A Thoughtful Approach to Selecting a Financial Advisor
The decision to engage an advisor to help you manage your finances is a very difficult and personal process. Before you start interviewing candidates, make sure you spend some time considering “what” you hope an advisor can or should provide to you. Are they strictly limited to investment product advice? Are you looking for an advisor to also opine on estate planning matters? What about more specialized services like major purchase planning, expense management, tax compliance, family governance and financial education for the next generation? In other words, are you looking for an advisor to act in a narrow, well-defined role? Or, are you looking for an advisor who will act as an advocate for you across multiple financial and non-financial disciplines? It is recommended that you include all stakeholders in this exercise, such as your spouse or significant other and immediate family, if appropriate. The more soul-searching you do prior to meeting with potential advisors, the more useful those meetings will become. Your goal here is to find the best match between your expectations and how an advisor will meet those expectations.
- Talk with Multiple Advisors
Often, people will get three quotes from contractors before selecting one to paint their house. Yet, they will only speak with one ostensible advisor before selecting someone whose guidance will prove critical in achieving financial goals and aspirations. Some people are comfortable asking friends and associates who have similar circumstances for names of their advisors. Others find it more comfortable to seek references from their existing professional advisors such as their accountant or attorney. Irrespective of how you decide to gather names, make sure you have several before you start your research. When you meet with the advisors, have a list of questions that you want each to answer. There is no set list of questions. But, the list should be developed considering the self-discovery process discussed above. Also, early in the process, ask for client references. When you do, make sure you call those references. Have a list of questions for the references as well. Inquire as to the length of the relationship, breadth of services they receive, satisfaction with the service and how they were introduced. While I feel that these candid discussions can be useful in gleaning insights into the advisor/client dynamic, it is useful to understand that the advisor is only going to provide you with the names of clients that they are convinced will speak glowingly about the relationship. - Experience
It is important to get a solid understanding of their experience as an advisor. Credentials are nice, but I have seen advisors who are very well credentialed and, yet, have little real-life experience. Alternatively, there are excellent advisors with decades of expertise who are in high demand with no certification after their name. Please don’t misunderstand; I have a great deal of respect for many of the professional designations and the commitment demonstrated by those individuals who have acquired them. I am simply saying that it is the relevant experience, not the certification, which provides utility when deciding to retain an advisor. Notwithstanding, to the extent that an advisor advertises a professional credential, make sure you understand what the credential is. Is it an industry recognized designation? Is it applicable to what they are supposed to be doing for you? (more on this later) - Typical client
Advisors tend to have a demographic with which they work best. This develops over the course of their career and frames their compendium of knowledge. Someone who works predominantly with foundations or endowments might not have the most relevant perspective for a private client. Also, if the plurality of their client base tends to be worth much more or much less than you, their sphere of knowledge might not be as applicable to you and your unique needs. For example, a young professional who is concerned about specific social causes and planning for a family may not be the best fit with an advisor who works predominantly with retired individuals utilizing passive investment strategies. You are best served when you are clearly in their demonstrated sweet-spot. - Philosophy
Have each of your advisor candidates explain their investment and, maybe more important, their wealth management philosophy? There are many schools of thought. And, since none is universally adopted, we can presume that there is not one that is absolutely “right”. Spend time to understand their philosophy. On what theory – or theories—is their investment philosophy based? How do they select individual investments or separate account managers? On what theories do they base their asset allocation approach? Then, make sure that this approach fits within your belief structure and that you can envision how this philosophy will advance your goal attainment. - People
The encompassing role of an advisor fundamentally precludes them from being a one-person shop; they need support. You must ask about the other people that will either work directly with you or be working behind the scenes. Do they have a team of analysts dedicated to the Process (discussed below) and what is their record of success? Similarly, what resources do they utilize to aid them in their work for you (i.e. asset allocation and goals-based planning)? You should have a clear idea of the entire team, their background and how they support what you experience. - Process
In Philosophy, we discussed their approach to investment selection and in People we discussed the human resources they employ to execute on that philosophy. Here, you would want to know how they go about this arduous task, whether it is analyzing investment solutions, opening and maintain accounts, implementing plans, etc.; what is their process. Make certain that their answer makes sense to you.
Associated with this is the process of keeping you engaged and managing expectations. How do they communicate with you and what is the frequency? Get samples of their statements and make sure that they clearly provide the information you would need to stay on top of your financial situation. What does their online reporting look like? Often, the online portal is more flexible and allows you to perform “what-if” scenarios, allowing you to project possible outcomes into the future for planning purposes. Is it okay to call, email, text at any time with questions or concerns? Remember, you are hiring them, not the other way around. They should be able to work with you in the manner that works best for you. - How Are They Compensated
In the opening of this article I advanced the idea of hiring an advisor within a variety of capacities. It is important to understand how they will be compensated in these areas. Are they charging you a separate fee for non-financial services? Or, are they hoping that the fees they charge you for your investments are significant enough to cover non-core services? Regarding investment fees, are the fees clearly and completely delineated on the statements? Or, are there additional fees built into the investment products themselves such as 12b-1 fees in mutual funds and placement fees and fee sharing arrangements in private placement and hedge fund investments. I strongly suggest that you have complete transparency into the fees that are being charged to you – directly and indirectly – and how your advisor is compensated from those fees to avoid any potential conflicts of interest. - Make Sure You Understand the Breadth or Constraints of Their Service Capabilities
In the introduction, I broached the idea that there are various types of services that you might want an advisor to provide. If, through that process, you have a clear understanding of the scope then make sure that the advisor competent to deliver on each of those. Even if your list of required services is brief, learn about the breadth of their practice as this might present opportunities for growing the relationship further down the line. - Check their record
I am not talking about their record of performance returns. No, here I am referring to their regulatory record. Advisors are typically regulated by either the Securities Exchange Commission (SEC) or the Financial Industries Regulatory Authority (FINRA). Through both you can check on their professional background and conduct record. FINRA’s Broker Check is FINRA. And, the SEC’s Investment Advisor search is SEC. Some advisors, such as a Certified Financial Planner (CFP) are not required to be registered with either the SEC or FINRA. However, you can check on their status at CFP and a Certified Public Accountant (CPA) can be check on CPA Verify if they are in a participating state or by going to the AICPA site to connect with the specific state at AICPA. You may consider checking on their background through these sites before you meet with them. If the search raises any concerns, you can save some time and move on to interview another advisor. - Fit
Most importantly, make sure there is a good “fit” between you and the advisor. The idea is to find someone that you can have a good connection with and one that you will want to work with for years to come. Without that connection, the comfort required to share very personal but important information may be inhibited and that would be deleterious to the objectives outlined above. Ultimately, poor fit will lead to an erosion of trust and you will be, once more, looking for an advisor. Even if an advisor checks all of the other boxes well, you will likely never develop the relationship required to have a lasting professional relationship.
In the end, finding the right match between your expectations
and the advisor’s capabilities is an iterative process. Be prepared to meet with your finalists two
or three times to ensure you have the right fit. Remember, you may be prepared to paint your
house every five years. But replacing
your advisor frequently can be a costly mistake.
