After working in the financial services industry for 20 years, I've learned that finding a good and trustworthy financial advisor that's right for you is harder than choosing the right person to marry and potentially more costly when you get it wrong. Just ask Bernie Madoff's clients.
So how do you go about choosing the person with whom you are going to place your finances and future economic security? Obviously there are books on this subject and I intend to quote from one, but for the purposes of this article I intend to streamline the process.
So here are the top ten things to consider when choosing a financial advisor.
It's like dating
First, think of this process as like dating, which means you will want to have more than one meeting before making any commitments. You do this because it's going to take time to learn everything you're going to need to learn before settling on the right advisor. And like with dating, the first thing you're going to want to do is like your financial advisor.
When we say "like," we mean, like the way he or she thinks, likes their values, their personality, the way they relate to you and their willingness to share information. This process should involve meeting more than just one potential advisor. Even if you like the first one best, it's helpful to meet others even for the sake of comparison.
Are they legit?
Second, now that you like them, make sure they're legitimate. His clients liked Bernie Madoff too. So liking someone isn't enough when it comes to financial advisors. Do a background check and talk to others who have worked with them.
Financial guru Chuck Jaffe warns against being swayed just because you see someone quoted in the media or on television. It doesn't mean anything other than they were available to do the interview. Background checks won't provide a guarantee either but you'll want to check to make sure there are no complaints or outstanding judgments.
BrokerCheck is a free tool to help you research the professional backgrounds of current and former FINRA-registered financial advisors. It should be your first resource when choosing whether to do business or continue to do business with a particular financial advisor or firm.
Compensation
Don't get hung up on how financial advisors are compensated. That's not to say it's not important to know how the advisor makes his or her money, but like with most things in life, we get what we pay for. In his book "Getting Started in Finding a Financial Advisor," Chuck Jaffe writes "cheap advice is, well, cheaper, but not necessarily better, appropriate, or the elusive 'right for you.'"
If
you save a few hundred dollars in fees to the adviser, but wind up
with someone who is incompetent and whose decisions cost you
thousands of dollars down the line, you did not get a bargain.
Likewise, if you go for more expensive counsel but can't get the
quality of service you desire, you'll be unhappy no matter how
respected the adviser and how sound his advice."
So consider what you're getting for your money compared to the returns or growth in your portfolio and then decide if your advisor is worth what you're paying for.
Degrees
A wall full of degrees and certificates do not mean the advisor is right for you or even a good advisor. All it means is that he or she graduated from college and took courses to pass certain licensing exams.
The question Jaffe recommends asking yourself is "Does this adviser have the expertise I need? The right credentials help, but you're going to have to find out if he or she has your best interest at heart and will be there when you need them most.
During the recent financial crisis, a large number of investors dumped their financial advisors because they couldn't seem to get them on the phone. You're going to want your advisor to be there in bad times as well as good.
Performance
Once you've had a few dates or meetings with your potential advisor and have given them a chance to prove their worth, don't just focus on short-term performance in terms of returns, which advisors have little control over.
According to Jaffe, you want someone who will help you develop strategies that enable you to reach your long-term goals. In most cases, achieving that requires participating in stock market gains during good times and not losing your shirt when the market sours. "What most people want from their adviser, says Jaffe, "is long-term performance that allows them to ride the market rollercoaster and get off at the end with a big smile."
You're in charge
Now that you're ready to commit to this relationship, keep in mind that the financial advisor is working for you. He or she is investing your money but you are still in control of it. One thing you shouldn't do is hand over control of your finances to your advisor. You are so make sure you understand everything your advisor is doing and why. Feel free to question things. If a particular investment doesn't feel right, say so.
Rule number one is never invest in something you don't understand so if your advisor can't explain it to you then they probably don't understand it either. If they react negatively if you don't immediately take their advice, Jaffe recommends take that as a warning sign and keep looking.
Avoid friends, family
Last but not least, avoid using friends or relatives. It could ruin your friendship or make the next Thanksgiving dinner very uncomfortable. You need to remain objective and if the advice a friend or family member is wrong, you may be reluctant to speak up.
To this Jaffe adds that when we do business with a friend or family member we let our guard down. Rogue advisers have no qualms about ripping off friends and relations. He says there is more than money at stake when you do business with friends and family. "Factor the extra value of your friendship into your decision making; you'll lose a lot more than just money if a financial relationship with a friend or relative goes bad.
