Recently on my podcast I interviewed estate attorney Ken Horowitz. When asked, “What’s an example of an estate planning mistake you’ve seen people make”, Ken responded this way:
The person bought an ILIT (irrevocable life insurance trust), created a trust to put the ILIT into, but didn’t put the ILIT into the trust before they died. The money was then subject to estate tax before they died which amounted to about a 40% haircut.
On the surface this seems like a simple oversight. A person makes some of the moves required to fulfill a strategy - but never completes the plan because a life event gets in the way or something goes unexpectedly wrong. Sounds innocuous.
It’s deeper than just that, though.
The more I see things like this happen, the more I am drawn to ponder why people make these mistakes. Often I am led to the understanding that it has a lot to do with how financial services are sold to clients especially those who earn high income.
High income earners are targets
It’s important to understand how your financial advisor gets paid. When a financial advisor is compensated based upon commission, he or she is motivated to sell a product with little regard for the whole picture. In the ILIT example, whoever sold the person this product failed to follow through afterwards with the diligence required to ensure that the strategy was fulfilled. This is because unless the advisor is operating as a fiduciary they are not obligated to make sure the client’s best interests are protected. In this case, as long as the ILIT was suitable for the client, the broker gets his or her commission and is free to walk away with no further obligation. If the advisor is a fiduciary, he or she is held to much higher standards of accountability.
Lack of a cohesive plan is particularly dangerous for high earning individuals. Unfortunately due to their high income they are preyed upon by commission-driven financial advisors, or brokers, who reap high commissions from selling products instead of creating an overall strategy that includes all aspects of the client’s financial picture. Stringing together a collection of products won’t cover all the bases. Unfortunately when it comes to finances, the law sees things as binary; either you have the box checked or you don’t.
Financial advisor compensation matters
If you are currently working with a commission-only advisor or even one who has the options to be paid either by commissions or by fees (hybrid advisor), there is still a high degree of bias involved. It makes sense to get a second look from someone who operates as a fiduciary 100% of the time. These fee-only advisors as they are called are able to render a much more transparent, unbiased, and conflict-free opinion about your overall financial strategy rather than just piling on products.
How is your financial advisor compensated? Have you had the conversation?