Consumers wouldn’t think twice about interviewing multiple doctors or getting several estimates for a home improvement project and that same diligence needs to be applied to vetting your financial advisor.
Far too often investors will choose their financial advisor based on a recommendation, not giving too much thought to the process. But that can be a costly mistake. Everyone has a unique financial situation and what may work for one investor may not be right for you, which is why you need to interview a few financial advisors before settling on one. That can be an intimidating prospect. After all, investing can be complicated, and advisors are the experts, but there’s more to a good financial advisor than a knack for picking investments. You have to be able to work with and trust the one that handles your money. (Read more, here: Do You Need A Financial Advisor?)
How Does The Advisor Communicate
When it comes to interviewing a financial advisor, there are a few key areas to focus on. Although past performance seems like the first topic to address, getting a sense of the planner’s communication skills can be even more important. There’s a lot of emotion attached to investing, not to mention it can be complicated, so you want an advisor you feel comfortable with. Also, you want to make sure your financial advisor can explain complex ideas in simple terms, and listen to your concerns, goals, and dreams — not only throw ideas at you. He or she also has to establish a way to communicate with you—whether that’s monthly, quarterly or anytime via email. The last thing you want to do is go with a financial planner who doesn’t return your calls when the stock market is tanking or doesn’t pay attention to what you want out of your investments. A good way to gauge just how good the financial planner is at communicating is to ask about how he or she deals with panicking clients or how he or she handled the great recession.
You also want to know if there is a team of financial advisors or if you will work with that one individual. A good financial advisor won’t try to sell you products at your first meeting. Rather, he or she will make it all about you to get a sense about you and your money. (Read more, here: Why Clients Fire Financial Advisors.)
Does The Advisor Make A Commission
How your financial advisor is getting paid is going to matter a lot, which is why it should be a top question for each and every professional you interview. When it comes to financial advisors, they can get paid in different ways. Commission-based advisors typically get paid based on the sale of a specific product or investment. They can also charge a fee for making trades for you. A fee-based advisor charges a percentage of assets under management as well as a mix of commissions while a fee-only advisor charges a percentage of your assets under management. A fee-only advisor doesn’t have anything to gain from selling a particular stock, fund or investment product while the other two get commissions. While there are honest and dishonest advisors in all fee structures, a red flag for investors to watch out for is a lack of transparency. If the person you are interviewing can’t or won’t tell you how she or he gets paid that's a telltale sign you need to move on to the next one. (Read more, here: How Your Financial Advisor Gets Paid.)
What Background Does The Advisor Have
Once you know the fee structure and how your financial advisor will communicate, then it’s time to learn the background of the advisor. That means finding out his or her education, credentials designations, associations, and experience. For more upfront people there’s always the question of the financial advisor’s record. Are there any complaints or penalties levied against the advisor is what you want to know. You can check that information out for yourself online at the Financial Industry Regulatory Website. (Read more, here: How Do I Know I Can Trust My Financial Advisor?)
Do Your Investment Styles Match?
With all things being equal the investment style and ideas the advisor brings to the table are going to weigh heavily on your decision. After all, if you are a risk-averse investor, a financial advisor that likes to take risks isn’t going to work for you. On the flip side, if you want a financial advisor that is going to take risks then you are going to have to find one with a less conservative temperament. Past performance should also play a big part in your decision. After all, the advisor may talk about all the complex and seemingly smart investments he or she makes but if the quarter by quarter and annual returns aren’t so hot then either is the advisor.
The Bottom Line
Hiring a financial advisor shouldn’t be a decision made on a whim, even if your best friend recommends him or her. Every financial advisor has a different approach to investing and communicating, making some an ideal match and others your worst nightmare. Since your money is involved, it behooves you to interview a few financial advisors, honing in on those tough questions that will give you a complete picture of who could be handling your money on a day-to-day basis.