The Dos and Don’ts of Choosing a Financial Advisor

You’re thinking about hiring a financial advisor to help you manage your assets. I can assume this is the case since you’re taking the time to read this paper. This is most likely because you’re planning for the future— your retirement funding or college, or you’re unhappy with your current money manager, be it a professional advisor or yourself. Or all of the above.

In either case you’re looking for someone who “Does” a lot of work on behalf of you and your family. We often focus on the “Does”, but ignore the “Doesn’t”. This could be a mistake since when choosing a financial advisor, “Doesn’t” is just as important.

The goal of this blog is to help you select a financial advisor, who is right for you. It provides questions to ask, points to consider, and other resources to help you evaluate whether a person or a firm is right for you.

What a Good Advisor Does

Listens to your goals/needs and creates an investment plan tailored to your objectives and risk profile. Shopping for an advisor in some ways is like shopping for a car. There are a variety of makes, models, and price points that need to be considered based on your personal preferences and needs. It is NOT one size fits all. How much time will the advisor spend with you discovering your needs in a holistic way? Does he really understand your short term plans, long
term plans, goals, hobbies, family situation, and health issues? If the advisor starts touting his or her products and services before asking about your goals, say, “Thank you” and walk away.

Uses his experience to make recommendations and decisions that are in your best interest. If you were hiring a senior executive, would you select someone experienced or a novice? Your financial advisor is the senior executive of your financial well-being. While the past doesn’t predict the future, having weathered the volatility of the markets (tech bubble of 2000, financial crisis of 2008) helps an advisor maintain perspective and make educated decisions that are in your best interest. Remember that longevity of a firm doesn’t always equal an experienced manager. Do you want an inexperienced Junior Investment Manager or a Senior Investment Advisor who has seen bull and bear markets?

One point to consider is the concept of a fiduciary. A fiduciary is an advisor who is required to act with undivided loyalty to you, the client. He must represent your interests, even above his own. Not every financial advisor or brokerage firm adheres to the fiduciary standard. In fact, there is no legal standard for calling yourself a "financial advisor". According to the 2012 fi360-AdvisorOne Fiduciary Survey, one-third of the participants do not have a fiduciary relationship with their clients.1 This means that your advisor could be a sales person who works for his or her firm’s best interest, not yours.

Shopping for an advisor is like shopping for a car. There are a variety of makes and models to consider. It’s NOT one size fits all.

Understands your benefit plan. It’s easy to talk hypothetically and offer broad suggestions, but does the potential advisor take the time to know the specifics of your retirement plan? Does he or she stay up to date on the rules regarding 401(k) plans? A good advisor is familiar with your employers’ rules on vesting, the plan specifics in terms of allowable contributions per year, the plan's matching provisions, and when contributions need to be made, and how frequently and how contributions elections can be changed. The financial advisor who doesn’t stay current on a plan's specifics may miss opportunities that would benefit the client.

The firm has enough depth and breadth to handle your account(s) and all their other clients as well. What do you want to happen when you call your advisor? Do you want the direct extension to the person or team managing your money, or do you want to hear, “Please hold for the next available representative.”? Do you want to be asked for your account number and maybe for a password, or would you prefer to be recognized by name? Is it important to you that your questions are answered the same day you call in, by someone familiar with you and your goals–even if your advisor is on vacation or in a meeting? You need to determine which size firm is right for your needs.

Reports to you, in writing or verbally, at least four times per year. Consider the frequency and quality of contact you want from your advisor. Are quarterly or annual standardized investment reports sufficient or do you want to speak and meet with your advisor regularly to better understand his or her thinking, performance, and plans for your money?

Shows a consistent 1-year, 3-year and 5-year performance record. But don’t judge by performance alone. It’s easy to look at the performance of the major indices and think, “They’ve out or underperformed.” However, it’s important to judge performance based on the appropriate index adjusted for your particular risk profile. The S&P 500 Index gained 32% in 2013, but most investors hold a combination of stocks, mutual funds and bonds. Comparing your portfolio’s return solely to the S&P isn’t fair unless your portfolio is all stocks – adjusting returns for actual risk taken is important. Performance will also vary from quarter-to-quarter and year-to-year. Reviewing the manager’s returns over 1-year, 3-year, and 5-year time frames provides more insight and reassurance into the consistency of their investment approach.

In addition to reviewing the portfolio’s return, consider how well the manager performs in areas such as client satisfaction by asking for three to five references. Call or email those references and ask the questions that matter to you. They may be: “How well did X understand your needs?”; “Did X help you achieve your investment objectives?”; “Does X return your calls?”; “Does X provide easy to understand monthly or quarterly reports and are they willing to walk you through them?”; “Does X offer financial planning services, tax services, Social Security optimization services, tax minimization strategies, and estate planning?”

The financial advisor who doesn’t stay current on a retirement plan's specifics may miss opportunities that would benefit you, the client.

A Good Advisor Doesn’t

Take possession of your assets. A financial advisor should NEVER take control or possession of your money or assets (transfer the funds into their name). Your funds should be held in your name at a firm that provides custodial, operational, and trading services for Registered Investment Advisory firms. This insures that the manager can never remove funds from your account. You are simply granting them the right to manage money within your account. Also, independently prepared statements, provided by the third-party custodian, allow you to confirm on your own the transactions, holdings, market values, fees paid, and performance within the account.

A custodial brokerage account is important for three reasons: 1) it provides a guarantee – with insurance provided by the Securities Investor Protection Corporation (SIPC)2; 2) you can login to your account whenever you want, via the custodian, and see the status of your investments; 3) custodian banks act on behalf of many institutional investors, which saves you money.

Promote one firm’s product or any firm’s fund family. Some advisors are considered “independent” meaning they can and should have access to many firm’s products and services. A financial advisor who works for one of the big name brokerage firms may not have that flexibility. Instead, he or she may be required to or at least be "strongly encouraged" to use the firm’s mutual funds, investment strategies, or account types. In fact, he may be compensated additionally for doing so.

While an independent advisor has access to a diverse selection of money managers, insure the firm you are considering takes advantage of those opportunities and finds the strategies, funds, and products that are best for your goals and risk profile.

Receive a commission or fee from a third party. Pricing should be transparent. A typical investment advisory fee is approximately 1.0% per year on the first $1 million dollars of assets under management.3 That is the fee for just managing your money. There may be additional fees for other services as well. Also some advisors receive commissions or fees from third parties. Our belief is that this situation creates a conflict of interest. Consider if you want to be charged by the transaction, pay an advisor for using a particular firm’s product, or reward him for growing your investments.

The bottom line is: Do your homework. Check the references that are provided and perform a background check. Two places to begin are at the SEC and FINRA websites. The Department of Labor publishes a list of questions to ask potential advisors and US News offers a search feature to help in choosing and comparing an advisor. Don’t be complacent – continue to check these sites on a regular basis once you have hired an investment firm.


[1]2012 fi360-AdvisorOne Fiduciary Survey