I have worked in the financial services industry for over 30 years. What I have learned is that it is very difficult for the typical consumer to distinguish between a good financial advisor and a bad one. A bad financial advisor could cost you hundreds of thousands of dollars over the course of your relationship. This is attributable to the advisor’s ignorance or greed or a combination of both. Unfortunately, to the untrained eye we all look and sound the same. You need to know the right questions to ask to identify the advisor’s motivation and determine if they are a good match for you. After all of these years, with all that I know, if I wanted to find a financial advisor, this is what I would look for:
Conflicts of interest- Does the planner work for a large Wall Street firm or bank? If so, there is inherently a conflict of interest. Wall Street firms and banks have an allegiance to make money for their shareholders. This may not be in alignment with your interests as a planning client. For example, if they manufacture financial products and provide financial services, naturally, their bias will be to use their own money managers and services as opposed to another firm that may better suit your needs. Many of these firms will also inventory assets and sell them at an undisclosed profit to clients. Of course, this does not mean that every planner that works for one of these organizations is dishonest; it just means that they operate in an environment that may not be best for you.
Holistic planning- It is our belief that it is better for the client to have a holistic planner that understands investment, income, estate, insurance and asset protection issues. Many planners claim to be holistic but are really only interested in investment management because that is where they make the most money. A way to ferret out whether a planner is truly holistic is to pay attention to the questions they ask and documents they request. A true holistic planner will want to look at all of your trust documents, tax returns, investment statements, Social Security statements, and your life, disability and long term care policies. They will also look at your liabilities in terms of what you owe and how your assets are titled. They will deal with issues such as:
- How to minimize income taxes now and in the future
- Are you on course to retire?
- What is the probability you will run out of money?
- How to maximize your Social Security benefit
- The best way to pass assets on during lifetime and death to accomplish your objectives
- The best way to pay for college
- How to best protect your assets from lawsuits, divorce and medical expenses
- What is the appropriate risk level to take to accomplish your goals?
- How to structure your investments to meet your goals
If the advisor is spending most of their efforts regarding your investments and only giving lip service to the other issues, you know you don’t have a holistic planner. Another tip off, does the advisor create a customized plan to accomplish your objectives? This will take several meetings and work behind the scenes. In my opinion, a good holistic planner will charge you a fee to accomplish this. If they do not, that is a red flag. They will need to sell you something to make their money. Many of the issues outlined above do not generate revenue for the advisor but are critical to the client accomplishing their goals.
Custody of assets– Another area I would look at is what entities support the advisor in serving you. For example, who is the custodian of your assets? If you go with an independent financial planner, you want to make sure that the assets are held with an independent firm unassociated with the advisor. That way you know where your money is and that statements are not being fabricated. Most advisors do planning under an entity referred to as a Registered Investment Advisor. When you hire an advisor, they are required to give you a disclosure document referred to as an ADV Part II. Most people don’t take the time to read this important document. I would suggest you read it and pay particular attention to the section entitle disciplinary actions. This will give you a feel for how the firm has treated past clients and if there are significant conflicts of interests in dealing with this firm.
Values– Lastly, I think it is important to understand the values of the advisor and how that relates to managing your money. For example, I hold a biblical world view. I believe there is much wisdom in the Bible as it relates to money. Look at debt: the Bible is clear that it is preferable to be debt-free versus in debt. Many advisors would suggest mortgaging your home and taking the proceeds and investing it in “safe” investments that will earn more than the interest rate on the mortgage. We would not suggest this and think it is poor advice and very dangerous. It presumes upon the future and all investments have risk. Another issue is, does the advisor put his needs ahead of the clients? This is tough to decipher and may only be learned after many years of dealing with the advisor. One tip is if the advisor is fee-based versus commission-based. In my opinion, the client is better served by a fee-based advisor.
To sum it all up, I would look to do business with a holistic, fee-based independent financial planner that is able to deal with the full spectrum of planning ideas and products. I would make sure we share similar values so that I feel confident in the advice they give me. I would initially engage this advisor to do a written plan for me to make sure we are on the same page, to take the time to get to know each other, and to gain trust before I put my financial life in their hands.
IMPORTANT NOTE: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at firstname.lastname@example.org.