Selecting a financial advisor is similar to selecting a primary doctor. You want someone you can trust, someone who communicates well, and someone who shares your general philosophy.
But that’s not enough when you are selecting someone to help manage your life’s savings. Below are a few additional points to consider while interviewing candidates. I’ve listed them in an order that will quickly narrow your search.
Round One: The Absolute Minimum Requirements for Your Financial Advisor
Start with the credentials, because you shouldn’t even begin a conversation with an advisor who isn’t qualified to give you financial advice. Next, make sure the advisor’s compensation is simple to understand and transparent. After this round you should feel confident that you’re talking to competent professionals and you understand their costs.
Credentials – look for a planner who holds the Certified Financial Planner(TM) designation. A CFP(R) professional will take a holistic approach to your financial situation. They are required to act in your best interests when making financial recommendations. The Personal Financial Specialist (CPA/PFS) and Chartered Financial Consultant (ChFC) are similar professional designations.
Compensation – unfortunately, the financial services industry is exceptionally skilled at hiding or obscuring how advisors get paid. You simply have to ask, and continue asking, until you completely understand where your money is going.
- Does the advisor receive commissions? If so, how much and how often? What’s the ballpark you should expect to pay in commissions for the first year? Will the commissions go down or go up in future years?
- Is the Advisor Fee-Only? This compensation model requires that all revenue for an advisor be paid directly by the client. For most families this is the best compensation model because it’s uncomplicated and easy to calculate exactly what you’re paying. You can find out more about Fee-Only Advisors at the National Association of Personal Financial Advisors (NAPFA).
- Are there any other sources of income or benefits for the advisor? Maybe they receive fancy vacations or gifts and prizes. These benefits may come from their firm, a parent company or from outside organizations. Your advisor should be willing and able to explain all benefits they receive that are connected to the advice they give you.
Round Two: The Financial Advisor That Fits Your Needs
During round one you narrowed down the field by credentials and compensation. During round two you will narrow down the pool of remaining advisors by their record, clientele, and philosophy.
Discipline – It’s easy to research the past history of any registered advisor. Don’t neglect to look them up, regardless of how trustworthy they seem or how highly they were recommended by a friend. Remember Bernie Madoff?
Before you start your search, though, ask the advisor directly how they are registered and whether they have any past disciplinary incidents in the industry.
Next, use these resources to find out if there are any issues you should be concerned about:
- Securities and Exchange Commission
- Financial Industry Regulatory Authority
- North American Securities Administrators Association
Clientele – Ideally, the advisor you choose should have plenty of experience working with people just like you. Ask them what their average client looks like – what is the average age, portfolio size, occupation and marital status?
How many clients do they currently have? How many do they expect to have in the next year? The next five years? If they personally have more than 100 clients, then you should ask more questions to make sure you’ll get the kind of attention you’re expecting.
Financial Planning Focused – The truth is, you’re unlikely to be a successful long-term investor without a financial plan. Sure, you might get lucky with your investments and you might win the lottery. But along the way your family needs a thoughtful financial plan that takes care of your life insurance, wills and other essential safeguards.
You need an advisor who starts with a discussion of your long-term financial plan. If all the advisor wants to talk about is your investment accounts, then they’re probably not focused on your long-term financial success.
Investing Philosophy – This is one of the most important questions and probably the most over-looked. If your objective is to find an investment advisor, doesn’t it make sense to learn how they approach that job? As I’ve said before you don’t need to know the details, but you do need to understand the underlying philosophy of your financial advisor and what you can expect.
Are they more concerned about the risk in your portfolio or the return? Someone selling you a hedge fund is very different than someone selling you an annuity. What perspective are they coming from?
Can they explain their process and their priorities in terms you can understand? How often do they make changes to a portfolio and what kind of event would cause a change? How did they communicate with their clients in 2008, which was a really bad year? Did they recommend changes to the portfolio? Why or why not?
The Bottom Line
If there’s one thing I’ve learned in this business, it’s that consumers are far too trusting of their advisors. They don’t ask nearly enough questions. I’m not recommending that you micromanage your advisor. Just make sure you completely understand the process and the costs. Stay involved in your financial planning process and ask as many questions as it takes for you to feel confident in your financial future.
This guideline from NAPFA for selecting an advisor provides a comprehensive list of questions you should be asking.
As you narrow down your search for a financial advisor in the Allen, McKinney, Frisco or Plano areas, we would love to answer your questions. Please get in touch and let us see if we might be a good match for your financial needs.
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