Five Questions to Help You Choose a Financial Advisor
Given the volatility of today’s markets, the reprehensible acts of some of the world’s financial giants, and the burgeoning domestic and international debt loads, I firmly believe that the first step to getting serious as an investor is to find an experience, ethical, morally dedicated financial advisor. After all, today’s financial markets can often resemble a raging white-water torrent rushing between the rock walls of a canyon. I would not try to get in that treacherous river without an experienced guide at my back. In short, there has never been a time where good advice was more valuable than it is today. Here are five questions to guide your search for a financial advisor:
# 1. How are you paid?
Amazingly, studies continue to show that many clients of financial advisors have no idea how they pay for the financial advice they receive. Think about that. Do you know how you pay your doctor or your real estate agent? Of course you do. So, why is it different with financial advice? What stops consumers from asking the simple, but essential question: “How do I pay you?”
The root of the confusion could be that financial advisors use different compensation models – commission-based and fee-only, terms that mean nothing to the investing public. What you need to know is this simple -- advisors who earn their living by commission may have an incentive to sell you particular products. In contrast, fee-only financial advisors who charge clients a percentage of assets under management and operate as fiduciaries always put your needs first.
Calculating fees as a percentage of your assets under management also enables trusted advisors like me to operate on a relationship basis. That is, rather than be interested in a quick sale that will generate a commission for me but might not be 100% appropriate for you, I take the time to really get know each client. I then develop a long-range investment strategy that is true to that client’s unique values and goals, and continually review the portfolio to ensure we stay on course as the markets change. Further, my fee encompasses a broad range of additional services, including tax planning, college planning, insurance planning, retirement planning, estate planning and philanthropic planning.
#2. Do you have business affiliations with any company whose products or services you are recommending?
Just as you don’t want to be sold a financial product just because it pays the advisor a nice commission, you want to be aware of any business affiliations your advisor may have. That is, if your advisor recommends an attorney for estate planning, it should be because that professional is uniquely suited to work for you, not because the advisor has a relationship with the law firm.
Also, find out whether your advisor works with a broker dealer or if they custody your assets at an independent custodian like Schwab or TD Ameritrade. Bottom line: You need to know where your assets will be physically held. Think back to Bernie Madoff's Ponzi Scheme. His firm acted as the investment manager and the brokerage custodian that processed securities transactions and issued dividends and interest. There were no checks and balances. Accordingly, when Madoff the investment manager stole from the accounts, Madoff the custodian covered his tracks.
#3. Does the advisor speak your language, or in financial jargon?
Do you want to be tortured with talk of basis points and the efficient frontier? More than many industries, those who work in finance tend to gravitate toward the $100 word when a one dollar word will do just fine. Seemingly, the goal of these financial masters is to mystify rather than educate. Look for an advisor who speaks in plain language. I want my clients to understand just what I’m talking about so they can ask questions and feel 100% comfortable with our investment course.
Some level of chemistry is important, too. Let’s face it, you have to be comfortable enough with your advisor to share your hopes and dreams — and your fears. Feeling comfortable with each other enables us to ask each other questions and work together to find answers.
# 4. Can you discuss your expertise and investment approach?
Above all, you want a trusted, competent advisor who has the knowledge and perspective necessary to chart your investment course. Your trusted advisor can provide a pedestrian bridge over an eight-lane highway. Yes, it’s possible to cross those lanes of traffic on your own, but getting to your destination will far less harrowing -- even enjoyable -- if you cross safely over a pedestrian bridge.
In addition to providing investment expertise, getting clients safely over the bridge requires helping them to make good decisions. And that gets personal. Therefore, your advisor must ask questions and listen to your answers to develop thoughtful investment strategies. Throughout the course of the relationship, the advisor’s expertise and market perspective can keep you from reacting emotionally in times of market stress and keep you on track to reach their goals.
It’s also important to understand your advisor’s investment approach. Is she a risk taker shooting to outperform the market? Does she believe markets are efficient and therefore favor passive investing? For instance, I invest in funds from Dimensional Fund Advisors (DFA), a low cost passive mutual fund family. DFA encompasses the work of esteemed finance professors Eugene Fama and Ken French. DFA has great funds and a strong academic discipline and only institutional investors and approved financial advisors can invest.
# 5. Will you be the person working with me?
Finally, you don’t want to fall victim to the bait and switch, whereby an experienced advisor dazzles you, only to hand you over to a much more junior associate. Sure, that person may be qualified to help you, but you don’t want any surprises. If you are taking the time to find an experienced financial advisor who really cares about you, be sure you are speaking with the person you will be working with on a daily basis to pursue your dreams.
Choosing the right financial advisor is perhaps the most important thing you can do to ensure a secure future. Choosing the right advisor is the key to the success of your financial plan, and you need to find someone with whom you can build a strong relationship based on honest communication, integrity, and trust. So take the time to ask questions.
For more from Kimberly, see her book here: Wealthy By Design: A 5-Step Plan for Financial Security