The good news for people who want to manage their own finance is that there is an extraordinary amount of information available online about a wide variety of investments. The bad news is that there is an extraordinary amount of information available online about a wide variety of investments. Even if you understand the basics of stocks, bonds, mutual funds, and money markets, it can be difficult to analyze all of the data about potential investments to find the best match for your personal investment goals. Unless you are willing to make portfolio management your full-time job, you might want to hire a financial advisor to help you with your investment choices and goals.
Advisors vs Brokers
One of the first decisions you’ll have to make is whether you want to work with an advisor or a broker. Although some people may use the terms interchangeably, they are two very different relationships and business models. An advisor is someone you hire to pick the right blend of stocks, bonds, and other investments to meet your personal investment goals. The relationship between an advisor and a client is considered to be a fiduciary relationship. That means the advisor is legally obligated to act in your best interest. Advisors usually charge a flat fee or a fixed percentage of the assets under management for their services. The nature of the relationship and the compensation structure reduce the conflict of interest that exists with brokers.
Brokers work for an investment firm and receive a commission when clients buy stocks, bonds, mutual funds, or other financial products. Since brokers get paid by the transaction, there is a strong incentive for them to encourage a high turnover rate of assets within a portfolio. A high turnover may not be in the best interest of the client, but the broker is not legally obligated to act in the client’s long-term best interests. Brokers have a transactional relationship rather than a fiduciary relationship with their clients. This doesn’t mean that you should not work with a stockbroker, but it does mean that you should be aware of the broker’s obligations to you as a client.
Three Things You Should Know About Your Financial Advisor
Before hiring a financial advisor, there are three general things that you want to know about him or her. First, you want to know about the advisor’s background. Find out about the advisor’s education, certifications, and specialty area. Second, you want to know about the advisor’s character. You need to determine if the person is trustworthy and will faithfully care for the assets you invest. Third, you want to know about the advisor’s business. Find out about the firm’s policies and legal responsibilities to clients. Here are some specific questions that you may want to ask the financial advisor.
Background Questions
What are your credentials?
Just as you wouldn’t want a surgeon who had not gone to medical school, you wouldn’t want a financial advisor who is not educated in personal finance. A financial advisor should have a college degree in finance or accounting. Many financial advisors also have graduate degree in business. Professional certifications also indicate the advisor’s knowledge and proficiency in the field. Ask if the advisor holds the CFP (Certified Financial Planner) or CFA (Certified Financial Analyst) designation.
Who do you usually work with and what is your specialty?
Some advisors focus on a niche client group. So, the advisor may mainly work with healthcare workers, teachers, or small business owners. An advisor who specializes in working with groups that have vastly different net worth and investment goals from you may not have as much experience with the type of planning and advice that you need.
Can you give me an example of where you helped to turn around a client’s financial situation?
The real worth of a financial advisor can be found in his or her ability to help a client out of a bad financial situation. It’s easy to look good when markets are strong and a client has done everything right. The best advisors, however, can help a client recover after a severe financial setback.
Could you provide the contact information of a client who would be willing to serve as a reference?
Other clients can be a great source of information. They can let you know what to expect when it comes to how the advisor operates and whether the advisor has helped them to reach their investment goals.
Character Questions
What makes you different from other financial advisors?
Asking this question gives the financial the opportunity to express what his or her strengths are relative to others in the market. Let the advisor convince you that she or he is right for the job. The answer can also give you some insight into what the advisor considers to be an important component of the job.
What is an area of weakness you need to work on, and how do you plan to get there?
This is a popular interview question even though it is unpopular with job applicants. It is difficult to be honest about your weaknesses when you know that your answer could potentially cost you the job. The answer, however, can help you to assess the advisor’s honesty and willingness to improve his or her job performance.
What was your biggest financial mistake and how did you recover?
A financial advisor who has never made a mistake is either being dishonest or is the luckiest person alive. People are not perfect, and life doesn’t always work out as planned. You can expect to make mistakes sometimes, and you want an advisor who understands what it takes to get your plan back on track.
What are your vision and core values?
You want to make sure that your financial advisor’s guiding principles and vision resonate with your own beliefs and feelings about how you want to invest and use your money. The advisor may have very strong beliefs about debt, risk, or life goals that don’t match your own. Although the advisor could do a great job helping you in spite of those differences, you need to decide if those differences in ideals are deal breakers for you.
Business Questions
Who is actually managing my investments?
Sometimes the person managing the firm is the person who manages your assets. Other times, that person delegates some of the accounts to an employee who probably doesn’t have the same credentials and experience. If you are hiring a person to advise you and manage your investments, you want to know whether that person is actually doing the job.
How are you compensated?
The difference in compensation structure is one of the major differences between advisors and brokers. When the advisor is compensated based on trades or sales, there is a strong incentive for the advisor to recommend high investment turnover. A flat fee compensation structure better aligns the goals of the client and the advisor.
Do you operate as a fiduciary?
The fiduciary relationship is another major difference between advisors and brokers. Advisors have a fiduciary relationship with their clients, which mean that they are legally obligated to act in the best interest of their client and to use skill and care. Brokers do not have this legal obligation to act in the best interest of the client.
How long have you worked with clients?
All financial advisors have to start somewhere, and a short career doesn’t mean that the advisor can’t do a good job managing your portfolio. More experienced financial advisors, however, have helped clients through a large number of life and investment situations. More experienced financial advisors have worked through market booms and busts. Advisors use this experience to help you maneuver through the twists and turns in your own life.
How, and how often will communicate with us?
Consider whether you are the type of person who prefers personal phone calls to email. Do you prefer updates every month or every quarter? Will you be able to contact the advisor and get a response when needed? Make sure that the advisor is available to communicate in the manner and frequency that you need.
What is your specialty?
Does the advisor work with a specific age group, net worth, or industry of client? If most of the clients are considerably different from you, the advisor may not have the experience in choosing the best investment options for someone in your situation. For example, an advisor who mainly works with high net worth clients may not be as sensitive to the financial needs of a struggling, young family.
Do you develop individualized financial plans or work with a set of pre-packed investment solutions?
There is a big difference between an advisor who listens to all of your individual financial needs and generates a plan for you and someone who puts your money into a generic financial plan. Look for an advisor who seeks out investment options that meet your risk tolerance and personal finance goals. Ask how the advisor chooses investment options and request a sample financial plan.
Do you guarantee investment returns?
An advisor who guarantees a specific investment return each year is either lying about that promise or the risk level of the portfolio. In addition, a financial advisor who promises a certain level of investment return each year may be in violation of SEC regulations.
*This content is developed from sources which are believed to provide accurate information. The information provided is not written for or intended to be financial, tax or legal advice and may not be relied on for purposes of avoiding any federal investment laws, tax penalties or any other laws. Individuals are encouraged to seek advice from their financial advisor, tax advisor or legal counsel. Individuals who wish to be involved in an estate planning process should work with a trained estate planning team, including a lawyer and tax counsel. Neither the information presented nor any opinion written or expressed constitutes a representation by PFA of a specific investment or the purchase or sale of any securities. Diversified portfolios and asset allocation do not ensure profit nor do they protect against loss in a declining market. PFA makes no representations to ensure profit or protect from loss. PFA developed this material to provide information on a topic that may be of interest to the reader.