Waiting too long to find the perfect financial advisor could cost you more than you think. But finding the right person to manage your money is not a simple matter. Your financial advisor doesn’t have to be your best friend but should have your best interests at heart. And just because the advisor has an amazing client base doesn’t mean that you’re going to be treated like a top client. Here are a few things to think about before you decide to outsource the management of your money.
1. Is the advisor acting as a fiduciary?
You would think someone who is working for you is working in your best interest, right? WRONG. Although the Department of Labor Fiduciary Rule (ensuring that a client’s interests be first and foremost) was not realized, it is now common for clients to ask and/or expect their advisor to abide by a fiduciary standard (acting in a position of trust and putting the client’s needs ahead of the advisor’s) vs. adhering to the “suitability” rule.
2. Does this person have the proper qualifications?
- Advisors don’t all have to be Ivy League, but they should have passed the right qualification exams: Financial Industry Regulatory Authority’s (“FINRA”) Series 7 (or Series 6—more here) and the Series 63 (or 65, 66—more here). Essentially, you want to ensure that the person is authorized to give financial advice. One way to check on licensing and registrations is to look up the person’s name in FINRA’s BrokerCheck and on the SEC’s Investment Advisor Public Disclosure website. (See also Otterwize’s Advisor Look-Up page.) These tools will also give you information about any disciplinary events involving the individual, such as arbitrations or complaints.
- Check the Form ADV (which the SEC defines as “the uniform form used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities”). This details their business activities and any disciplinary actions. You can find Part 1 of this form at the SEC’s Investment Advisor Public Disclosure website.
- Does the advisor have Certified Financial Planner (“CFP”) certification? It is good to have someone who keeps up with the latest sell-side reports, but you should also think about having someone well-versed in long-term planning. (This includes issues such as life insurance, retirement, and significant life events.) You can verify a person’s CFP status, as well as disciplinary record, by doing a name search at the CFP website (“Verify a CFP Professional”). (Accessible also at Otterwize’s Advisor Look-Up page.)
- Does the advisor have a clean record of compliance? If there’s a history of non-compliance, the chances are, well, . . . history has a way of repeating itself. Be diligent about looking into these issues. You should ask your potential advisor about any compliance events that you may see in any of the previously mentioned searchable databases (or other sources).
3. Is this person right for you?
Does the advisor communicate well with you? If your preliminary conversations lapse into industry jargon to convince or confuse you, then that person isn’t a good fit. If you need more time to understand something and the advisor won’t give you that time, then you should look elsewhere. The person who is most concerned about your financial future is you. If the advisor doesn’t understand your needs, then consider it like a bad date: get up, get out, and put yourself back in the (financial) dating pool.
Establishing effective communication between advisor and client is vital. This is not just about meetings by phone/teleconference/lunch.
- Does your advisor help you understand your portfolio and let you make guided and informed decisions?
- How often does the advisor touch base with you?
- Is your advisor accessible when you reach out with questions or issues?
- Does your advisor thoroughly address your concerns?
- How does the advisor communicate when things go south? (Emergencies happen both personally and in the financial markets.)
- Do you know what the plan is with your financial advisor if the S&P tanks?
Communication is a two-way street, but you need to make sure that the advisor’s communication style matches with your needs and expectations
Personal service and attention:
- Are you getting the personalized service and attention that you need or just a cookbook general package? You may pay dearly for a one-size-fits-all recipe.
- Up front, you should understand exactly what services will be provided to you. Make sure that these address your needs and expectations as well as are tailored to your specific situation.
- Do you have to dig for transparency? If there’s nothing to hide, then your advisor should be able to show you what you want to see (such as information about fees, expenses, experience, qualifications, gains, performance returns, etc.). Transparency should be obvious and freely given. If it isn’t, then run.
- Can you see a recent report issued to a client (likely a quarterly) and find out whether this is the type of report that you will be receiving?
- Ask for client references (this is like a job interview . . . for the advisor). A financial advisor’s willingness to provide references can tell you a lot about transparency with the person’s clients as well as with you.
4. Do you understand the fee structure?
The fee structure is often opaque (but shouldn’t be).
- Always make sure that your advisor is clearly enumerating any and all fees, expenses, or other forms of compensation.
- Are the fees negotiable?
- Ask how your advisor charges: Hourly? Flat Rate? AUM (Assets Under Management—a percentage based on the amount of assets that the advisor manages for you). A flat rate for advice often makes sense. Why? Managing $100K vs. $100M can cost the same in terms of time spent. Should a person pay more for the same advice? No. Clients are asking for fixed rates, and firms are listening.
5. Have you read the fine print?
DO.NOT.JUST.SIGN. Even though you may accept terms of service and other boilerplate legalese on various websites, entering into an agreement with a financial advisor is not the time for you to just sign your name without understanding what you are signing. There may be important clauses about mandatory arbitration, willingness to invest in speculative investments, as well as other issues. So before you give your John or Jane Hancock, always ask for an explanation of any language that you don’t understand.
6. Do you even need a human advisor?
For some people, a low-fee robo-advisor may be a suitable alternative to an advisor with a pulse. However, complex issues such as taxes, estate planning, retirement, and personalized financial plans cannot (yet) be fully addressed by an algorithm alone. Choosing how your finances are managed is a highly personal decision, and choosing the right person (if you go the human advisor route) is a crucial first step down that road.
Bottom Line: Know what type of advisor you are dealing with, who the person is, what the fee structure is, and, ultimately, whether the advisor is right for you.
7. It’s never too early to get started.
Advisors are always eager to bring in new clients (especially those with long-term earnings potential). Even though you may think that you are too young to need financial planning, you’re probably not. Retirement isn’t something to start planning for when the first gray hairs appear (assuming you still have hair). The sooner you start saving for your future, the easier your path will be. People who wait until their 40s or 50s to start putting aside money for retirement will face an uphill battle, because they will have lost the benefit of decades of compounding. It’s also not too early to save money for other life events, even if those topics—like buying a house or pre-stork college funding—aren’t even on your radar screen.