why Baby Boomers Are Retiring in Their Early 60's

Many Baby Boomers are learning about retirement readiness first-hand during the Covid-19 pandemic. Factors such as layoffs, health, disability, and technology are why Baby Boomers are retiring in their early 60’s. Decisions in retirement around Social Security, (long-term) health care, and taxes need careful planning. The pandemic’s effects continue to ripple and are still unknown despite vaccine rollouts. The world will look very different on the other side. This means that careful retirement planning is even more important than ever.

Covid is Making Baby Boomers Rethink Their Retirement Date

Federal Reserve Chairman Jerome Powell recently cited a surge in the number of retirees. Many Americans are leaving the workforce sooner, contributing to labor shortages. As a matter of fact, 3.2 million more Baby Boomers retired from 2019 to 2020 than in the previous year.

More Baby Boomers retired in 2020 than in prior years

The Covid-19 pandemic has made many Baby Boomers reflect on their plans. Surging asset prices are making the decision easier for those that own homes and stocks. The health scare from the pandemic has spurred many to reevaluate what matters to them. 

The shutdowns caused many businesses to go into survival mode by reducing labor costs and increasing dependence on technology. The New York Fed reported a record low percentage of people planning to work beyond age 67. 

Many data points support this, including the recent Census Household Pulse Survey. It shows that 2.7 million people over the age of 65 plan to apply for Social Security Benefits. This compares with only 1.4 million stating that they will continue working.

Employers may not be able to afford the cost of all their employees returning to the workplace. Entire industries have undergone a decade’s worth of change in a year. Remote work has opened the world up to new ways of doing business and has given workers a glimpse of retirement. 

The advancement of technology is also providing more avenues for part-time work. Yesterday’s hobbies are quickly becoming today’s income. In a digital economy, the very definition of retirement may look different. 

The top three pandemic related changes impacting business owners that should continue.

Covid accelerated the move to a digital world and is still transforming the global economy. It is still too early to understand how it all plays out. But it underscores the importance of careful retirement planning now more than ever.

Late Boomers are Unprepared for Retirement and Aging

Unfortunately, many prospective retirees face financial shortfalls despite surging asset prices across the economy. This is especially true for “Late Boomers” who were 55-60 in 2020. This demographic is worse off on average, as reported by the Center for Retirement Research at Boston College.

The reason for this is that they were the hardest hit by the Great Recession of 2008-2009. Unemployment, underemployment, and early retirement were all contributing factors. 

Workers in their 50’s forced to search for jobs find it more difficult than younger people entering the labor force. Many of them settle for less pay, as we saw in 2008 and more recently in 2020. Thus poor labor market outcomes from the last crisis left many ill-equipped for this one. 

The Late Boomer demographic has contributed most to 401(k) plans but has the least amount of defined contribution assets compared with other generations. Those that sold assets at the bottom of the market crash realized losses at the worst possible time. The housing crash in 2008 also affected home equity values for Late Boomers the worst. 

Retirement Age Expectations Clash with Reality

For those over the age of 60, 40% of them are no longer working full-time and rely primarily on Social Security, averaging $17,000 per year. A Stanford study in 2014 found that 30% of all Baby Boomers had no money saved in retirement plans. 

Life expectancy has also increased by about a decade since 1960. Too many have to fund longer lives with lower asset levels and shorter careers.

Thus, many plan to keep working into their golden years, yet the data does not bode well for this. The annual Retirement Confidence Survey indicates that half of the retirees surveyed retire earlier than expected.

The study underscores the importance of honest assessments and avoiding unrealistic expectations. Half of those surveyed expected a gradual transition to retirement. In reality, 73% experienced a full-time stop. 

Seventy-five percent of Baby Boomers expected to earn extra income in retirement while only 30% did so. This statistic has been consistent throughout the survey’s 31-year history. Studies also show that most retirees who planned retirement at age 65 are retiring closer to age 62.

And those planning to retire earlier than age 65 end up retiring later. The main takeaway: many people are unrealistic, overconfident, and underprepared for retirement.

Retirement age expectations clash with reality. A comparison of the actual age of retirement compared with the expected age of retirement.

Planning Your Retirement Lifestyle

What makes retirement different than other stages in life is that you gain an extremely valuable non-financial asset – control of your time. You no longer have to answer to your boss. And if you are the boss, you no longer have to oversee the business.

Children are close to or have reached adulthood in most cases. And of course, you can’t take your financial resources with you after retirement. It’s a great time to reflect deeply on your values and goals that will lead to your most fulfilling retirement.

