Do you have a financial advisor? And if so, do you know if your advisor:
- Is charging a fair fee?
- Is trustworthy?
- Has the right expertise?
- Has implemented a sound investment strategy?
Here’s the framework I use to assess a client’s financial advisor.
1. How — and how much — do you pay your advisor?
- Are the fees reasonable, transparent, and understandable?
- Does the fee structure align the advisor’s financial interests with yours?
For example, a typical 1% asset under management fee may seem fair and conflict-free but it turns out to be expensive and conflict-ridden. Furthermore, fees and other expenses are usually so hidden and difficult to decode that you may not know what you’re paying. Be careful. I wrote more about this in a prior note.
2. Can you trust your advisor?
- Does the advisor act as a fiduciary?
- Has the advisor had any disciplinary proceedings initiated against her/him?
If the advisor is not acting in a fiduciary capacity for you that means that s/he has not committed to always act in your best interest. If not, you should be skeptical of any guidance that you receive as you would not know whose financial interests are being prioritized. The NY Times wrote about what can happen when you have misplaced trust in your advisor.
3. Does your advisor have financial expertise?
- Does the advisor have relevant credentials such as a CFP (Certified Financial Planner)?
- Is the advisor’s financial education and experience appropriate for your needs?
- Does the advisor provide expertise on other aspects of personal finance such as Social Security, annuities, mortgages, or college financing?
You may face a choice when considering an advisor — do you want a relationship manager or a financial wiz? You may not get both in the same person. Some advisors are better at managing their clients than they are at managing their clients’ finances.
4. Is your investment strategy optimal?
- How does the advisor determine your asset allocation?
- How does the advisor implement this strategy?
- Does the advisor minimize your investment taxes and expenses?
Does your advisor try to beat the market with expensive and complex trading schemes or instead, does s/he determine an asset allocation for your situation and implement it in the lowest cost manner? If it is the former, your advisor may extol you with the firm’s superior stock-picking skill and past performance but you want the latter — boring, tax-efficient, and low-cost index funds optimized for you. Your goal is to earn market returns while minimizing trading expenses and taxes.
Do you want to assess your existing financial advisor or get help in selecting a new one? Contact me to learn about my Financial Advisor Assessment service. I provide an understandable, affordable, and unbiased evaluation of your advisor.
PS: For those of you in the Boston area, I’m offering a one-hour workshop on How to Evaluate a Financial Advisor in October. You can sign up here.