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How to Choose a Financial Advisor

How to Choose a Financial Advisor

In full disclosure, I am a financial advisor and for objectivity’s sake I’m going to pretend for a moment that I’m terminally ill and this is the advice that I’m giving to my existing clients on choosing someone other than me.

First of all, I think that you have to decipher fees versus costs. Yes, in the end it’s all money out of your pocket, but let’s think of a fee as something that is charged to you in the absence of value. You must take it for granted that all financial advisors are in the for profit business and there is nothing wrong with this, but do you feel that however much you’re paying them gives you value that you couldn’t find on your own or at a lower cost? Over the years I’ve come across many people who have investment accounts that are being charged fees. I like to ask them, “When was the last time you talked to the broker who set this up for you?” More often than not the answer is that they haven’t talked to them for years and when they do talk to them, it was the client reaching out to the broker. To me, clients in this situation are just paying fees. On the other hand, if your broker has created a financial plan for you (which, to me, I cannot personally fathom managing client assets without a financial plan), and there is some level of oversight and regular meetings, management and ongoing advice, then I see this as simply the cost for those services. Good advice is often worth many multiples of the cost for the advice – and this is true for all professions. In addition to this, they should be transparent about their costs. Sometimes costs are obvious, but sometimes they’re built into an investment. A broker should be able to explain what they’re for and what you get for them. I also have a personal bias toward independent advisors versus advisors who work for a large brokerage firm. Generally an independent advisor may to be able to control the cost structure better than an institution.

Secondly, you have to see if the financial advisor is listening to you or are they merely directing the conversation toward whatever product or solution they like to use? There are thousands of investment options out there and I’m of the opinion that there are many ways to proceed in terms of how you invest your money. But be suspicious when you are told about a product before they know anything about you (let alone, everything about you as a good advisor would seek to do). A good advisor asks a lot of questions about your situation, your goals, and objectives. They should get a comprehensive picture of everything about you. Investments should be approached as seeking to solve a problem or in pursuit of a goal. Think of it like a doctor. Imagine walking into a doctor’s office and before you can say a word, tells you to take some new pill or rushes you over for a chest x-ray. How can the advice be worth anything if the doctor hasn’t asked any questions? On the same note, you should feel comfortable telling your advisor everything; if you don’t, something is wrong.

Thirdly, what you eventually invest in should make sense. Easier said than done, but while you may not know all the nuances of everything, you should know roughly what’s being done and what the goals are. If you are trying to take regular income from an investment, you should understand why your investments are suited for that. If you are trying to minimize taxes, you should know why you chose your investments over other alternatives. There should be a level of simplicity and consistency to everything. An advisor shouldn’t be doing radically different things year over year and doing dramatic shifts to your money.

Fourthly, the financial advisor should have principles in what they do. I feel that one of the most common and devastating mistakes investors can make is panicking out of the market. I believe that an advisor who helps you with your natural emotions (there’s no shame in having fear) and can help you think long term is usually going to be well worth their costs. If you have an advisor who is chasing fads and running from fears, it’s going to be very hard to have a disciplined portfolio, let alone being relatively relaxed as the markets go up and down.

Lastly, never choose an advisor based on his or her claim or goal to beat an index such as the S&P 500 or the Dow. I believe that this is an absurd way to choose an advisor and anyone who claims the ability to predictably beat it is lying. It’s completely foolish to choose an advisor based on performance. If I may stay on my soapbox for another minute, I feel that the 24 hour news cycle (particularly if you watch business or financial news) has given the investing public the illusion that investing is all about market timing, stock selection, short term gains, etc. While there may be people in the world who are gifted to invest with this style, you shouldn’t look to your local broker to do it and even more so you shouldn’t try to do it on your own. From time to time I’ll come across people who’ve lately gotten cocky day-trading stocks or options online. I always tell them the same thing that I’ve never seen anyone successfully trade online for more than three years (and usually it’s just because the broader stock market is in an upswing anyway). Also, I have colleagues who give me stock tips. When they do I always have them put a time frame on it for growth and write it down on a sticky note in my desk drawer and check on it at the end of the time frame. It just doesn’t work for your average person which is you and it’s me and it’s pretty much every advisor you’re going to interview. Every day the world is getting more and more complex and it allows you to diversify better and more conveniently than all of history. One singular advisor is not going to be able to keep up with the various stocks in China or pour through lists of small US company stocks, let alone spend quality time digging through them, let alone daily stay on top of the various changes. You should expect that your advisor will delegate each sector to investment managers who specialize in each of these areas of the market and whose job it is to manage their portion of your portfolio.

Much of this is about determining whether or not an advisor is ethical; in my opinion, I’d rather have an advisor with stronger ethics than with clever investing ideas; if you find both, beg him or her to manage your money. Regrettably ethics is a very gray area. It’s something that you have to have an instinct about and if you don’t have an instinct about it take someone along with you who does. Don’t look for the letters after their name, the fancy car they drive, the mahogany in their office or the watch on their wrist. There should be a calmness and humility about them and they shouldn’t be in a hurry to get your money.

It’s also good to keep in mind that it’s getting easier and easier to have a professional advising relationship over the internet and over the phone. You may live in Green Bay, Wisconsin but could easily have a financial advisor in Denver, Colorado. Personally, I have clients in about 10 different states. It’s easy to be able to service clients in any US state and even internationally if needed. If you know of a good advisor somewhere else in the country, call him or her up and see if they can accommodate you. At a minimum, things can be done over the phone, but they should be able to help you through a webcam or other online tools.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.


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