Avoid These Five Mistakes of Advice-Giving Professionals 

Are you an “advice-giving financial professional?” 

If so, please take a brief quiz consisting of one question. 

Quiz: Suppose that one of your clients, a grandmother, tells you the following: “I would like to help my grandchild by making small annual contributions toward her college fund. She’s 14 years old and I’m thinking about putting a little money aside for her benefit in the 529 Plan of our state. I know that a 529 Plan is a good way to save for college with tax advantages but I’m concerned about one thing. Her parents are struggling financially. She’s a brilliant girl and probably will be admitted to a good college, but she will need financial aid. I would rather not jeopardize her ability to qualify for financial aid.” 

Here is the one-question quiz, asked by this hypothetical client:  

“What specific advice can you offer on this matter?” 

Please take as long as you wish to answer, and I’ll tell you the answer at the end of the article. If your answer is accurate, you are a rare advice-giver…perhaps 1 in 100. This article is designed to help you answer many such questions that solicit your advice.  

Some Facts about Advice-Giving

You probably have learned most of what you know about giving advice by “the seat of your pants.” You didn’t study advice-giving in college and haven’t attended many seminars sponsored by “advice gurus.” Some advisors switched from financial transactions to advice in mid-career, and old transaction-oriented habits are hard to break.  

In my experience, many financial professionals try to give their clients “good advice” without intuitively understanding what the terms means—as many doctors, lawyers, CPAs and psychiatrists seem to do. In this column, I’ll offer a checklist of five specific mistakes that financial advice-givers commonly make. I’ll use 529 Plans as an example because: 1) it’s an area in which many clients are asking for advice; and 2) lately, I’ve heard so much bad advice about this subject. 

529 Plans have always been a dilemma for advice-professionals because most clients can, and probably should, participate directly through the plans of their home states. It’s a good thing for parents and grandparents to set money aside each year for a kid’s college, with tax advantages, but doing this in a home-state 529 Plan usually doesn’t help financial advisors earn a living. It looks easy for professionals to offer advice on 529 Plans but isn’t—because complex rules vary from state to state and change often.

Mistake #1: Giving Advice Too Soon 

When you take the time to research and contemplate your advice, it is almost always worth more than ideas cast off  “the top of your head.” So, avoid the temptation to offer advice as soon as clients ask for it. A call back the next day, saying you checked facts and consulted with others, demonstrates responsive service. Also, it often pays to “sleep on advice” before delivering it.  

Never offer advice in the first meeting with a prospect. The purpose of a first meeting is to convince prospects that you are the best advisor for them. Your advice means nothing and has no value until you are hired and fully understand the client’s needs. It’s okay to help prospects and referrals by passing along factual information, but make sure they understand that your role in these situations is service-oriented, not advisory.  

The problem with some advisors is that they have grown too focused on cost-efficiency and process uniformity. For example, in the first meeting with a new client, they always gather data and explain how they work. In the second meeting, they always deliver planning recommendations and advice. But 90% of the time, that’s too early in the relationship for the advice to be meaningful and valuable. If the client can’t produce enough revenue to justify another meeting or two before advice begins, don’t accept the client under an advisory arrangement. As the pinnacle of financial services, advice is a rare commodity that should always be conserved and doled out sparingly at the appropriate time. 

If your quiz answer implied that you responded immediately, sorry—incorrect.  

Mistake #2: Advice That Isn’t Requested 

Whenever a client solicits advice, your immediate response can always be an “open question”—namely: “Why do you want my advice on this matter?” The answer can help to avoid exceeding the need or offering complex advice when simple advice will do. In the quiz example, the client is not asking whether 529 Plans are tax-advantaged. She “knows” they are. She isn’t asking whether alternative solutions would work better, or whether she should consider 529 Plans outside her state’s own plan.  

Recently, I witnessed a situation in which a client asked a similar question of a professional who charges a hefty fee for planning and advice. Yet, the explanation that immediately came out of the advisor’s mouth held that grandparents should never make 529 Plan contributions of their own accord. Rather, they should give the money to their children (the child’s parents) and have them make the contributions. Not only is this advice wrong—it’s unprofessional, because the advisor was giving advice to people (the parents) who weren’t his clients and didn’t request it.  

