Investing Basics

Personal Financial Advisors: What to Look for Before Hiring

There is certainly no shortage of financial advisors eager to manage money for a fee. When seeking professional help, investors quickly discover that intellectual clutter is not limited only to the research and literature the industry circulates. Confusing, complicated choices face investors when they shop for personal financial advisors, as well. Financial advisors come prepared with a script designed to sell their services, but investors should try to see through the clutter and look for the following signs of a truly great financial professional.

Curiosity: The Telltale Sign of a Good Advisor

Good personal financial advisors are curious by nature. Advisors should be far more interested in hearing their client than discussing the dollars involved. Good financial advisors, ask questions—lots of questions. They know the answers they receive will determine what the client’s goals are and only then which investments to suggest. Before ever asking how much money a client has or where it is invested, a good financial advisor will ask:
  • Where their clients are in their lives, or where they think they are in their lives.
  • If any major events — such as a health problem, a divorce or an issue with a family member — altered their aspect on life or their plans for the future.
  • What are their financial goals?
  • What are their goals that don't involve money?
  • What do they like to do? What do they enjoy?

From there, the advisor can begin discussions about where money is located and where it might be better off or how to optimize a portfolio. More importantly, the best advisors use preliminary interviews as an opportunity to vet the client and make an honest decision about compatibility. If the investor does not meld with the advisor's philosophy or area of expertise, the advisor should be able to say so and refer the client to someone who is a better fit.

Don't Focus Too Much on Age and Fee Structure

Investors should resist making judgments based on age. Experience can, of course, be a benefit, but at the same time, advisors who have been doing the same thing for a long time might become stuck in a mindset that is no longer suited for a fast changing landscape.

Investors are also likely today to get hung up on the way their advisor is paid, and many are inherently skeptical of commission-based brokerage accounts. While investors should be diligent, they should also know that some products cannot be sold on a fee basis and must be sold on commission. When these products—which include Real Estate Investment Trusts, insurance, private equity funds, hedge funds and other alternative investments—are traded inside of a fee account, it is not only unethical but typically illegal or prohibited to charge both the fee and commission. Therefore, these products can only be traded inside a brokerage account.

A brokerage account is not necessarily a bad thing, nor is a fee-based account necessarily a good thing.

Portfolio Optimization

If you want the maximum amount of growth and income from your investment portfolio—and who wouldn’t?—you need someone who talks about optimization. A non-optimized portfolio will suffer from many problems.

Your non-optimized portfolio may:

  1. Be over diversified, meaning you have too many investments.
  2. Have multiple investments with the same stock and bonds in many of them, which is unnecessary over-diversification.
  3. Have five large cap or international funds–another, a case of over-diversification.
  4. Own only mutual funds or ETFs without any individual equities or bonds.
  5. Fail to include individual securities, meaning you miss out on the fastest growing assets.
  6. Own the same types of investments in a 401k and your other accounts.
  7. Own anything other than individual stocks in Roth IRAs, which is a misuse of that tax-free growth vehicle.

A great advisor will have optimization skill and a healthy fear of the stock market—but not a fear of owning a basket of 10-20 great individual company stocks or bonds. Why miss out on the best part of what markets have to offer?

A Good Advisor is Also a Mentor

The best advisors do more than manage money. They guide their clients through the complex web of professional advice they are likely to receive from multiple parties. Good advisors possess a natural curiosity that makes them inquisitive about who else their clients are engaging. They will educate their clients on the differences between the numerous professionals who are likely to be in their lives—including insurance experts, certified public accountants, estate planning attorneys-and steer them toward healthy financial relationships.

Great financial advisors don't just create financial plans and strategies. Their curiosity drives them to develop an intimate understanding of who their clients are and where they want to go. This familiarity is the basis of everything they do—only after they've worked to truly know the client can they create plans that suit the client's needs.

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