How To Evaluate and Choose A Financial Advisor

"I'm very satisfied with my advisor."

That’s what I frequently hear when I speak with potential clients regarding their investments. In reality, what I have found over the years of my experience advising new clients is that what they actually were saying was, "I don't know you that well. I trust my present advisor and really can't tell one advisor from another."

I have come to this conclusion because when I’d ask "What is your investment strategy and what defines its success?" rarely could anyone answer, which begs the question. . . why would people say they were satisfied? For many it seems a case of the old adage: “The devil you know is better than the devil you don't know.”

Financial advising is serious business, one in which your future, including things like college education for children, retirement, a vacation home—or simply feeling confident about your financial security--are at stake. You deserve a financial advisor that you can rely on for the best suitable advice and responsible stewardship over your financial well-being.

What to Expect From an Effective and Reliable Advisor

First and foremost is a clear and measurable definition of success. Your advisor should write an investment plan or policy statement tailored to your specific situation, needs, and goals. This statement should cover the following objectives and constraints: target returns, risk tolerance, time horizon, anticipated withdrawals or contributions, tax constraints, and regulatory issues, if any. Success varies by individual, so it is imperative that you have a definition for yourself. If an advisor cannot help you define and, equally important, regularly track the success of your portfolio toward your desired goals, you should be concerned.

Second, a good advisor communicates clearly and promptly. Many investment strategies can employ vocabulary, including jargon specific to the industry, that aren’t easily grasped by lay persons. Your advisor needs to explain his strategies and investment products carefully and patiently in easily understood language. This should also include a detailed description of the advisor’s personal philosophy that guides his or her approach. Many don’t have a formal approach to investment management; instead they merely sell a variety of investment or insurance products without any established methodology or approach.

In addition, you should feel that you are getting personal service that includes prompt responses to your questions or requests, including a face to face conversation at least once a year. You shouldn’t be forced merely to navigate a website where you put in a request for a call back by someone other than your advisor or are communicating via an internet chat line.

Third, ethical advisors make clear how much you are paying for their services. Many blogs will tell you to make sure you know how your advisor is compensated and will advocate a fee only approach over a commission-based approach or vice versa. Just as important as how much you’re paying or how it's being paid is what you're receiving for your money. For example, I believe that paying 2% for a solid plan with benchmarks and tracking is better than paying 1% for investment management without a solid plan. It is also better to pay 2% for a 9% return than to pay 1% for a 5% return.

An advisor's compensation is relevant mainly as it pertains to your goals and their achievement. Advisors should be willing to be completely transparent with regard to their compensation. After all, your relationship is based on mutual trust and openness, so transparency about compensation is paramount.

Consider the differences between Independent vs. Captive Advisors

Captive investment professionals:

• Know their captive products in and out because there are far fewer products to know about.
• Usually are with well-established companies--that also have a great deal of turnover.
• Usually have more procedures and suitability circuit breakers in place to ensure tha sales and trades are done correctly. However, this often results in clients being profiled and placed in a "basket" based on that profile.
• Have direct access to large amounts of proprietary education, research, and R&D. However, this research can be watered down to the lowest common denominator and less applicable to your specific situation.
• May only use certain financial products, often the case with a larger company.
• Have their work processed more slowly due to big corporation red tape.

Independent Investment professionals:

• May have access to more products.
• Have fewer limitations on financial vehicles.
• Deal with less red tape and less extra paperwork, freeing their time for your needs.
• Because independent advisors are not beholden to the opinions of large parent corporation, they have access to a large variety of 3rd party education, research, and R&D allowing them to customize research to your specific situation.
• Are with smaller companies, not around for 100 years like some captives, but are able to provide personalized and prompt service to customers.

Give it some thought. Are you satisfied with your current advisor?