Four Questions to Find a Financial Advisor

 

Confused about money?

In the aftermath of swan dives in both the housing and stock markets, many individuals are questioning their ability to manage their money on their own.  Banks, insurance companies, brokerage houses, and accounting firms are some of the many institutions offering financial advice. With so many choices, however, it can be confusing to figure out who to hire, especially if you are just starting out. Here are four questions you can ask to help find the financial advisor that’s right for you.

(1) HOW DO YOU GET PAID? A good financial advisor should be able to answer that question easily and directly.  If the person can’t look you in the eye, hems & haws, or gives you some complex answer… run, don’t walk, away.

  • Here are the various ways an advisor typically gets paid: (a) commissions on products that your advisor recommends, (b) a percentage of your assets under management, (c) an hourly rate. {Note, I prefer the last two.}
  • Don’t you have to be really rich to hire an advisor? Yes and no.  Percent of asset advisors often have a $500,000 or $1,000,000 minimum asset level (the economics just don’t work for them at lower asset levels for all the services they provide). So if you are just getting started, I suggest starting with an hourly fee-based planner because they’ll work with you at any asset level.  It’s sort of like paying for personal training sessions for your money. To find an hourly fee-based financial planner in your area you can go to GarrettPlanningNetwork.com or NAPFA.org.

(2) WHAT PROFESSIONAL CREDENTIALS DO YOU HAVE? Anyone can call themselves a financial planner.  My favorite answer for someone who is going to advise you on the nuances of your entire personal finance situation is one of these: CFP (Certified Financial Planner),  CPA-PFS (Certified Public Accountant – Personal Financial Specialist,  CIMA (Certified Investment Management Analyst), or CFA (Chartered Financial Analyst).

(3) HOW OFTEN DO YOU MEET WITH YOUR CLIENTS? I like to hear three to four times in the first year of the relationship and one to two times a year after that.  You’ll also want to ask what kinds of things they will talk with you about during these reviews.  Good answers include: your income, your expenses, your goals, and your worries – not just how much money you have to invest!

(4) CAN I TALK TO SOME OF YOUR EXISTING CLIENTS? You earned your money with your life energy so take the time to protect it by doing your homework. I suggest asking for three existing client references. I also suggest talking to three different advisors before hiring one.

What other question would you add to the list?

12 Replies to “Four Questions to Find a Financial Advisor”

  1. When you talk to the references for an advisor, ask questions about what the results have been – not necessarily simply monetary results (that will vary like the performance of any stock or bond or fund) but things like “I invested in x or y opportunity that was suggested to me by so-and-so.” What did this advisor do to shape the reference's use and investment of available monies? Was there a clear financial plan that had varying goals? Did the advisor cover more than just investments? Don't just be content to hear that the advisor is really a nice person or always interested to talk to you. You're looking for expertise. Similarly, ask references who say that the advisor “increased their portfolio value by xx%” about what types of investments were suggested, or what range of goals were set.

  2. Hi Jean – Bravo, I couldn't agree more. I'd also add… ask the references how deeply the advisor delved into their risk tolerances and goals when setting their asset allocation. The best advisors really try and understand things like your upcoming cash draws (Why? So that specific money is not invested in stocks or long-duration bonds but parked in something that earns enough interest to offset inflation – such as a CD with a maturation date that corresponds to the payment date or a money market fund). During my 15 years working in the investment management industry I have seen, sadly, examples where individual and their advisors talked about risk tolerance, assets available to invest, and historical returns of proposed investments – but neglected this key component of cash draws. The painful results was the investor ending up in an allocation that was a total mis-match for their day-to-day life (Translation in plain English: Investments by definition are volatile and when the individual needed the money, the investment was either at a low – or worse illiquid in the case of an allocation to alternative investments). So hearing from those references more about the granularity with which the advisor probed the entirety of your financial objectives before proposing an investment plan is a great point. Thanks Jean!

  3. I really found your advice to choose financial advisor fruitful, as I am having small portfolio and I want to expand it but in that trial I made it almost half and was really afraid of buying anything or vice-versa.

  4. Sonal – First up, I want to say it's GREAT you have some savings to invest. That's a huge first step and many people never even make it that far. As for your first attempt at managing it yourself resulting in a 50% reduction in your asset value, don't beat yourself up. The past few years have been brutal ones in the stock market. That said, an hourly fee-based financial planner may be just what the doctor ordered to help you decide what your asset allocation should be (“asset allocation” is just fancy pant speak for what mix you should have between stocks, bonds, and cash) – as well as help you identify institutions where you can execute that plan using low cost index funds and/or ETF (that stands for Exchange Traded Funds). Three firms I think very highly of, especially for individuals who are have portfolios on the smaller end of the asset scale, include Vanguard, Fidelity, and Charles Schwab as all three will accept portfolios at “starting out” levels. An hourly fee-based financial planner could absolutely help you identify which of these institutions is a match for your situation as well as help you figure out what kinds of investments you should be making there. Over time as your assets grow and your need for advice and guidance becomes more complex, you can reevaluate and see if you meet the asset minimums to work with a “percent of assets under management advisor.” Bottom line, go you for wanting to take charge of your money!

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