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  • Writer's pictureDAVID SAVAGE, CFP®

3. How to Choose a Financial Advisor

Updated: Mar 7, 2018

This is the third in a series of posts about financial advisors.

The previous articles covered financial advisor licensing and how various types of advisors work. Now we’ll look at how to choose a financial advisor.

1. Make sure the advisor is licensed.

If the advisor works for a major company or Registered Investment Adviser, they will undoubtedly have the appropriate securities license. However, be aware that life insurance agents are typically limited in what securities they can sell: most can only sell mutual funds and variable annuities. Also, if the advisor is a CPA or is not affiliated with a securities firm, check to see if he/she has a license. When in doubt, just ask.

2. Check to see if the advisor’s firm takes custody of client assets.

If you invest money with a financial advisor, someone has to handle deposits and withdrawals, record keeping, etc. on your account. This is called “custody”. In the case of the national firms, they always do their own, and they are well regulated. But it is possible for Registered Investment Advisers (RIA’s) to do their own custody, which opens the possibility for fraud. Though it’s unusual for RIA’s to have custody of assets, if you’re considering an RIA, always ask them if they take custody. And if they do, cross them off your list and move on.

3. Require five years of experience.

The washout rate in the financial services industry is high, so if you work with someone who just got into the business, chances are they won’t be around for a long time. Also, there’s a lot of information an advisor has to know it order to be good, and it takes time to learn it. So, don’t waste your time with a rookie—let them train on someone else. Exception: someone working closely under a veteran advisor.

4. Look for a CERTIFIED FINANCIAL PLANNER™ professional.

You may just want to make some basic investments. In this case you may not need advice on other areas of your finances. Most people who invest want their investment advice coordinated with the rest of their finances though. The advisor most qualified to do this is on who holds the CERTIFIED FINANCIAL PLANNER™ designation.

5. Decide on commission-based, fee-based or fee-only.

In a previous post I discussed the various compensation models advisors use. Most advisors sell products on commission as well as advise on a “fee-based” model. While there are plenty of honest advisors who work this way, the “fee-only” model has grown in recent years. If you have enough assets to invest (typically $250,000 or more), seriously consider a “fee-only” advisor, who will act as a fiduciary, putting your interests first. (Note: to be “fee-only”, an advisor must be affiliated with a Registered Investment Advisor firm.)

6. Ask about the advisor’s investment philosophy.

The professional standard for portfolio design is called “asset allocation”, which simply means diversifying the assets among a number of different asset classes, such as bonds, stocks, real estate and foreign stocks. Make sure your advisor has a clearly articulated asset allocation discipline. Ask them what models they use, how they pick the investment vehicles in each asset category, what their strategy is for rebalancing, and what kind of reporting you can expect. Look for an advisor who sends out quarterly performance and asset allocation reports. Avoid advisors who claim to be able to time the market or have some kind of special market-beating strategy—it can’t be done.

7. Find out how the advisor does financial planning.

Financial planning is the process of gathering information, analyzing it and presenting recommendations. Frankly, good financial planning requires a lot of experience and hard work. Most “financial advisors” do little real financial planning because they get paid a lot more to manage investments.

There are several ways advisors go about financial planning. Some do virtually no analysis, simply giving you verbal recommendations. Others give you a questionnaire to fill out, which gets input into a computer program where a thick plan (often in a binder) is printed out. The advisor presents the plan, which has some boilerplate recommendations in it. The best advisors will use software to produce an analysis, and then will write up their own recommendations, using the analysis as the reference.

8. Look for an advisor who communicates well.

When you get to the point where you’re ready to interview a prospective advisor, pay careful attention to her communication style. Does she ask you a lot of questions and listen well? Or does she talk a lot about herself and try to impress you with lots of jargon? You want someone who understands you and treats you like a person.

Also, ask how he will keep in touch with you. How often will you receive reports? Will there be regular reviews? How often can you expect him to make changes to your portfolio? When should you call him versus calling his assistant?

If you follow these eight steps, you’ll be far more likely to have a positive experience with your financial advisor. Yes, this involves some work. But when you consider that your life savings and financial future are at stake, it will be well worth it.

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