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As a Financial Advisor myself, I believe there are a lot of advantages to working with the right financial professional. Huge emphasis on the right.
The right Financial Advisor can simplify the financial world for you and help you navigate the way to reach your goals. But unfortunately, not all Financial Advisors are created equally, and that results in not everyone getting the best advice or service.
People should approach hiring a Financial Advisor as what it really is—hiring someone. It should be more of a ‘why should we pick you?’ rather than settling for the first person you meet with. People probably spend more time looking for coupons for their laundry detergent than they do vetting their Financial Advisor. Over your lifetime getting coupons can save you tens of dollars, the right Financial Advisor could help create you tens of thousands of dollars.
So here are five tips for when you’re looking into hiring a Financial Advisor.
1. Focusing on Past Performance
Too often people focus on performance only, and although it’s important to get great returns, it isn’t that straightforward.
You need to have a good idea of how the stock market performed in the past year. A 10% return can seem great, especially if as a whole the stock market had a negative return. But if the stock market produced a 20% return, then 10% doesn’t seem so hot. Past performance doesn’t guarantee future performance. And just because one portfolio they have access to performed really well, it doesn’t mean that portfolio is right for you.
Let’s say you want to buy a house in two years. A 100% stock portfolio has averaged over 10% from 1926 to 2019 (source here). But it also has a down year about 27% of the time. So although it’s a great performing option, it is the wrong option for you. Increasing your down payment would be nice, but not if you have to expose yourself to unnecessary risk.
2. Not Asking About Fees
Fees can take a big chunk out of your long-term investments, or cost you a lot upfront. So it’s important to understand how a Financial Advisor is paid, and what you are receiving for that fee.
Most Advisors make a living by having Assets Under Management (AUM). They earn a small percentage of the total amount they help manage, so they have some skin in the game. If your investments grow, so does their income, and vice versa. This is great for people looking for a lot of advice or who may have a bunch of questions. A nice thing too is that you never pay them directly, it just comes out of your investment account so it’s simple and transparent.
Other Advisors are paid by fees for service. These can be planning fees, meeting fees, or anything else. Instead of collecting a fee based on a percentage of your account, they might charge you when you need service. Fees for service are more advantageous for DIY investors, who might need a second opinion or more in-depth planning.
3. Not Asking About Their Credentials
Unfortunately, anyone that gives financial advice can call themselves a Financial Advisor. Which I believe increases the chance for people to get bad advice, or for people to have a negative experience.
Asking a prospective Advisor about what financial credentials they have, what organizations they are a part of, or what standards they hold themselves to can help give you confidence in working with them. Advisors who have a QAFP or CFP designation, for example, hold themselves to high standards and are regulated with their activities.
If someone doesn’t have credentials yet, you can ask them if they are working towards anything. I believe having some credentials shows initiative and dedication to the work they are doing. But credentials don’t necessarily make someone better at their job than someone that doesn’t — so it’s a tool you can use for consideration, but don’t base it entirely on this.
4. Not Asking What Sets Them Apart
I always like asking people what sets them apart from other people when it comes to what they do. I recently heard that there are over 100,000 Financial Advisors in Canada, so it’s important for each Advisor to set themselves apart from the crowd. It’s a good idea to ask them what that is.
Some Advisors work better with younger people, or older people, or specialize in different areas such as professionals, families, businesses, etc. I believe what your Advisor focuses on should align with what you need help with. If you’re a young person looking to save up for your first house, going to see an Advisor who focuses on estate planning doesn’t make sense.
You might also align yourself with an Advisor who shares your interests, or something in common. The Advisor-Client relationship really should be a relationship. You should get along, joke, be able to have conversations. Your Advisor should be someone you look forward to seeing or speaking with.
5. Leaving With Confusion
If at the end of meetings you feel more confused than when you arrived, or you feel like your needs just aren’t being met, there’s no need to settle.
You might feel silly asking a lot of questions, but I believe the financial industry is purposefully confusing. When you understand something it is actually really easy and straightforward to explain it to someone in a simpler form. If your Advisor can’t explain something to you in a way that makes sense to you, there’s an Advisor out there that can.
Being confused won’t ever help you. It won’t keep you on track, or encourage you to take better control over your financial situation. It can actually be detrimental to your financial plan. I find people are most able to do something properly when they understand why they are doing it.
It might sound silly, but making sure you have a good Financial Advisor will help your overall financial picture, motivate you to get and stay on track, and in the long run help you in every aspect.
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Overman Capital Management
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About the Author
Winnipeg based Financial Advisor focusing on investments, financial planning, and mortgages. I prioritize education, because I believe the more we know, the more we all benefit. It allows me to help people make the most of their financial future.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.