What to Look for in Your Advisor or How to Choose a New One
I meet with dozens of prospective clients each year, and some hire me, and some don’t. Lots of things shock me when I meet with these people, and one of the things that shocks me the most is what they put up with. Unfortunately, people tolerate advisors who lack professionalism, courtesy, experience, and empathy. This month I’d like to take on what to look for in your advisor and if you are not happy where you are what to look for when you go looking for a new one.
Where Do You Look?
Most of our clients come from professional referrals, CPAs, attorneys, insurance agents, real estate professionals, and existing clients. Let’s start here. Where should I not look? Invitations in the mail to eat a steak dinner and hear a pitch about annuities or insurance product thinly veiled in a discussion about Social Security or the Secure Act or any other hot topic. These seminars are very effective when the markets are in flux. Recently a client called because she had attended a pitch about the Secure Act, and her take away from the presentation was that she was going to need to take her IRA funds out over the next 10 years. Was it the intention of the speaker to put fear in the audience members? I suspect the aim of the seminar was to get people to sit down with the advisor so that he might gain their business. Playing to client fears to get them to come into your office or worse use it as an opportunity to sell high commission products makes me angry and casts distrust of our entire industry.
What do you Look for When you Interview an Advisor?
When you have identified someone, you want to interview as your next advisor I’d suggest looking for three things:
Experience – How long has he or she worked in the industry, and where? Why is this important? Our business is complicated and requires years to be good at it. Look for at least seven years’ experience and look for gaps in employment. An advisor should ideally have been through a few market cycles and have the expertise to guide you from that experience. Was the advisor’s experience from a wirehouse like a Merrill Lynch or a Morgan Stanley, or was it from an insurance company? While neither is a disqualifier, we all had to start somewhere; it can give you insight into their biases. Work at larger companies often indicates better training and education, though not always. They could have been mentored at an independent advisory firm by a highly qualified professional. Ask questions. Where did she or he start? Why? What kind of training did she or he receive?
Education and Certifications – The best in our industry have at least one designation, and some have several.
Why is this important? Because it shows a commitment to learning and education, of excellence in the profession. What designations are important to see?
- CFP or Certified Financial Planner is the gold standard in the industry because of the education, rigorous final exam, and commitment to the fiduciary standard as well as ethical minimum standards. For more information, check out www. cfp.net.
- ChFC or Chartered Financial Consultant has the same curriculum as the CFP but lacks the final exam. While ChFCs are expected to uphold the fiduciary standard and have similar educational and ethical standards the CFP, the ChFC community lacks the support the CFP has with the Financial Planning Association. More about the ChFC is available at www.theamericancollege.edu
- CFA or Chartered Financial Analyst is a very rigorous program typically sought by investment managers but not necessarily those who meet with clients for financial planning. For more information check out https://www.cfainstitute.org
There are lots of certification programs that can make an advisor better, and many financial professionals are also CPAs and attorneys.
How Are They Paid?
One of the most important questions is how the advisor gets paid. Are they paid by commission, fee, or a combination of both? Advisors paid by commission are my least favorite and the ones who are the source of my anger at my chosen profession. When I meet with potential new clients, I often see financial products that I know have huge commissions and lock up the client for years with surrender charges and high ongoing fees. In my view, this is some of the most toxic financial sewage sold to unsuspecting clients. Often advisors new to the business sell these types of products because the commissions are high, and they recently hired with little or no salary.
To survive, they have to sell the products with the highest commissions. Some advisors never outgrow this nasty and harmful habit.
My preference is for fee-only advisors as you usually know what you get and what you are paying for. Fee for service is generally charged at the beginning of the engagement for financial planning services. That fee could also be quarterly or monthly and shows up on your statement.
In my view, this is the cleanest way to operate. What you see is what you get, and if you are not getting what you hired them for, they are easy to fire without surrender charges or other exit fees.
There are those out there who are a hybrid of the two and may call themselves fee-based. While I understand the decision, this grey area may allow these advisers to sell high commission-based products while appearing as a fee-based advisor. Often, the practice may be forced upon them by their firm. This situation is a nuance that there simply isn’t enough time for in this column. If you’d like me to go deeper, let me know. I am happy to talk with you about it.
I said there were only three things to look for, but I think I need to talk about one more thing, and that is – do you like them and are you going to enjoy meeting with them. There are a lot of high IQ people in finance, but maybe not enough high EQ people. EQ or emotional intelligence measures how likely your advisor will be able to relate to you, connect with you, and empathize with you. EQ may mean the difference in whether you have a positive experience with your advisor or not and, consequently, whether you implement their recommendations and meet your goals. How do you know if the advisor you are interviewing is high EQ? Recommendations from family and friends, as well as professional advisors, will help. While it may help you narrow the search, it will still require you to interview them.
Go with your gut here and notice how much they talk vs. let you talk. In the first interview, you should be doing most of the talking. No one wants to go on a date with someone who only talks about themselves, and you don’t want to work with an advisor whose attention is on his or herself instead of you.
One of the best resources for screening advisors is Broker check; it allows you to see the advisor’s work history, education, and certifications as well as any complaints they may have against them. FINRA’s Broker check can be found here https://brokercheck.finra.org/
Keep in mind, if your advisor is fee-only you’ll need to look them up on the SEC website which is here https://adviserinfo.sec.gov/
I continue to like these resources for those who want to learn more. I’ve added a few to the top of the list and will talk about them in upcoming newsletters.
Tapping into Wealth, Margaret Lynch
Discover Your Purpose, Rhys Thomas
Thinking Fast and Slow, Daniel Kahneman
You are a Badass at Making Money, Jen Sincero
I Will Teach You to be Rich, Ramit Sethi
The Science of Getting Rich, Wallace Wattles
Your Money or Your Life, Vicki Robin
The links provided are for educational purposes only. The links do not represent an endorsement by either Hicok Financial Solutions or ProCore Advisors, LLC.