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Choosing a Financial Advisor can be a pivotal point not only in your personal finance journey but also in your overall life. For some, the DIY approach is preferred, but for the rest a Financial Advisor can be a critical asset that helps make the most of what we have earned through hard work.
Not all Financial Advisors are cut from the same cloth. Some are good. Some are bad.
Among the Financial Advisors that you could say are ‘good,’ many are not good for you specifically. Each advisor is a human. They have personalities and experiences that drive their decisions. They must be able to fit like a puzzle piece into your life to not only understand what you want for your financial future but also what risks you are willing to take to get there.
This article will help you choose an appropriate Financial Advisor. I will highlight both the quantitative and qualitative as aspects that need to be considered so you end up exactly where you want to be financially years or decades down the road.
Identify the Advice you Want
You are reading this article because you are at least considering the idea that you might want or need a financial advisor. Before you even bother starting your search its important to clearly define why you think you need a financial advisor.
Figuring out why you need one in the first place will keep you focused. It will help prevent you from paying for skills, services, or personality traits that you flat out don’t need or want.
So, what type of advice or services does a Financial Advisor typically provide? Below is a list of basic categories:
- Investment Planning
- Estate Planning
- Tax Planning
- Wealth Management
- Savings Planning
- Investment Risk Advice
- Retirement Planning
Many of these categories overlap. For example, Retirement Planning may be composed of several other categories to make up a larger Retirement plan. Whatever you are looking to get out of your Financial Advisor should eventually be a demonstrable strength of whoever you end up hiring.
It’s important to note that if you don’t want advice on the above topics then you also don’t need a Financial Planner. I don’t have one. I frankly don’t want anyone’s advice. If you are willing to go the DIY approach it’s okay to forgo expensive advice for which you don’t want anyway.
Find a Fee-Only Financial Advisor
I alluded in the last section that you are ‘hiring’ a Financial Advisor. This means that you should be PAYING your financial advisor. This means that they are a Fee-Only Financial Advisor.
Think about it… if you aren’t paying them up front then someone else is. Some Advisors receive commissions based on the products you eventually use (e.g. Annuities, Insurance). Why would anyone who receives a commission have your interest at heart? Wouldn’t they be more concerned with you selecting a product with the best margins for them?
Hiring a Fee-Only Advisor is the only way to be sure that the only thing your Advisor is concerned about is earning your fee. This keeps them focused. If you end up not liking their performance, they will lose your business and thus your fee.
Fee-Only Advisement occurs in 3 main ways. Each one is a legitimate way for a Financial Advisor to charge for their services. These 3 ways are:
- Taking a small percentage of Assets Under Management (AUM) – As your portfolio grows so does your advisor’s incentive. Advisors who charge a percentage of AUM often will have minimum aggregated account size since folks with limited capital may not return enough of a fee to make it worth the advisor’s time.
- Flat Rate Fee – This fee will likely be charged monthly or annually. Advisors in this case are incentivized by needing to keep customers returning over time. In my opinion, this is the most beneficial fee structure for those seeking a Financial Advisor, however, it may not be the most common.
- An Hourly Rate –Some advisors, like attorneys and accountants, charge an hourly rate based on the amount of time they work on your behalf. Although this is common in many industries, it may be difficult for a consumer to gauge exactly how much advice they need to make the best decisions.
If you are good with your finances and you are looking for a Financial Advisor for expert level questions only then this fee structure may work for you. Consider this the ‘A la carte’ method for buying financial advice.
In general, you should expect to pay about 1% a year on your principal in fees in one form or fashion for a human Financial Advisor. This is on top of any expenses an investment that your advisor may recommend. This is not cheap. Financial Advisors are expensive, and you should know that up front. If your advisor is charging you more than 1% then look elsewhere. 1% is more than enough.
Avoid Commission Based Advice
Again, Financial Advisors that take a commission should be avoided… even if they only accept commissions on products that you are not interested in buying. Even if they are charging you a fee but charge other customers based on commission. A financial advisor who accepts commissions has willingly compromised their decision making in exchange for profit.
There are some products and industries that completely revolve around commissions such as life insurance and annuities. These products pay handsome commissions because they are garbage products. They need a used car salesman to find customers dumb enough to buy their product.
Stay away from financial advisors who think its okay to profit off the product they sell you and not off the return they help you earn on your investments.
Verify the Advisor’s Background
Besides determining if you need a Financial Advisor in the first place, verifying your advisor’s credentials may be the most important thing you can do to prevent disaster.
Verifying your Financial Advisor’s Form ADV at adviserinfo.sec.gov is a way of ensuring that your advisor and their firm is on the up and up with the Federal Government. Registration is mandatory for financial advisors.
Searching your Financial Advisor on the SEC’s website listed above should be considered a mandatory step. After finding their profile, you will be able to learn more about their business, fees that they charge or commissions that they earn as well as any disciplinary reports made against them.
You will be surprised by the number of advisors and firms that have negative marks against them. This is a warning sign that should not be ignored. Following the rules for financial advice is not difficult if you are honest and ethical.
When Advisors try to skirt regulations, they don’t always get caught… if they have been caught before then its time for you to move on.
