FAQs: How To Select a financial Adviser
Any important buying decision you make requires investigation. If you don’t know what questions to ask you’re putting yourself at a disadvantage. Most people spend more time planning a vacation than they do planning their financial future – including with whom to trust for reliable, competent advice.
The majority of “financial advisers” are insurance, bank, or brokerage reps (aka brokers) who are paid to sell you proprietary or affiliate products. Nothing inherently wrong in this; however, you must know this before you sign an agreement. Why? You want to know what motives are driving the advice. Conflicted advice is the root cause of fraud, and legally siphons money away from unsuspecting consumers.
Why should you care? Because it’s your money, right? Not all financial advisers are the same. There are vast differences in service offerings, fees structures, and business models. This summary of FAQs is a good guide to help you sort through the confusing array of titles, business models, and service offerings, so you can evaluate your needs, all-in costs, and what types of questions you need to ask to gauge the value of services.
Q: What is a true adviser’s proper role(s)?
A: Simply put, an adviser should ask you questions until he/she understands enough about you and your goals; and helps you build a plan that reflects your priorities. A majority perceive an adviser is only about investments beating the market or finding the next Amazon, and fall prey to cheap talk about killer performance levels. That type of mindset won’t arm you with strategies to weather market cycles, adapt to life transitions, and help you achieve the goals most important to you.
Q: Why an adviser might help you better navigate your future?
A: A competent adviser can increase your awareness and understanding of various facets of your financial life (investment, savings, legal, estate planning, asset protection, insurance, risks, etc.). The advantage: perspective on how to make it all work for you. With an action plan built for your preferences, you can be confident your decisions are consistent with your goals and you won’t make the costly emotional mistakes that plague many people.
Q: When should you think about hiring an adviser or a 2nd opinion about your situation?
A: The answer will vary with your circumstances. In our experience, most people start thinking about getting help between their early 40’s and early 50’s. When contemplating the transition to retirement many concerns often come to light. The most common being: how long will your money last and will you need to make lifestyle changes as retirement nears?
Q: How to select an adviser or how to measure an adviser’s value to you?
A: A wise starting point is to understand the motives that drive the advice. Standard industry compensation models (banks, insurance companies, and broker dealers) make it very difficult for you to know the true “all-in cost” of products and services. The “sticker” price might hide costly details. Financial consumers lose hundreds of millions of dollars every year not knowing how or how much their adviser and their affiliations get paid. To determine value, you need to know cost and what products and services are offered, and if they best serve what you need and want. Be certain before you sign anything! It’s always best to get two or three opinions.
What’s the Cost?
To simplify, below are the three primary industry compensation models to help you understand the potential for adviser conflicts of interest, motives, and your “all-in” costs.
“Commission-driven”– (banks, insurance reps, and brokers) get paid to sell products or services. Conflicts/Risks: reps are incentivized in various ways to sell products which may be high priced or not appropriate for you. Fee disclosure is often buried in pages of cryptic fine print.
“Fee-based” – NOTE: the use of “fee-based” is misleading; it’s NOT the same as “fee-only.” Hybrid or dual-registered models include (banks, insurance reps, and brokers). These models may get paid commissions to sell, or an asset-based fee, or an hourly, or fixed fee. The sales pitch here is that by offering fee and commission based products they can offer a full array of services to meet your needs. Conflicts/Risks: The pitch is one thing, the reality is that it blurs the lines of accountability, and creates conflict between you and your money. Survival of the fittest: be aware to protect yourself.
“Fee-only” – (Registered Investment Advisers (RIAs, aka a fiduciary). Typically charge an asset-based fee that will vary depending on the size of assets and the fund used. Some advisers may charge hourly or fixed fees depending on the services you need. This is the cleanest and easiest model to understand.
There are two primary service categories: investing and managing money, and financial planning:
- Investment management: what discipline is in place to select, allocate, and monitor your investment dollars? How are risk, return, and tax considerations managed? What are the investment costs? How is the advisor paid? And how much? Where is that disclosed? What are the “all-in” costs?”
- Financial Planning: Planning is an overused, under-defined term in the financial industry; be sure to ask what “planning” means! Ask to see examples of other Plans. Will they work with your other advisers? Do they work with other advisers? Do they get referral fees from these other advisers? A financial plan can be a good idea; it can also be a trap through which you can be sold your various products that may not serve you well.
- What licenses or credentials does the planner hold? There are so many licenses and credentials listing them all would complicate this message. The key for you to know is this:
Is the advice objective and not driven by someone’s commission schedule or a corner office sales quota?
Q: Is a large brand name firm going to offer you the best suite of services?
A: Sounds good on paper and in the marketing materials. Fact is, it’s a huge misconception that a bigger firm or brand name is safer and has more resources that can help you. Sure, they may have an A-Z suite of products & services, but that doesn’t mean they are designed to work in your best interest. In fact, these are business models with layers of conflicts, and generally offer sales-driven, boilerplate solutions. Remember, the selling person is representing a large institution with shareholders and a corner office with sales quotas whose interests stand between you and your goals.
Q: Where should you look to find the right type of adviser that will best serve your interest? What credentials can help you evaluate the value of their services?
A: Titles, terminology, and industry credentials confuse more than inform. It’s easy to get lost in the jargon and the alphabet soup. Some advisers serve a niche, others are generalists. A good starting point is to find an experienced true, transparent fiduciary. Fiduciaries have a legal obligation to put your interest first. This limits the conflicts that are inherent in standard industry practices. Experienced, transparent practitioners will help you understand their services, fees, and strategies. If they can’t explain these to you in plain English (and a written agreement), keep looking.
Cautionary Buyer Beware
Fiduciary advisers are a minority in the industry. Yet the brokers and reps who call themselves advisers and wealth managers are masterful in co-opting fiduciary language in their marketing. It’s a sales and marketing strategy designed to confuse the financial consumer. Remember you must take some responsibility to investigate and inquire.
Make sure you understand what products or strategies will be used. If you don’t understand, make the adviser explain it to you in easy to understand terms. A right-thinking adviser will be happy to help you understand what they are doing for you, and contrast it with other options.
Stay away from the financial supermarket (one-stop shops such as banks and insurance companies). There are layers of interests in these business models that stand between you and your money.
Stay away from any sales person who tells you there is no cost to you. There is surely a cost and you are surely the one who will pay – even if you aren’t writing a check.
Stay away from the dabblers. For example, a CPA who doubles as an investment adviser isn’t likely to be a skilled investment adviser or planner. Let them give you tax advice. See an investment professional for your investment advice.
The industry is full of charming, approachable sales people. Sure, you want to work with someone you like, but don’t get sold by the charm offensive alone. Talk to several advisers so you can compare.