Choosing a financial advisor is arguably THE most important decision you will make regarding your personal finances. So how do you choose?
Jason Zweig of the Wall Street Journal wrote a great article The 19 Questions to Ask Your Financial Adviser, which appeared this weekend. While I agree with about 95% of what Jason wrote, there are some answers to his questions I don’t necessarily agree with.
For instance, if you are referred to a financial advisor and that person is paid a referral fee for referring you, I don’t feel like that should automatically disqualify you from using the advisor, Question #9. As long as that is disclosed to you and you are comfortable with the arrangement, you should feel confident moving forward with that advisor.
Also, Question #18, asks what estimate will be used for future returns. Jason feels 3-4% is fair. I would argue that it depends on the assumed asset allocation. It could be less, it could be slightly higher. The important point is that your advisor should be using multiple what-ifs to see how you would fare in many different investment environments. With that being said, it was a very helpful article and serves as a great starting point when interviewing/reviewing your relationship with an advisor.
Here are four of the most important factors I believe you should look for when hiring a financial advisor; many coincide with Jason’s 19 questions:
- The two most important designations in finance are the CFP and CFA, both are difficult to earn and one, the other, or both should be required when hiring an advisor.
- Your advisor should absolutely be a fiduciary and be willing to sign a contract stating as much. This doesn’t mean you’ll be 100% protected. Bernie Madoff was in fact a fiduciary. However, there is no reason at this point that an advisor wouldn’t sign off as a fiduciary.
- Any conflicts of interest should be disclosed up front and be written down. This would even include things like dinners and sporting tickets your advisor might receive from investment companies whose products they use.
- Finally, any and all fees and compensation arrangements need to be disclosed upfront and discussed and put in writing. You should know exactly what you are paying your advisor and how else they may be getting compensated. Here, I would keep an eye out for asset management fees and how they are calculated. For instance, if the fee is 1%, is it 1% for the total or is it 1.5% on the first $500,000 and 1% on the second $500,000.
The bottom line is that you need to look out for yourself when choosing your advisor. There are some amazing people out there and some really, really bad ones. Just like there are good and bad doctors, lawyers, dentists, and mechanics. Do your due diligence and if they aren’t meeting your expectations move on quickly.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.