How to Evaluate Your Financial Advisor

TIP CONTENT PROVIDED BY: BRIAN KELLY AT FINANCIAL FINESSE

There are a lot of advertisements and radio shows by financial advisory firms trying to convince you their company is the best and the most trustworthy. I recently saw one compare two advisors: theirs being a trustworthy, honest guy and the other a person who is only interested in charging you commissions and fees.

Ironically, the next day, I was solicited by the former company on LinkedIn and the job didn’t include anything about having the client’s best interest at heart – the only qualifications they were looking for were skills in asset gathering and sales.

I spent almost 18 years as a financial advisor and know a lot of planners that I would trust my mom’s financial future with. Financial planners offer a lot of value to their clients by providing expert advice and peace of mind. But how do you know how to determine the value of the services you are receiving? How do you know if your advisor is doing a good job?

Determining Value

Like any service you pay for, you need to know what the total cost is. Some advisors prefer to talk in percentages instead of dollars, say a 1% fee on the assets they are managing for you. This might be a fair rate – 1% doesn’t seem like a lot – but it may not include all the costs involved.

Ask about money management costs and incidental fees, which can bring the total to 2% or higher. If you are transferring a $500,000 IRA account to this advisor, the total cost (at 2%) is $10,000 per year. You’ll want to know this and what you receive in return to determine if the cost is worth the service.

Remember, You’re a Team

No one, I repeat no one, can or will have more interest in your financial success than YOU. Your advisor is just that, an advisor on your financial team. Your team can (and often should) include a tax consultant and attorney. You don’t have to know all the ins and outs of investing and tax laws, but you should know what and why you are planning and investing.

A good financial team also provides a system of checks and balances: as an advisor, I often had client’s tax preparers question their investments. This provided them confirmation they were invested properly or opened up discussions to explain the reasons for certain investments.

What to look for and how to find it 

Here are some traits of a good planner and questions you might ask at your next check-in:

Trust and Transparency

An honest and transparent planner will have no problem disclosing total costs information.

  • Question to ask: “Can you provide me with a total sum of fees, commissions, expenses and other costs I paid last year and what I can expect to pay this year?”
  • Red flag: If their answer is vague or they hesitate to answer, it could be a sign you’re with the wrong advisor.

No Conflicts of Interest

It is not uncommon for some advisors or insurance agents to have incentives for promoting and selling certain products. That does not mean these products are not appropriate, but you should know this and ask about alternatives if these products are suggested to you.

  • Questions to ask: “Do you have quotas? Do you have proprietary products you are required to sell or get paid more for selling? Do I own any of those? What are the alternatives?”
  • Red flag: If they are unwilling to explain alternatives or when they do, it seems that their product always comes out on top. It’s also a red flag if you only hear from your advisor toward the end of the month or to discuss a “new and exciting” product – that’s a strong indication they’re just trying to meet a quota rather than provide the best solution to you.

Competence (Not Just Credentials)

There are so many credentials an advisor can obtain today (CFP®, AAMS, ChFC, CFA, etc.). While these show the person has taken the time to study and pass the tests, they don’t necessarily show they are good at providing you with personalized, expert advice. You are hiring an advisor to fill the gap of knowledge you don’t have.

  • Question to ask: “What is your investment philosophy? How are my investments allocated according to this and my goals?”
  • Red flag: He/she is unable to explain their investment philosophy to you in terms you understand or doesn’t have one. Also, watch out for defensive or uncertain behavior when you question the ‘why’ behind certain things – that can be a sign he/she does not yet have adequate experience to deal with your situation.

Performance

Let’s face it, you are hiring an advisor because you expect them to get better results than you would on your own. One way an advisor can show value is by delivering “alpha” – the excess return of an investment relative to the return of a benchmark index. This outperformance is often a way to justify the fees being charged.

  • Question to ask: “How are WE going to measure the performance of my portfolio?”
  • Red flag: Any promises of consistent market outperformance – this is the goal, but no one can promise this. If your advisor ever uses the word “guarantee,” unless he or she is referring to an insurance product, that could be a sign of fraud. Finally, keep in mind it’s unfair to compare the performance of your account to anything other than the benchmark you and your advisor set. You actually SHOULD have different performance than someone who is significantly younger, older, or in a different life situation than you.

All advisors should be investing according to your personal risk tolerance, so if you tell your advisor you are uncomfortable with risk and yet you’re being pressured to allocate more toward riskier investments, that’s a red flag too. (As long as your performance expectations are also aligned with the level of risk you are willing to tolerate.)

Candor

When I was a brand new advisor, I didn’t have the confidence or experience to tell my clients what they really needed to hear. I was afraid they would leave me. Everyone has to hear bad news once in a while, whether it’s a poor investment choice, market correction or a warning you are spending too much money. A good advisor discloses underperformance and challenges you when you are getting off track in your planning.

  • Question to ask: “When I am going off track of my goals or my investments aren’t performing as planned, how are WE going to address it?”
  • Red flag: If your advisor does not return calls during turbulent markets or avoids discussing anything negative.

Services offered

Does your advisor offer other services besides money management? Holistic financial planning, which looks at all areas of your financial picture, (and not just investments) can be a way a good planner delivers value. On the other hand, if they are also performing a variety of disjointed services you don’t need, they may be too distracted to provide you with the service you expect.

  • Question to ask: “What services besides money management do you offer to your clients? How often will we be reviewing my plan?”
  • Red flag: If you’re looking for someone who will be incorporating your goals, tax situation and other circumstances into their services, but he/she only wants to discuss investing and market performance, you may not be working with a holistic planner. On the other hand, if you’re strictly looking for investment advice, but your advisor is repeatedly pushing insurance or other products, that can be another red flag.

Many people start off working with their advisor due to the recommendation of a friend or family member, but it’s not unusual to outgrow each other. Your advisor may be perfectly great at what they do, but not great for you. By asking these questions, then following up to make sure that the answers fit with what YOU need, you can help to ensure you’re getting the most value for the fees you’re paying.

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