Interview the Advisor
After verifying that your Financial Advisor has a clean background its still not a done deal. Financial Advisors are people. They have temperaments. They have investment ‘styles.’ You will want to make sure that whoever you choose is a good match for you emotionally.
Some of the most critical investment advice comes during the most emotionally charged moments of our lives. When the market crashes, most folks are inclined to ‘protect’ their future by selling their stocks. When a child is born or a spouse is injured, similar extreme emotions feed into our decision making… especially around finances.
You will want an advisor that understands what you want for your future even when emotions override the logical side of your brain. It’s their job to talk sense into you when you get emotional about money. You will be paying them a lot of money to help steer the ship.
Whether your Financial Advisor is successful or not will often come down to how successful they are of convincing you of what you already know. You know not to ‘buy high and sell low.’ When the market is crashing it will likely come down to a conversation or two with your Financial Advisor if you follow through.
Interviewing your Financial Advisor is the step you need to take to ensure that you all are compatible.
What to Ask a Financial Advisor
But what questions do you ask a Financial Advisor? I like to think of it as an interview. You need to know exactly how they will perform during crisis. You need to know that they are the ones capable of talking sense into you when you aren’t fully rational.
Here are a series of questions that you can ask your Financial Advisor to make sure they will make a good fit:
- How are you paid? – Just make sure they are ‘fee-only’… any other answer should make the interview short.
- Will my financial plan be customized? – If not then why hire them? If your situation isn’t unique enough to warrant a customized financial plan, then why pay for a unique fee?
- Are you a fiduciary 100% of the time? – Ensure that they will have your best interest at heart 100% of the time. If they say the are part time fiduciaries, then run.
- Are you registered with FINRA or the SEC? – You should have checked this out prior to the interview, but it’s always good to cross-check.
- What’s your investment philosophy? – Make sure it jives with the way you think. If it doesn’t then ask further questions. Ultimately, if you aren’t comfortable with how they make investment decisions then it may be time to look elsewhere.
- Do you have any customer references? – See if they are willing to put you into contact with a current paying customer. Firsthand information from another customer may help you get a better idea of the advisor’s style.
- How are you paid? – Just make sure they are ‘fee-only’… any other answer should make the interview short.
After the interview go home. Don’t sign anything or agree to anything. Take some time to get comfortable with the idea of this person being your advisor. If you have a spouse, make sure they agree with you.
This person will be giving you advice about how to handle a lifetime’s worth of money. That is no small thing. You should take the time to air things out. If the advisor tried to pressure you to sign any type of agreement or buy any product prior to leaving, then consider them fired before they were hired.
Be Prepared to Walk Away
Don’t get caught up in trying to find an advisor as quick as possible. Like buying a car, finding the right Financial Advisor may take some time. You need to have the mental flexibility to walk away from an Advisor before or during any paid services.
Trusting someone else with your money is difficult… and it should be. Bad actors are highly incentivized to take advantage of those seeking financial advice. It’s possible to survive a scam-artist if you are willing to shake things up and walk when things seem fishy.
After your interview with any Advisor, you should be polite and courteous, but you need to try and remove emotion out of the decision of hiring them. Even if they seem like nice folks, you need to determine if their style and competence are what you need to make the best possible financial decisions.
Check Up on your Advisor
Hopefully you will be able to find, interview, and hire a Financial Advisor that makes sense for you. But that’s not the end of the story. You need to stay engaged. Monitor the performance of your investments and make sure your advisors Form ADV stays clean.
People change. Circumstances change. Sometimes advisors who had no marks against their record just hadn’t been caught yet.
I don’t think you need to be paranoid, but you do need to check routinely to make sure everything is going ‘as expected.’
Now markets and investments go up and down. Just because your portfolio is down doesn’t mean that something nefarious is going on, however, the directionality should make sense based on the risk you have taken on and the broader economic picture.
Is a Financial Advisor Worth It?
I saved this section until the end for a reason. Determining if a financial advisor is worth it sometimes requires hiring one first. Many of the decisions and much of the advice we crave is just confirmation we are doing the right thing already.
Hopefully, if you a hire an advisor, this is what you find out. In this case you can subsequently move on to a DIY approach with much lower fees. Even reasonable fees, such as 1% of AUM, can be quite onerous over the long haul. When you start shaving 1% off your principal for 30 or 40 years the amount can be staggering.
Hiring a Financial Advisor may be worth it initially. They may help you orientate yourself… get you going in the right direction. They may help you clear up some misunderstandings or get an appropriate portfolio built.
But once a few years have past and you are comfortable with the plan in place it may be time to consider if you are getting the same value from your advisor that you once were. Try to ignore the emotional relationship you have likely developed and try to determine if it’s possible to do things on your own.
I write this blog as an expression of my opinion. This article is also my opinion. I think professional advice in lieu of personal research can be incredibly powerful. If you don’t have the time or willpower to think about how best to deploy your money or save up for important events such as retirement, then hiring a Financial Advisor may be money very well spent.
That said, I highly recommend you always do your own research before doing anything with your money.
This includes researching any advice that any Financial Advisor gives you as well. You should always understand what your money is doing. At no point, no matter how much you pay someone to do it for you, will the outcome of your investments or money decisions be someone else’s fault.
The buck stops with you.