WHAT TO KNOW WHEN CHOOSING A FINANCIAL ADVISOR

| February 26, 2019
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Who is your financial advisor? An acquaintance, friend, a friend of a friend, someone you know from church, your college room mate’s brothers friend? The relationship with your financial advisor may be a very personal relationship that might not have anything to do with business. This person has gained your trust through some connection and the longer you stay with them the stronger that relationship becomes.

You usually find a financial advisor the same way you find a plumber or a mechanic. You ask your friends and relatives for recommendations. Nothing against anyone in the other service industries but they don’t have the impact on your life that a financial advisor does. A good advisor can be very helpful and a bad one can cost you a lot of money. Hiring a financial advisor should be a very careful and calculated decision given the impact they could have on your life, but it rarely is. 

Finances and investing can get really complicated. Most people don’t have the time, the training or the desire to fix their own car, do their own plumbing or do their own investing and financial planning. So they just have to trust someone. Many times people don’t even shop around. It is easier to trust someone you know or someone that a friend recommends. But is that really the way to make one of the most important financial decisions you will ever make?

The vast majority of financial advisors are fine honest people who try to do the best they can for their customers. But they are stuck in a system that is sales and profit based that lacks transparency. In a perfect system the customer would know what they are paying for and any conflicts of interest the advisor has. As it is now that is not the case. Fees and conflicts are required to be “disclosed” in written documents but you almost need to be a securities attorney to understand them. So how should you evaluate your current or prospective financial advisor?   

Trust but verify. Don’t get so wrapped up in the process and your relationship that you don’t know what advice is costing you and the conflicts of interest your advisor and their company could have with you. The vast majority of investors have no idea what they pay their financial advisor even though it may have a profound effect on their investing success. Most of the time these fees are hidden – you don’t get a bill every month telling you what to pay – the fees are taken directly from your account and/or the fees are built into your investments and sometimes extremely difficult to determine. And that’s no accident. There are both fees to manage your money or commissions, plus more fees for the investments themselves. With insurance and annuity products you usually have commissions plus internal costs. 

You also need to ask what conflicts of interest your financial advisor and their company have with you. Do they charge you a fee to manage your money and then also make money on the investments they recommend? Do they get free vacations or other compensation and bonuses for selling you certain profitable fee based programs or other products? Does their company get kickbacks from products they invest your money in?

There is no real transparency in financial services just lots of disclosures. As long as financial advisors and their companies disclose fees and conflicts of interest they can do some pretty amazing things that don’t help their clients much. Most investors just sign the disclosure documents and move on without really knowing what they say.

Your financial advisor is probably a really great person and maybe even a friend but isn’t the whole point of investing to make money? The more money that goes into their pocket the less money goes into yours. You may be OK with paying a lot of money every year but just for the record wouldn’t you like to know how much that is? Ask some questions about fees and conflicts and get the answers in writing on their company letterhead. If you don’t get it in writing don’t bother. No ethical advisor is ever going to get mad at you for asking and if they won’t do it, or just don’t know or try to deflect or diminish the importance of your request or won’t answer in writing maybe it’s time to move on.  Remember it’s your money.

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