By Jon Meyer, CFP®
Key takeaway: For many people, hiring a financial advisor is a bit like going to the dentist: You might feel like you need one, but you don’t relish the meetings. Tip the scales in your favor through a better understanding of how to evaluate true advice givers from product salespeople.
You don’t need to hire a financial advisor. The internet can give you almost any piece of information you need to make financial decisions. And in today’s world, the robo-advisor (online investment management with some or no human help) allows you to invest in a very inexpensive portfolio that will be broadly diversified.
Yet you still might want to hire a financial advisor. Malcolm Gladwell asserted in his book Outliers that it takes 10,000 hours to master something. Keep in mind that this time is the initial outlay, as there will be more hours involved in living with and maintaining a skill. It is this trade-off between time and money that is the crux of hiring a financial advisor.
The internet can give you all the information you need to do your finances, but siphoning it down to what applies in your situation—and the longer-term ramifications of those short-term decisions—is what will help you sleep at night.
Do You Want a Relationship?
Before going down the path of hiring someone to manage your investments, ask yourself the key question: Do you want a relationship?
The reality is some people don’t, or they don’t need a relationship during a certain stage of life. If you are one of these people, you’ll find plenty of online brokerage options with robo-advice. But note that online options will most likely handle your investment issues but not your financial planning needs.
The reason to consider a relationship is for more comprehensive advice. And this is where our industry has done a poor job of explaining your options.
There is no agreed-upon definition of what a financial advisor is; anyone can use the title, whether they only sell insurance or an investment product, all the way to comprehensive financial planners. The best way to discern the difference between salespeople and financial advice givers is to look for those willing to answer a few questions.
There are four questions that get to the heart of true advice over product sales:
1. Are you a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional? CFP® certificants must pass tests on various financial planning topics as well as maintain their license with ongoing continuing education. Note that you may find CFP® certificants who do not use a comprehensive financial planning process, so there are still more questions to ask.
2. Are you a fiduciary? A fiduciary advisor always acts in your best interests. A non-fiduciary advisor acts in the best interest of their employer. The distinction is important. In today’s world, there are advisors who try to wear both of those hats, acting in a fiduciary capacity sometimes and in a non-fiduciary capacity other times (like when selling a product). Get someone who is always a fiduciary.
3. What is your fee structure? Between commission, fee-based (a mix of fees and commissions) and fee-only, I advocate for fee-only (no commissions). But even with fee-only advisors, you get variety in how advisors charge for their services. Some advisors charge a percentage fee on the assets they manage for you, some charge a retainer, and some charge an hourly rate. No one method of fee-only is better than the other; just choose one that you can be comfortable with based on the value the advisor provides.
4. What are your services? Investment management is a commodity these days. As I mentioned, robo-advice can give you inexpensive portfolio management. One thing robo-advice can’t give you is behavioral management (e.g., don’t sell out when the markets get rough), which is worth a lot and something financial advisors can help with.
Beyond investment advice, look for comprehensive financial planning. Dig deep on this topic, as different advisors might say they do financial planning but might not give comprehensive advice on certain topics (e.g., some might ignore tax ramifications of their trades).
When asking questions of advisors, note that plan is a noun and planning is a verb. Ongoing financial planning is what you should look for instead of a one-time document that will be outdated in a year. Another way to ask this question: What services will you not provide me?
Beyond these specific questions that help you look for advice over products, consider a few more questions that help you get comfortable with the type of firm you want to hire:
1. Who is on the team? While there is a probably one lead advisor working with you, who else is on the team that will be interacting with you and working to implement planning on your behalf? There is no right or wrong answer—you just want to understand who is working with you, what their expertise and qualifications are, and what their role is.
2. What is your succession plan? Small firms are often on the short list of good advisory firms because of their focus on financial planning. But you should at least know what happens if someone gets hit by the proverbial bus. Or, more likely, how does the transition between the current owners and future owners affect you? Hopefully, this is an answer that rolls off their tongue.
3. What has been your biggest mistake with a client? Humility is hard to come by these days, but the people who grow the most are those who learn from mistakes. Look for an advisor who is confident in their services, but humble in the outcomes. After all, mistakes will happen, but it is how they get fixed that differentiates a good experience from a bad with an advisor.
4. How do you evolve in the industry? Look for advisors who are constantly reading, listening to podcasts, viewing webinars, and going to conferences. You want a continuous learner on your side of the table. Note that this is important not just to bring new ideas to the table, but also to justify why new trends might not fit your financial situation.
While this is not a comprehensive list of every question you can ask, it should allow you to walk out of an advisor’s office knowing if you have a good feeling or not in the pit of your stomach. Note also, many advisors work nowadays with clients all over the country using technology to do meetings. You no longer need to hire someone in Minneapolis just because you live there.
What is important is that you and the advisor should like each other since candid communication is needed to make the relationship the best it can be.
Schedule a complimentary 30-minute discovery call with a fee-only financial planner to discuss your personal situation.
Jon Meyer, CFP®, is Chief Operating Officer and Investment Manager for BGM Wealth Partners. Outside of work, he is busy raising his four children and training for his next marathon.
The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.