So get that bucket list out and start prioritizing your goals. What does that have to do with creating retirement income? You have to know how much you need to spend each year to reach your goals. Here are some common lifestyle goals that newly minted retirees need answers to:

  1. Feel confident and secure while transitioning from saving to spending what they’ve earned
  2. Have the confidence to explore new opportunities in retirement
  3. Provide gifts to children and grandchildren during your lifetime
  4. Spend your life doing what you love to do, not what you have to do
  5. Retire to your dream destination
  6. Have plenty of money every month to support your desired lifestyle
  7. Leave a legacy and support future generations
  8. Enjoy total financial independence
  9. To have the same feeling of security you had while working
  10. Donate to charitable causes and organizations

Once you have determined how much you need to spend (and this changes every year in retirement), you can construct a plan to maximize your financial resources.

The Conversations that Couples Need to Have Before Retiring

It’s important to begin talking to your partner now about potential retirement dates. The majority of couples have different ages, which means that Social Security Benefits, Pensions, Medicare, and RMD’s begin at different dates for each spouse.

In some cases, one spouse may retire while the other continues working. Or one or both spouses has the option of continuing to work part-time in retirement.

Another challenge that some face is having a dependent child enter college at the same time the couple plans to retire. The cost of college continues to rise at a rate greater than normal inflation and can contribute to higher income shortfalls in retirement.

The danger is that large withdrawals from retirement funds earlier in retirement can significantly increase the risk of outliving assets.

Spouses should coordinate their retirement dates to maximize their financial resources and ensure a smooth and gradual transition. Think hard about the kind of life you want and what you will need to realize it. 

Discuss your goals with a fee-only financial advisor so you have an actionable plan to accomplish them. Leave no stone unturned. Don’t forget to factor in costs like dependent expenses and health insurance until you reach the age for Medicare eligibility. 

The Biggest Decisions Baby Boomers Need to Make in Retirement

Retirement brings about a number of complicated decisions. It causes serious contemplation around finances, quality of life, legacy goals, and health concerns. Couples want to know the financial ramifications of the passing of a spouse or the need for long-term care.

According to The Center for Medicare Services, annual health care spending reached $11,582 in 2019. Americans now spend 17.7% of Gross Domestic Product on health care. In addition to rising healthcare costs, there are many other retirement decisions that need to be coordinated between spouses:

  1. Retirement dates
  2. When and how to take Social Security Benefits
  3. Determining the optimal pension payout option
  4. Which retirement accounts to withdraw from in retirement
  5. How to create the retirement income that you need as expenses continue to rise
  6. Reducing taxes
  7. Planning for RMD’s
  8. Having adequate life insurance for your heirs
  9. Planning for a long term care event
  10. Formulating an investment strategy both spouses are comfortable with

Let’s face it, there is a lot to consider when making your permanent exit from the labor force. But all of these decisions tie into the most important decision -replacing your paycheck after you retire.

Replacing Your Paycheck When You Retire

Once you identify how much annual income you need, the next step is to figure out how to maximize any income sources in retirement. The most common types of income streams in retirement are Social Security, pensions, and rental income.

There are a number of different payout strategies when it comes to Social Security and pension payout options. It’s important to perform some careful analysis to determine which option provides the maximum financial benefit.

After you know how much income you will receive each year, subtract that number from your total expenses. You are left with either a surplus or a shortfall. A shortfall represents the amount of “income” that you need to generate for yourself.

It’s time to finally start tapping into your nest egg for income. A good understanding of how taxes work is needed at this stage to make optimal financial decisions.

Know How Retirement Distributions are Taxed

There are three main types of accounts you can withdraw from to satisfy your income needs in retirement. The primary differentiator between them is how distributions are taxed:

  1. Taxable (Joint, Trust, or TOD Accounts) – In these accounts you pay taxes as you go along. There is no special tax treatment like there are in IRA’s. So it’s to important to pay attention to how this account is invested. Avoid investments that aren’t tax-efficient and understand how capital gains work.
  2. Tax-deferred (IRA’s, 401k’s, pensions, etc) – These are accounts are where deductible or pre-tax contributions are made. This means that you never paid tax on any of the contributions or growth in the account. When you make distributions, the entire amount is income taxable to you. The percentage of tax you pay depends on your federal & state marginal tax bracket.
  3. Tax-free (Roth IRA & Roth 401k) – When you contribute to a Roth, you forgo any current tax benefit. That means you contribute after-tax monies to these accounts. Therefore, all distributions from these accounts are 100% tax-free, with a few exceptions.

Since distributions from these accounts have different tax ramifications, it’s EXTREMELY important to understand the tax consequences for each. The decision of which account to withdraw funds from depends on other factors like your current income.

Of course, the ultimate goal in determining your withdrawal strategy comes down to paying the least amount of tax possible.

Ultimately, deciding to take Social Security or pension benefits needs to be coordinated with your withdrawal strategy and tax reduction plan. Since income fluctuates year-to-year in retirement, there are often plenty of unique tax planning opportunities available to retirees.

