Eight Hard Core Tips To Picking A Great Financial Advisor
July 27, 2015

Eight Hard Core Tips To Picking A Great Financial Advisor

Each week, millions of people build small backyard fires.  They pull out matches.  They take $10 bills out of their pockets.  Then they burn them. Every week.  Every month.  Every year.

They burn this money because they pick the wrong kind of financial advisor. Many people select an advisor based entirely on a friend’s referral. Others choose an advisor who “seems nice.”  Or they choose a financial advisor after a cold sales call.  There’s a better way to do it.  In fact, some of the best advisors in your town could be low-key experts right around the corner.  You just need to know what you’re looking for.

Not everyone needs a financial advisor.  But many people require professional help with financial planning, taxes, estate planning, and insurance advice.  Based on DALBAR’s Quantitative Analysis of Investor Behavior, most people also need guidance when investing. The average mutual fund investor averaged just 5 percent a year between 1983 and 2013.  By comparison, the S&P 500 averaged 9.2 percent.  Most investors did poorly because they paid high fees and they made silly mistakes. With a great financial advisor, you could avoid both errors.

Before hiring anyone, you need to ask questions.  Here are eight questions or tips to help you find the best financial advisor possible.

1. Do you invest only with low cost index funds or ETFs?

If the advisor says no, walk away. Some active funds do beat their benchmark indexes.  But nobody can consistently pick such funds ahead of time.  Looking for the funds that have done well in the past is a bad idea. Each year, S&P Dow Jones Indices publishes The Persistance Scorecard. Their data shows that actively managed funds with strong track records rarely keep winning. Low costs are better predictors of strong fund returns.  That’s why index funds or ETFs give the best odds of success.

2. How do you earn your money?

Don’t hire an advisor who gets paid commissions.  They could be choosing investments based on how well these products help them make their Maserati payments. David Melnyk, a Financial Planner with Florida-based Verus Wealth Management says that the fee-only model is better at aligning client interests with those of the advisor.  “Advisors typically charge their fees by a percentage of their clients’ assets, commonly 1 percent annually. When the portfolio’s value falls, the client pays a smaller advisory fee. This model gives advisors every incentive to grow portfolios while also reducing investment risk.”

3. Can experts predict where stocks are headed?

If an advisor answers yes to this question, move on.  Nobody knows whether stock markets will rise or fall this year or next. “If an advisor says they can forecast the market’s direction, that’s immoral,” says Paul Ruedi, of Ruedi Wealth Management Inc. “It puts any serious financial plan in jeopardy.” There’s no room for a foolish fortune teller in your portfolio’s future.

4. Can I see a model financial plan and portfolio?

There are two reasons you should ask for these things.  When an advisor explains something, you need to understand it.  If you don’t, it’s not your fault.  It’s the advisor’s problem.
What the advisor says about the sample portfolio is also important.  They shouldn’t try to wow you with past returns.  Instead, the advisor should stress the importance of asset allocation, diversification, and rebalancing. “A definitive allocation and rebalancing policy will help deal with the uncertain outcomes of the various asset classes,” says Jim Winkelmann, of Blue Ocean Portfolios, LLC. “Every major pension plan, endowment and high net worth investor has well developed and relatively simple allocation policies.”

5. What credentials do you have?

There are many financial advisory credentials. The Certified Financial Planner designation (CFP) is the most rigorous.  Jamie P. Menges, of PDS Planning, Inc. says, “the CFP® designation is important because it shows not only intellectual competency, subscription to an ethical paramount, and an integrated fiduciary standard, but it ensures they are working with an advisor committed to his or her profession in the most basic way.”

6. Be wary of top advisor lists

Each year, Barrons lists the year’s “Top 100 Financial Advisors.”  Such lists largely base rankings on assets under management. Whether a firm is listed or not may also depend on whether the firm paid a fee. Ryan O'Donnell says size shouldn’t matter. The co-founder of the California-based O’Donnell Group says, “Top advisors should be listed by the experience they deliver and the unique strategies they’re able to create for their clients. These lists should focus to some degree on the value these firms provide for their clients, not their size.” 

7. Is the advisor walking the walk?

Ask the advisor about their own financial journey. If an advisor tracks their personal spending, sets financial goals and lives within their means, they’ll proudly tell you about that if you ask them to.  If they don’t walk the walk, these questions might offend them.  Do you want a financial train wreck giving you advice?

8. Do a background check with regulators.

You can learn if a broker has a record at FINRA and you can check up on an RIA at the SEC.  Here’s a link that will guide you: Also contact your state securities regulator to see if the advisor has a sordid history with any of the regulatory organizations that he or she belongs to.

Choose an advisor who passes these eight tests.  But remember that the selection process works both ways. Some financial advisors won’t take clients with small accounts.  If you want a great advisor, but you don’t have enough money, build your assets with low cost index funds. You may learn that you don’t need an advisor.

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This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

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