How Can You Reduce Your Risk When You Select a Financial Advisor?
The tips in this article can help you select the best advisor and avoid selecting weaker advisors.
Let’s assume most financial advisors are personable communicators with exceptional relationship and sales skills. Would you believe these are not traits you are seeking when you select a financial advisor? In fact, these traits make this type of advisor relatively dangerous because you may select him or her for the wrong reasons.
You should select a second type of advisor who is intellectual, quantitative, and analytical. These are the traits that make this type an ideal advisor.
The first type of advisor, who uses sales skills to make a living, may not have the specialized expertise you need to achieve your financial goals. The second type of advisor does not have exceptional relationship and selling skills, but is very knowledgeable about planning and investing.
The Delegation Decision
You can delegate planning and investment work to a financial advisor. But you cannot delegate your advisor selection decision to anyone. You have sole responsibility for this critical decision.
The right selection decision can pay major financial dividends. That’s because the advisor you select will control or influence your financial decisions. These decisions will impact when you retire, how you live during retirement, and your financial security late in life when you need it the most.
Top 5 Categories of Questions
You don’t have to become a financial expert to select a financial advisor. You do need an objective process that will help you select the best financial advisor.
It starts with the Top 5 Categories of Questions that are described in this article:
- Is the advisor trustworthy?
- Is the advisor a real financial expert?
- What services does the advisor provide?
- What are the total expenses for the advisor’s services?
- How does the advisor service his clients?
Two Quick Tips
These quick tips will make your selection process easier and safer:
- Ask each advisor the same questions so you can compare their responses
- Require documentation for responses to key questions (written record)
It Starts with Trust
The quality of the advisor’s advice does not matter if you can’t trust the advisor. But that is a real dilemma. How do you know if an advisor is trustworthy in the interview process? You don’t, so you have to rely on information that is provided by the advisors and third parties (FINRA, SEC, State Commissioners):
- Is the advisor a financial fiduciary?
- Does the advisor have a clean compliance record?
- Does the advisor have active licenses?
- Has the advisor ever been sued, filed for bankruptcy, or had a foreclosure?
Real Financial Experts
Anyone can claim to be a financial expert. But the reality is it takes years of experience to become a real financial expert. How do you measure expertise when you are interviewing financial advisors?
Like trust, you have to ask the right questions:
- Do you have any college degrees?
- How many years of financial years of experience?
- Do you have any of the top certifications or designations?
- Are you a member of any of the top industry associations?
You Need Financial Advice & Services
If you are like most investors you are seeking a financial advisor who can provide financial planning and investment services. Some advisors also provide tax and legal advice and they may sell insurance products.
It is important to know which financial advice and services are provided by the advisor or by an affiliated professional (inside or outside the advisor’s firm):
- Planning: Financial, Retirement, College, Estate, Charitable
- Investment: Active, Passive, Funds, ETFs
- Insurance: Life, Annuity, Health, Disability, Long Term Care
- Tax: Advice, Preparation
- Legal: Trusts, Wills, Probate
Total Expenses Deducted from Your Accounts
One of the most important pieces of information is a description of all of the fees that will be deducted from your account. Keep in mind, there can be layers and layers of fees, commissions, and transaction charges that are deducted from your assets.
The advisor must disclose every penny that is deducted from your account(s) as follows:
- What is the dollar amount of the fee, commission or transaction charge?
- Who gets the money that is deducted from your account?
- What service do you receive for that amount of money?
- How frequently is the money deducted from your account?
You should know what services are provided by the advisor and/or an affiliated third party. For example, the advisor provides planning, but a third party manages the assets, or an affiliated CPA provides tax advice for a separate fee.
The top five wealth management services are as follows:
- Financial planning
- Investment management
- Risk management (insurance)
- Tax advice and preparation
- Legal advice (wills, trusts, probate, estate)