Who is the ideal financial advisor?
They understand your ideal future lifestyle and wealth goals.
They understand the risks you currently face.
They have a large collection of tactics to help you work towards your wealth goals.
Most importantly: they use their expertise to advise you on the best path to achieve your goals.
How do you find this ideal financial advisor?
Most people will find advisors in two ways:
By researching on their own
By a referral from a friend, family member, a colleague, other professional e.g., personal physician/attorney or even their employer
The question is: how do you know if your advisor is the ideal financial advisor?
TIP #1: Check the financial institution with which the advisor is affiliated.
Your first instinct may be to go with a large, well known institution aka wire-houses e.g., Merrill, Morgan Stanley, Wells etc.
This is understandable.
However, they may not have the availability of all products necessary, at the right cost, to meet your needs & goals.
In addition, larger companies may push highly profitable proprietary products and platforms, limiting their advisors to research and bring products from outside of company’s realm.
Therefore, choose an advisor from a firm where you will avoid conflict of interest.
Most wire-houses described above, are likely to have conflict of interest.
TIP #2: Check the advisor’s FINRA (Financial Industry Regulatory Authority, Inc.) record at https://brokercheck.finra.org/
You can check for:
Any derogatory decision made against the advisor in the past
His or her tenure at the current position
Some advisors will change their BD (broker dealer) every few years to get a big signing bonus while dragging the clients with them for no reason.
An advisor who has repeatedly changed firms, or who has been the subject of disciplinary proceedings, may not be a good choice.
TIP #3: Check and ensure the advisor adheres to two known industry standards.
Standard 1 is the “Fiduciary Standard.”
This requires the advisor to act in your best interest and to disclose any potential conflicts of interest.
Standard 2 is the “Suitability Standard.”
This requires an advisor to make suitable recommendations to fit a client’s needs and goals, but it does NOT require disclosing conflicts of interest.
A fiduciary standard might be the better choice. You can choose one, the other OR both depending upon other factors and needs. However, in certain circumstances where your advisor follows the suitability standard, be sure to ask them to justify and clearly explain why the product they recommend best fit your needs.
TIP #4: Check the advisor’s credentials and industry experience.
In most cases, hands-on industry experience relative to your needs is the most important factor.
However, good credentials and training, backed up by supporting financial planning software tools and a broad spectrum of products, definitely enhances an advisor’s ability to find solutions for the client.
TIP #5: Make sure the financial professional or planner communicates effectively with you.
Once you agree together on risk and strategy constraints, you can choose whether or not to delegate day-to-day purchase and sale decisions to that adviser (or firm) by giving them “discretionary” authority.
An advisor should clearly articulate his/her methodology to solve problems.
Stay away if an advisor can’t explain their strategy in simple terms, aka Black Box Attitude.
TIP #6: Determine how does the advisor gets paid.
There are three common ways an advisor can get paid:
Fee-only advisors will only bring to the table products that they can manage for a flat fee.
These advisors may also charge an upfront fee to put together a financial plan.
They are also limited to some of the risk managing products that a client might need, e.g., annuities, life insurance etc.
FINRA has come down very hard on certain advisors for excessive trading (aka churning accounts) to generate commissions to favor the advisor and not necessary the client.
This is where an advisor has the ability to suggest many different paths to success in order to fulfill the client’s needs and goals by using an extensive array of products.
Of course, a good fee-based advisor will be able to communicate the benefits and terms of each product and possible pathway.
TIP #7: Determine advisory fee and what it includes.
Discussing compensation with the advisor can be uncomfortable for some.
It can feel like pulling teeth, but if not done at the onset of the relationship, future disputes will likely happen.
Accepting that good advisors with sound financial advice never come for free, clients should dig deep in understanding what is covered under their fee.
Most hybrid advisors will either manage an account by either:
Charging a flat fee without any trading cost to the clients and earning commissions OR
Only earning commissions for some insurance-based products.
Ask the advisor if they have a graded fee schedule.
More assets under management means (AUM) generally mean lower fees.
TIP #8: Be aware of over-promise and under-deliver.
If an advisor claims to be the greatest stock picker in the history, can beat the market consistently and can predict future stock market moves, BE SKEPTICAL.
It could mean the advisor is not disclosing risks that may not coincide with your agreed risk tolerance and time horizon.
A seasoned advisor will explain the risk associated in a portfolio to make sure it parallels your profile.
They should go through the historical (without guaranteeing similar returns).
They should manage your expectations by practicing dynamic (not static) where they make investment changes according to market trends with your consent and understanding over time.
TIP #9: Demand transparency by gaining access to tools which helps you monitor your accounts.
Most financial institutions and broker dealers give advisors a tool to pass to their clients for self-monitoring of their accounts and underlying investments.
These tools also enable clients to pull monthly/quarterly/year-end statements as well as tax related statements and documents at their leisure.
Ask the advisor to have an access to such tools.
Some institutions also allow clients to assign an interested party (e.g., a CPA or an attorney) to receive duplicate copies of the above, which enhances client’s ability to forward these documents to other professionals in a timely manner and without extra effort.
Another useful tool is self-planning.
This empowers and encourages a client to get involved in and monitoring their whole financial health.
This allows a client to link all financials, including income and/or payments, and gives total picture of the current situation.
TIP #10: After all your due diligence, check your GUT feeling.
Answer the following questions:
Do you believe that the advisor has a philosophy that is in agreement with yours?
Do they have the steady pair of hands that makes you feel comfortable?
Do they involve and interact with your spouse or partner vs ignoring them?
Does the advisor give special attention to risk management or are they are only interested in investing for you?
Stay involved and meet with advisor regularly. It could be a meeting once every quarter. Over time, as the trust develops, you could meet once annually.
Be prepared for the meeting and let the advisor know of any changes to your circumstances, be it financial or otherwise.
[BONUS] 8 Questions to ask when referred an advisor
If someone refers an advisor to you, ask them the following questions:
Are you happy with the service you receive from your adviser?
What exactly is that advisor best at?
What made you select them over competitors?
Do they respond in a timely manner and communicate in a way that makes you feel comfortable?
Does working with them help you sleep better at night?
Do they charge a reasonable fee with graded schedule or are they commission only?
Are they a captive or an independent advisor?
Do you feel comfortable that their knowledge, education, licensing and certifications, and relevant experience (as well as their commitment to stay informed) will satisfy your current and ongoing requirements?
If you like further assistance in choosing the right financial advisor, click this link to schedule a free phone call with me: https://calendly.com/raymond-singh/30min.
Raymond Singh, AWMA, RFC
Innovative Retirement Solutions, PLLC
10565 N. 114th St., #102
Scottsdale, AZ 85259
Office Phone: (480)443-3303
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.