How To Choose a Good Financial Advisor
The five must have criteria for an advisor, ranked in order of importance.
(Click the drop down arrow for more info on each topic.)
1. Is the advisor a fiduciary (for all parts of the relationship)? - Must be a yes for all parts, especially investment management. Avoid the "drive-through" brokers who are not required to be fiduciaries: Ameriprise, Edward Jones, Merrill Lynch, Fidelity, Raymond James, Charles Schwab, and the like.
Having a fiduciary is the most important aspect of a relationship with an advisor. Advisors who are not fiduciaries have perfected describing their situation and how they can still take just as good care of their clients - it's a lie.
Sadly, it is possible for an advisor to be a fiduciary for only certain parts of the relationship, such as financial planning, but not for the most important part, investing your money.
Brokers who work for Ameriprise Financial, Merrill Lynch, Fidelity, Charles Schwab, Edward Jones, Raymond James,, and many others are not required to be fiduciaries. Instead, they owe what is called a “duty of suitability” to their clients, which means they are only required to suggest investment products suitable for an investor but are not required to give advice or recommend investments in the investor’s best interest. Brokers are “registered representatives,” and that is not the same as being a Registered Investment Advisor - the terms are very similar, but they mean very different things. Brokers might call themselves “advisors,” but they act as agents for their brokerage firm and typically earn commissions.
2. Does the advisor earn any commissions? For anything? Or charge other fees? - Find one that doesn't earn commissions or charge extra fees.
Would someone prefer a salesperson or an advisor? Simply put, if an advisor can earn commissions in any way there is a barrier between the desired outcome of maximizing wealth. This is because the advisor is motivated to put clients in an inferior investment due to commission paid while shunning a better investment choice that doesn't have commission.
This is not a joke: most advisors that sell insurance have this exact quote in the documents that they must give a client: "These professionals therefore have incentive to recommend insurance products based on the compensation to be received, rather than on a client’s needs. The receipt of additional fees for insurance commissions is therefore a conflict of interest, and clients should be aware of this conflict when considering whether to engage or utilize these professionals to implement any insurance recommendations."
Find a fee-only advisor that charges only to manage investments and provides other services included as part of investment management.
"As an advisor working in the industry for over a decade I've come to realize everyone wants to know the important criteria for selecting an advisor, but there's not a simple resource that explains how. That's why I created this simple, one page website."
If you have any questions about choosing an advisor, don't hesitate to reach out to me personally at the contact info listed here.
3. What is the investment management experience of the advisor? - Institutional experience and the CFA designation is ideal.
There’s no federal law that defines who can and cannot say, “I am a financial advisor.” One does not have to pass a specific exam or take certain classes to claim the title. Just because someone says,“I am a financial advisor,” it means nothing about whether that person is qualified to choose investments and manage an investment portfolio.
If an advisor has experience in an institutional investment management role combined with the hard-to-get CFA designation, there's a good chance these qualifications can maximize the investment management part of the relationship.
Does the advisor make any changes to their client's investment portfolio depending upon the future economic outlook? Many advisors make no changes to an investment portfolio. Look for an advisor that makes tactical investment changes to improve the risk/reward of investments throughout the business cycle.
4. Does the advisor offer financial planning as part of investment management? - Find an advisor that offers planning included with investment management.
There are indeed investment advisors who include financial planning as part of investment management for no extra fee.
Find an advisor who does financial planning included with investment management.
Some advisors offer to do financial planning for what is typically a high fee every year.
5. How long is the advisor relationship going to last before retiring or changing jobs? - Find one that can likely work with you for the rest of your life!
Odds are there will be a new face every few years to an advisor relationship. Turnover in this industry is high.
Think about how it feels to have a changing face for the relationship every few years.
A new face has the potential for changing investment strategies and varying returns that come with someone new.
While finding an advisor that checks all the boxes above could be difficult, don't sell yourself short on finding the advisor that you can work with for the rest of your life!
If you're reading this and exploring for an advisor, I'd love the chance to connect and hear your needs and wants and help make sure you find the right advisor for your situation and, importantly, avoid advisors who will not maximize your wealth.
Give me a call or even a text - 330-256-4283