What is the advisor promising? If a financial advisor promises you anything more than that they will do their best, run away. An advisor needs to explain how he or she will invest for you, but no advisor should promise, or even imply, specific results. Markets are always more powerful than advisors and money managers. If something sounds too good to be true, it probably is. If the advisor offers historical investment results, understand those results may be largely meaningless and are normally based on numbers that are hypothetical rather than actual. In any case, the future will be different than the past. Ask how the advisor will handle risks and opportunities in the future and how often they adjust portfolios as markets and economies change.
Do you understand their strategy for protecting and growing your assets? If a strategy is too complex for you to understand or the advisor can’t explain it specifically, run away. The more complicated a strategy, the less likely the advisor understands it or can control it when markets do the unexpected. There are very few rocket scientists in the world and most of them are building and guiding rockets.
An advisor should have the ability to consider buying any asset and security types, not just their company-sponsored securities. They must always understand what the ramifications may be when they invest for you. If they don’t fully understand a security (which is reasonable given the multitude of possibilities today), they likely shouldn’t invest in it. Despite my background in mathematical economics and options trading, I find it very difficult to decipher the inner workings of many exotic structured products. As a result, I avoid those securities and find simpler, safer ways to try and create a desired outcome.
As always, there is no guarantee results will be as intended, but the strategy should be understood by everyone.
How does the advisor get paid? Generally, investment advisors are paid an annual fee (some small percentage based on assets managed) for managing your investment portfolio. Their incentives are generally aligned with yours – to keep your assets safe and growing. They may also serve to solve financial issues for you and work with other trusted advisors (attorneys, CPAs, etc.) for your benefit.
A financial advisor may sell products or securities, and earn commissions for doing so. He or she may also get paid for managing your investment portfolios. Neither type of advisor is necessarily better. However, you must understand the differences because they affect the incentives for your advisor, which may affect the risks and returns in your portfolio.
Paying an investment advisor for service means, if you are unhappy with the service or with the investment results, you can find someone else you think will do better for you. That is as it should be. Unfortunately, many sales products (e.g., many annuities and structured products) charge large, built-in, upfront fees and lock you in for extended periods. So, be careful when a financial advisor pitches you something you can’t sell without an unnecessary charge.
Advisors should always try to solve your financial issue, not theirs.
How does an advisor spend his or her work hours? Does the advisor spend hours managing investment portfolios and solving financial issues for clients? Or does the advisor spend most of the day trying to find new clients? If an advisor is responsible for the safety and growth of your assets, which would you prefer?
Obviously, every advisor searches for new clients where there may be a mutual benefit. That’s fine. However, if your advisor is not directly responsible for managing your assets on a day-to-day basis, do you know who is? How quickly will that outsourced investment manager change course when the market does? Is that manager even qualified?
Although advisors must invest for a period of time suitable to each individual client, often 10 to 15 years, I believe they must often make investment decisions over the short-term—days and weeks—as well. Considering the drastic drops in stock market prices in 2000 and 2008, there can be no “set and forget” regarding investment portfolios. It should be clear to you that long-term portfolios can drop precipitously in the short-term, which can affect long-term results and your ability to retire as you desire. Adjusting portfolios to changing environments can be critical to long-term investment success.
No one can tell the future, nor know when exactly to buy or sell. You simply want someone who thinks about your portfolio every day and makes decisions for you. Even when the decision is to stand pat, that needs to be an active decision by the advisor. So, keep your eye on the short-term, too, and on an advisor who will do the same for you.
What is the advisor’s specific experience in investment markets? Young advisors may be at a disadvantage, because they haven’t experienced the ups and downs of markets and the cycles. However, they may be more aggressive and adventurous than more experienced advisors. If an aggressive strategy suits your risk profile and needs, such an advisor may be good for you.
Experienced advisors have seen good and bad markets, and likely remember the factors that made them so. Although the reasons for market volatility change, an experienced advisor may understand the factors and potential consequences more than a less experienced advisor.
However, one’s experience encompasses much more than simply time served. If a young advisor worked on a trading desk or managed portfolios and risk before, while a long-serving advisor is mostly sales-oriented, the younger advisor could be just what you need.
The Bottom Line
Hopefully, this discussion has given you some valuable areas to focus on and understand when choosing your next financial advisor. Of course none of the above are hard and fast rules. They are my opinions, based on my experience. In short, consider everything you can learn about a financial advisor before entrusting your investments to him or her. If the advisor isn’t forthcoming with information that you need, find another advisor. There are a lot of us out there