First of all, let me direct your attention to the CFP Board of Standards, for the best generic summary of what to look for in a financial planner. [click here to read it]
Second. These articles about what you should look for in a financial advisor often leave much to be desired. Almost every one of them is written by someone with a significant conflict of interest. I have one too: I want you to do business with me. Right? I’m obviously going to say you should look for traits I possess so that when you call up to interview me, I’ll check all the boxes. (by the way, if you want to contact me about your financial needs, my direct line is 406-206-7571). For the record, if in any business transaction, someone tries to explain that they are “the one” who is solely looking out for your best interest… run away.
On to the Article…
I don’t want to rewrite the “what to look for” article for the 20,000th time. I have noticed, however, that there are some very important things that are missing from all of these I’ve read as well as a few factual errors that frequently show up as misdirects. I’m going to highlight these here.
Ask them: “Tell me about your finances?”
I believe that every person giving advice should be following their advice. I think Financial Advisors should have their financial lives in order. One of the great things about the investment industry is also to its detriment: the “Financial Advice” Industry was built as one of opportunity for the tenacious (think of the Will Smith movie Pursuit of Happiness). It’s great that people can change their circumstances and many who find success selling investment products actually master their own finances, but many don’t. It’s fine to do business with someone who is great at the stock market, but doesn’t have a clue how to manage expenses. You should know who you’re signing on with and how they do or do not fit your needs.
I could go on into a dozen examples, but I’ll simply note that success in retirement has more to do with how you manage your spending and your risks than it does the amount of money you earn the hot stocks.
You don’t need to get a detailed balance sheet from a prospective advisor. What you need to know is how they are on the right track themselves. If you were to ask me, I would tell you how my wife, Christa, and I learned to balance a budget when we were living on $9.50/hr and avoid the use of short-term debt. I would talk about how we worked to pay down our non-mortgage debt, and how we eventually paid it off. I would talk about how we’re saving for retirement, how we have capital for our present needs, and how we strive to grow in our generosity each year.
We have an articulated plan. We follow it. We talk about it. Whomever you are interviewing to help you be successful in your financial life should be do the same. They may be in an entirely different point in their financial life than I am (for being 30 I’ve learned a lot, sometimes the hard way, but I expect to grow and get better at living for at least another 60 years), but they should be able to talk about their financial story past, present and future.
Do you serve a diverse group of clients?
One of the questions most of these articles suggest is this “describe your typical client.” The reason for the question is because you should know your advisor can handle a situation like yours. I think it’s a good question, but I always hated when it was asked. After a number of years contemplating the question, I realized why. I may or may not have clients with the exact situation you do. You may be one of two clients with the same exact financial details. An advisor could primarily serve retirees who have an median asset value of $750,000. The advisor may have a number of clients with less, and clients with a lot more. If you’re in the $2,500,000+ club, you’re a fraction of a percent of the US population, so odds are, most advisors only have a couple of you.
I think there is a better way to gauge the advisor’s relevance. The one question should really be three.
- Do you serve a financially diverse group of clientele?
This is a benchmark for a healthy business. It tells you that the advisor has clients who have the wisdom of old age but may be spending down their assets, clients who are growing into the best clients of “tomorrow,” and clients who are the at their peak right now. It speaks of success and sustainability.
Your situation won’t always be what it is now. An advisor who serves many different situations can help you adapt to varying circumstances and can help you plan more effectively. The obvious example: Can an advisor help you create a retirement plan having never worked with people who are in retirement? How does he or she know what to plan for?
(I also feel there is an ethical component to serving people who aren’t “wealthy,” and it bothers me that people make assumptions about very good advisors who choose to do so. This is a soapbox I’ll avoid…for now). - Do you have experience working with people in situations like mine? Tell me a tale (anonymously of course)?
You don’t need to be sneaky to ascertain if an advisor has relevant experience. Just ask them. They can give you some specific solutions that they have provided to others to demonstrate their worth. The only issue here is whether they will tell you truthfully, but trustworthiness is a different part of your evaluation (FINRA has a tool for background checks https://brokercheck.finra.org/). - What processes do you have in place to supplement the deficiencies in your experience?
Every advisor has gaps in knowledge and experience. We also all have gaps in our licensure. A good advisor is used to working closely with other professionals and takes supplementary education very seriously in order to meet all of your needs.
How are you living in a way that recognizes the world is bigger than yourself?
Because generosity is an important financial discipline, your financial planner should have eyes for something other than his/her pocketbook. I know many advisors that are wonderful people who are working hard to make their communities better, to bless their neighbors, and make a difference around the globe. I can write out a long list of advisors who are doing things like foster care, global relief work, volunteering with at risk youth, helping people with disabilities, and more. In my travels I’ve talked to hundreds of other advisors with different perspectives and lifestyles when it comes to service, but I can say that I have yet to meet one who is passionate about serving and giving to others that has given me a reason to question their professional character or the quality of their advice.
The “fee-only” Myth
This one is flagrant. Fee-only is different… not better.
It seems like it’s plastered on every blog, “make sure your work with an advisor who is only compensated on a fee basis because commissions make advisors do too much trading and buy the investments that pay them bigger commissions,”. It’s asinine and a bold-faced lie told by a growing number of people in the financial industry. Asset-based fees and commissions are different, but none is universally superior. If an advisor doesn’t grasp this, they simply lack experience and are buying into a widely circulated misconception. (sorry to my fee-only friends, my intent is not to insult.)
The truth is, the best interest of a client is best served by the most cost-effective solution balanced with the most ideal result. Sometimes this is best accomplished on a fee basis, but it is sometimes most effective to charge a commission. (Please note that I am presently a fee-only advisor. I just don’t like dishonesty in marketing.) As a fee-only advisor, I have conflicts of interest too, even if I’m a charging the same fee across all products. Those things don’t force me to do what’s in your best interest, it just changes the way our relationship looks.
Sure, I’ve seen a lot of circumstances in which someone came to me after another advisor had charged them a commission for an unsuitable product or engaged in what were perhaps abuses of the commission-based system. But what about the advisor that charges a recurring fee that produces a high profit margin and does nothing for the client? There are a lot of responses someone might toss back at me, for example, most fee-only advisors are only “Investment Advisors” under the Investment Advisors Act of 1940 (or their representatives) and are thereby fiduciaries. First off, Fiduciary status isn’t the result of fee structure. There are commission-based advisors who are fiduciaries. Second, “Fiduciary” is usually a legal term, and it’s always a technical one, and it doesn’t always mean the same thing. When you hear the term Fiduciary, you need to know what kind of fiduciary, and what standards they need to follow. There are ERISA (retirement plan) Fiduciaries, Fiduciaries under the Investment Advisors Act, and fiduciary standards for various credentials like the CFP®. The short answer is this: everyone in business has a conflict, and no fee structure can eliminate that.
Sorry about the rant. Here’s the question you should ask:
“how do you evaluate your recommendations and compensation that minimizes your conflicts of interest and is fair for the products/services you are providing?” If they dazzle you with a bunch of technical information to avoid the question, give you a non-answer such as “that’s just the price for access to the markets,” then ask the question again. As financial professionals we should all have a satisfactory response to this question.
The most important part of choosing a Financial Advisor is finding someone you trust, who has the ability to help you with your financial needs for the long term. If you have questions about the process of finding the right advisor for you, reach out to Co|Create for help.