Final Thoughts on Why Baby Boomers Will Retire Sooner

The Covid-19 pandemic has jolted our collective interpretation about what matters. For Baby Boomers at the end of their careers, these feelings are more pronounced.

There are many strategies and investment vehicles available to implement an optimal retirement plan that accomplishes your goals. If you plan to do it by yourself, it’s extremely important to know your limitations. Thorough knowledge of the tax code and time value of money calculations are just the tip of the iceberg.

The challenge with retirement planning is that changes in one area often impact other areas. As an example, a large capital gain realized in a taxable account can push your other income into a higher marginal tax bracket. It can even subject a greater portion of your Social Security Benefit to taxation!

The average retirement timeline is about 30 years. Mistakes made today can be very costly over such a long timeframe.

If working with a financial advisor, your plan should be custom-tailored to your goals and circumstances. Avoid a “one size fits all” approach to your retirement plan. A good plan is centered around your needs and goals first.

The good news is you don’t need to do it alone. An experienced fee-only Certified Financial Planner™ can help reduce uncertainty and avoid mistakes. Nowadays, you can even find a fee-only CFP® that specializes in retirement planning.

Above all, you want to make financially optimal decisions to turn your uncertainty into confidence to make the last chapter of your life the best chapter.

The number of Americans that have sought help from a financial advisor has increased tremendously over recent years. The primary reason most people seek professional assistance is their finances have become too complex to handle on their own. Some want to avoid repeating a financial mistake again or realize that they don’t pay attention to their finances enough. Or it may be that our lives have become busier and the financial landscape has become too complex and time-consuming to manage on our own. We want to help simplify the process for you by providing a guide to find the best financial advisor for you.

The primary steps in evaluating the right advisor for you are to:

1. Determine Your Needs 
2. Understand How Advisors are Compensated
3. Evaluate Credentials and Experience
4. Conduct a Firm Evaluation

This 5-minute article should help you save hours in your search for the best financial advisor and help you avoid making any costly mistakes.

Determine Your Needs

As with a good financial plan, your search for a financial advisor should be centered around your specific needs. While most traditional financial advisors from the 1980’s and 1990’s focused on investments and stock-picking, many financial advisors today provide comprehensive financial planning services to their clients to help them make better financial decisions. 

We are inundated with information these days, which is what makes self-managing one’s finances so difficult. Having a professional that truly understands your goals in life is crucial in helping you plot the shortest and most efficient path from point A to B. 

What percentage of your income do you need to save to retire at a certain age? If you saved X amount more, how many years earlier could you retire? Does keeping your target retirement age the same, but spent 15% less change things? 

These questions are an example of the types of questions you should be asking yourself and your financial advisor candidates. You want to gain a thorough understanding of their knowledge, education and scope of services offered. Will they review your tax return? Ask them about their typical client – does that sound like you?

Part of a sound financial plan is to have an investment philosophy that reflects your goals and it’s important that you and your advisor share a similar philosophy.  If you are seeking an active investment philosophy (trying to outperform market indexes), then a financial advisor might help you construct an allocation and find suitable active managers to attempt to outperform the market. You should keep in mind that this approach is expensive and can be tax-inefficient. Also, many studies show that this investment strategy can underperform a portfolio comprised of index funds. 

If you are only seeking investment management and don’t want to pay the higher fees associated with active management, then a passive strategy can be pursued through index funds exchange-traded funds (ETF’s) or through a number of different robo-advisors. A passive investment strategy is predicated on the belief that markets are efficient and that buying indexes that track the market is more effective than the higher costs and low odds associated with beating the market. A passive investment strategy will typically be lower in cost and more tax-efficient than an active strategy and has more support from the academic community.

Understand How Advisors are Compensated

The most crucial element that must be understood about the person giving you financial advice is how they are compensated. A Fee-Only financial advisory firm receives all of its revenue from its clients as opposed to any third parties. Simply, the firm or advisor charges their client’s a fee for the advice that is being provided. 

There aren’t any other commissions or alternative sources of revenue from sales of products that could influence the advisor’s objectivity. Because after all, you are hiring someone to provide advice that’s in YOUR best interest, not theirs. Fee-Only advisors are also held to a fiduciary standard in working with clients, so by law, they must always act in a prudent manner for their clients. Working with a Fee-Only advisor is the best way to ensure you are getting objective advice free from conflicts of interest. 

In addition to Fee-Only financial advisors, there are a number of other financial professionals that are commission-based and earn the majority if not all of their income by selling a certain number of products or opening a certain number of accounts. Products come in the form of insurance products such as annuities, mutual funds, or even private investments. 