Did your quiz answer venture into areas outside the direct advice requested, without first checking to make sure this was wanted? If so, mark it incorrect.

Mistake #3: Giving Advice Too Loudly 

A corollary to mistake #2 is to “shout” your advice too strongly—as in a specific recommendation to take immediate action. Giving good advice and motivating people to take action are different skills. Often, the most valuable advice is nuanced and toned down, helping clients compare pros and cons. For example: “It’s a good idea that you want to help pay for your granddaughter’s college, and the 529 Plan of your state can have advantages. The specific area you asked about, financial aid, can be complex. I can help you wade through it, if you want.”  

Another way to give advice “loudly” is to be overconfident about your knowledge and opinions. For example, admitting to yourself (and your client) that your knowledge about financial aid formulas is limited is a great place to start. Doing more research and quoting opinions of other qualified people, in addition to your own, is even better. If clients are initially a little confused by advice, it’s not always a bad thing. Helping to resolve confusion makes advice-givers more valuable. 

If your quiz answer said that 529 Plan contributions have a specific amount of impact on financial aid eligibility, regardless of the account owner, sorry. It’s more complex than that.  

Mistake #4: Failing to Consider the Cost of “Colored” Advice 

Every professional adds his/her own “color” to advice, based on experience and beliefs. It’s unavoidable. The problem is that clients often sense “colored advice” more than you think, and it can affect their view of your objectivity.  

Since your clients can participate in the 529 Plan of your state directly without going though you, your view of that Plan may be negatively colored. But is it worth the risk to a client relationship to give colored advice, if your potential reward is minimal or nil? Save your colored advice for important “core” issues that compensate you well, such as asset allocation, investment planning and insurance protection.  

You can always “pass” on giving advice. You also can compensate for the “colors” that you know are in your mind, as in this example: “It would probably be fine to set aside a few dollars each year in that 529 Plan. It’s not my area of expertise, but it seems to work for some people and that’s as much as I can tell you.”  

If your answer indicates a negative attitude toward your state’s 529 Plan, and there is not much money to be made from the advice one way or the other, it’s probably not worth the risk. 

Mistake #5: Inaccurate Advice 

Most inaccurate advice given by financial advisors falls outside their core competencies, in areas that may not appear central to clients’ long-term success. Perhaps it’s not worth your time to stay abreast of changing regulations in those areas, since clients ask about them so infrequently. For example, once in a blue moon, a senior client may ask about reverse mortgages. Or a client may ask whether estimated tax filings are required.  

Here’s a rule to remember: All inaccurate advice is equally bad. If the client acts on the advice and later views it as a mistake, your relationship may suffer. Even worse, clients have as much right to complain or sue about bad advice in “little things” as in “big things.” In any case, it’s not your role to assess how important the advice may be to clients. That’s interpretation is made by the client—often after the fact. 

Seemingly small questions, such as those involving 529 Plans and financial aid eligibility, can be very complex and meaningful to clients, as the answer to our quiz demonstrates.

 The Quiz Answer  

Under the current rules for financial aid eligibility, the grandparent in this example probably can make 529 Plan contributions that have zero impact on the child’s financial aid eligibility, as determined on the Free Application for Federal Student Aid (FAFSA) 

When parents own a 529 savings plan, they are required to list the account on the FAFSA. However, a 529 savings plan generally counts for less weight in the eligibility formula than many other assets. The American Association of Retired Persons (AARP) says that students will potentially lose 15 cents in financial aid for each dollar that parents save in a 529 savings plan. (The assets are considered to be owned by the parent, not the student beneficiary.) AARP says that each dollar parents save in a Traditional IRA can cost 26 to 33 cents in financial aid, and each dollar in mutual funds can cost 40 to 45 cents.  

In summary, 529 Plans owned by a child’s parents will count on the FAFSA and have a minor impact on financial aid eligibility. But assets owned by grandparents (including 529 savings plans) are not listed on the FAFSA at all, and in most cases these assets will have no impact. 

Is this the quiz answer you gave? If so, you are a superior advice-giver. Just make sure to tell your clients that even this answer is a simplification of FAFSA rules. Individual colleges and universities may apply their own interpretations to these rules, and the rules do change.  

Your professional advice is valuable! So, spend it wisely.