How to Choose a Financial Advisor

While most investors have the ability and common sense to create their own investment plan, many of us simply have better things to do with our time than paying significant attention to our investment portfolio.  It does take time and effort.  Plus, really smart people know their limitations.

As I’ve touched on before, the biggest risk we all take is letting our emotions drive our decisions.  Fear and greed can lead to anxiety that causes us to make choices we will regret. For many of us it probably makes good sense to get some outside expert advice to help manage these emotions.  Look at the number of people who know how to exercise, but still hire a personal trainer at the gym to motivate and push them.

In fact, over 1 in 3 Americans work with a financial planner.  A good financial advisor can help you through your decision-making process regarding your risk tolerance and investment time horizon. They should help you set and attain your financial goals such as retirement planning, college tuition funding, and the overall personal/family budgeting process.

Picking the correct investment options should be secondary in this relationship.  It does come into play but determining and reaching your goals should be priority number one.

A good advisor should be independent and earn their money on a fixed hourly fee basis, or as a small percentage (usually around 1%) of your assets under their management. It is just not economical to use an advisor who generates income and commissions from trading transactions within your portfolio. Your incentives must be aligned to create the correct balance between good decision-making and long-term portfolio management.

So how do you determine how to choose a financial advisor?  To help you through the process I have created a list of questions that you can ask to determine whether a prospective financial advisor is right for you. This is a list that any good advisor should be willing to answer to get your business.

The Basics

• How long have you been a financial advisor?
• What is your education background, and do you have any financial advisor certifications (CFP, CFA, etc.)?
• How do you establish goals for your client’s portfolios?
• How do you help clients determine risk profiles, time horizon, and asset allocation?
• What is your investment approach to help keep emotions out of the decision-making process?
• How do you determine, and what are your total fees for management (including referral and other fees)?

This general background information will help you get a better sense of their experience and knowledge level to determine if they are suitable to help you meet your goals.  Getting to the bottom of these areas will give you a sense of how they will aid you in determining your long-term investment plan.

More In Depth

• How do you manage your own investments?
• What is the biggest mistake in your investment career and what did you learn from it?
• Do you build your portfolios with individual stocks and bonds, or mutual funds and ETFs?
• What tools do you use to determine when is the best time to buy, sell, or hold investments?
• How will you benchmark my portfolio’s performance?
• What is your asset allocation rebalancing policy (monthly, quarterly, annually)?
• What is the historical performance of client portfolios with risk profiles similar to mine?
• How did your portfolios perform during the difficult periods of the past 10 to 15 years (technology bubble of 2000, debt/housing bubble of 2007 & 2008, market recovery from the bottom in 2009)?

You need to make sure that their investment philosophy matches their actions with their own portfolio. Also, every investor makes mistakes in the markets. It’s just a matter of owning up and learning from them to minimize the damage going forward.  These general portfolio construction questions will give you a better sense of how they will implement their ideas.  Although the past in not a predictor of future success with your investment results, going through different scenarios can give you a good idea of how you would have reacted or felt with the historical performance of your plan (both gains and losses).

Follow Through

• Can you provide references of current clients?
• How often will we meet in the future to update goals and check my progress?
• How often will I receive periodic updates on the performance of the portfolio?
• What are some important things you would like me to understand that I have not yet asked?

This will not be a one-time meeting but an ongoing relationship. Talking to current clients will help you figure out if the advisor follows through with their plan.  Trust will be key.  And setting goals for ongoing check-ups will give you expectations for the future.  Long-term goals will definitely change as your circumstances change so you need to update them on a periodic basis.

It’s a long list of questions but this will (hopefully) be a long-term relationship that you develop so you want to make sure you get all of your questions answered up front. We have all spent countless hours researching a flat screen TV or new car purchase. Choosing the right financial advisor is that much more important in the long-run so do your homework.

If you are interested in finding a financial advisor take a look at the NAPFA (National Association of Personal Financial Advisors) website that you can use to search for a fee only financial advisor in your area.  Another resource is the FPA (Financial Planning Association) website which gives you multiple choices that can be based on your circumstances. You can choose by fee type (hourly, fee only, etc.) or investment goals (retirement, buying a home, college, etc.).  Another option is to talk to family members or friends who have financial advisors that they trust.

Take your time and talk to multiple advisors before making a decision.  Make sure that you are confident that they will have your best interests in mind and that you are comfortable with them not only as an investor and planner but as a person.