This is not to say that all commission-based financial professionals are acting in bad faith. However, under current law, the only protection the consumer has is that these professionals recommend products that pass a “suitability test,” but not a fiduciary test. Under the suitability test, they can sell any products that are suitable, but they do not have any legal duty to their clients.

Evaluate Credentials and Background

No assessment of hiring any professional is complete without a thorough analysis of that individual’s resume. Finding an advisor with the CFP® designation should be at the top of your list when evaluating credentials. The CFP® certification is the most recognized and rigorous credential for financial advisors and requires proficiency in all areas of financial planning.

The list of designations is nearly endless and while some may imply additional knowledge and expertise, none require the same experience, testing, educational, and ethics requirements presented by the CFP Board. While the CPA and CFA credential programs are well recognized and accepted, they are focused on taxes and investments, not the broader financial picture. 

Let’s face it, experience matters. You are going to want to know how many years the advisor has been working with clients. If you are working with a younger advisor, it doesn’t hurt to ask if there will be another senior advisor involved in the relationship. Working with a more experienced advisor who has advised clients in similar situations goes a long way in getting reliable financial recommendations.

If working with a broker, you can perform a background check by searching for their form U-4. This form will provide you with all sorts of information about the advisor like have they ever committed a felony or misdemeanor, filed bankruptcy or been involved in any lawsuits or violations of securities laws.

Firm Evaluation


One of the most overlooked criteria in searching for a financial advisor is determining what type of client they work with.  As more financial advisors have made an effort to provide financial planning services, many advisors have become subject matter experts in one niche. 

There are financial planners that specialize in employee stock options, business owners, millennials and retirees. From college planning to retirement planning and everything in between – there’s an expert for that. Aside from ensuring that you are working with a  Fee-Only CFP®, working with an advisor that is a specialist in your area of need may be the most critical factor to evaluate. 

If you are approaching retirement you need to know how much you can spend, how to replace your income, when to take Social Security, etc. Ideally, you want to work with a firm that helps retirees since they will have the expertise, resources and experience to provide you with the best solutions to your problems. 

Firm Type and Size

One thing that has changed over the last 20 years are the number of independent and smaller Registered Investment Advisors (RIA). Advancements in financial technology platforms and dedicated platforms from the largest custodians (Fidelity, Charles Schwab & TD Ameritrade) have allowed smaller firms to offer a more boutique-style personalized approach than larger firms. In some instances, you may even be directly working with the founders of the firm, who are typically more seasoned advisors and also business owners. RIA’s have been the fastest-growing segment in the financial advisory realm in recent years.

Outside of RIA’s, the most populous platform to work with a financial advisor is through a brokerage such as Merrill Lynch, UBS, Raymond James or Edward Jones just to name a few. Even your local bank has a licensed securities branch representative who can sell you financial products.

Again, broker-dealers are not held to a fiduciary standard, and the products they sell all pay them different types of commissions, so make sure to understand the costs associated with the investment and how the broker is being compensated. Some representatives are under salary & bonus structures, but bonuses are typically tied to selling a certain type or number of products. At the end of the day, it’s your right to understand any conflicts of interest the advisor has, so you shouldn’t feel that these questions are inappropriate.


As a potential new client to a firm, you should be paying close attention to the initial onboarding process. Most firms have an initial meeting with some type of free evaluation of your situation. You want to ensure that the advisor is being transparent in all facets of the relationship, especially how they are compensated and the types of clients they serve. 

Most importantly, how much time are they spending upfront to gain a thorough understanding of your life goals. This will be paramount to a successful relationship because a good financial plan is a result of how much the advisor understands your core values and goals. They should be helping you make financial decisions that are in alignment with what’s most important to you. 

If you are working with a comprehensive financial planner, they will most likely request a number of documents, but tax returns, insurance policies and investment statements are some of the most common documents for the planner to begin their analysis. Depending on how thorough the initial process is, they may also need to spend more time with you to clarify goals more clearly prior to making recommendations. 

If you aren’t working with a financial planner, then your onboarding process with a broker or agent will most likely be to review a final proposal or illustration and sign the paperwork depending on the type of financial product you are purchasing.

Once you have made your decision and completed your client onboarding process and have implemented all recommendations, you should feel good about unifying your goals with all of your financial decisions. At this point, you should know how many times a year you will be meeting with your advisor, how to access online portals and what type of reporting you will receive.

While it may take some time effort before you find the right fit, you don’t want to cut any corners in finding the best financial advisor for you. However, if you know that you are looking for a Fee-Only financial planner, then you can really start your search by looking for a firm that specializes in your needs. From there you can continue your evaluation of the firm and the advisor you will be working with. There are also a few websites such as NAPFA and the Fee-Only Network that offer databases of Fee-Only planners to help make your search easier. Aside from your doctor, you will probably interact with your financial advisor more than any other service provider in your life, so make sure to hire the best one for YOU.