I’ve taken to wine. I enjoy several aspects of wine. In fact, as I write this, I’m partaking in a delicious cuvée from Australia. Don’t worry, it’s 7:55 in the evening. Depending on who you are, you most likely value the various qualities of wine differently than I do. And there’s nothing wrong with that. You may be drawn to the label, the price, the nose (smell), the taste, or even the vineyard it comes from. The cool thing is you can’t be wrong. If you like it, partake. If you don’t, don’t. Financial advisors, in a way, can be described in a similar manner.
I know of very expensive wine that is garbage. I know of very expensive financial advisors that are garbage. I know of very young wine that is good. I know very young advisors that are good. Price and time in the industry aren’t the qualities you are looking for, however those are the major selling points for many advisors. As it goes with wine, price and age tell you nothing.
I was a financial advisor for nearly 15 years. Technically, this meant that I held a securities license, and I was qualified to aid people in their investment decisions. In other words, I took a test. That’s right, my qualifications to help you with your money began with: I took a test. Don’t worry though, I passed the test. This, in my expert opinion, is where things can go wrong.
Before I go into depth about what to look for a financial advisor, it’s important for you to know that I think everyone should have professional help them with their money. However, that doesn’t mean that everyone needs a financial advisor, based on the technical definition of a financial advisor. Most people simply need personal finance help. That’s why people like Dave Ramsey, Suze Orman, Clark Howard, and I have jobs. We earn a living by teaching people about everything other than investing. Sure, we tell you to invest in index funds and things like that, but our primary goal is to help you get into the position to be a saver and/or investor. So basically, you really only need a financial advisor if you are going to invest. It has been my experience that financial advisors offer very little expertise in anything other than investing and technical financial planning. By the way, debt and budgeting generally fall outside this expertise.
Have I scared you off yet? I hope not. A good financial advisor will be important to your future. Once you’ve cleaned up all your BS (debt, budgeting issues, and discipline issues), like we all have to, then follow these tips to pick a great financial advisor.
- Knowledge– It’s even weird to write about this. A great majority of financial industry people have no idea what they are doing. In fact, last year a cat named Orlando outperformed a number of investment advisors in the U.K. No one knows what the market is going to do. No one. They might have a theory as to why it might go up or down, but they don’t actually know. Financial advisors love to compare themselves to doctors, but I’d hope to hell that doctors don’t guess as much as financial advisors do. This isn’t meant to be overcritical. It’s just fact. You simply want your financial advisor to position you in the best possible manner so that you can do well in good markets, and survive in bad markets. Anyone else that tells you they can do something different than this is lying. Come to think of it, this first quality should probably be “humility paired with knowledge.” Your financial advisor should be able to give you confidence via their vulnerability. Several financial advisors try to gain your confidence by appearing all-knowing. That’s a bad idea, especially if a cat named Orlando just kicked your ass.
- Attentiveness– No one likes to be ignored. I’ve accidentally neglected to return phone calls. I’ve accidentally neglected to return emails. Does this mean I’m terrible at customer service? To some, it may seem that way. The reality is that, no matter the industry, customer service is really important, yet at times, people make mistakes. When money is involved, all the money you have ever saved, things can get extra stressful when a phone call isn’t returned. You’ll know if your advisor is ducking you. But I have to admit that it is a rare situation for any advisor, despite what the Charles Schwab commercials might say with their snazzy animation, to duck you. You should meet with you advisor at least once per year. The responsibility to set up this meeting is shared.
- Ability to teach– Do you know what an American Depositary Receipt (ADR) is? No? That’s okay, you wouldn’t be in the minority. If you work with a good advisor long enough, you will learn stuff like this, and be better for it. I tend to eat at restaurants that make me a better home cook. Somehow, someway, I learn things about cooking by interacting with the waitstaff or kitchen staff. Have you been with a financial advisor for 5 years, yet you haven’t learned anything? That’s bad. Make sure that you are a better investor for having known the advisor you are working with.
- Risk radar– Do you want to hear something crazy but true? I became a riskier investor, personally, when I stopped investing other peoples’ money. Weird, right? I don’t think so. My theory is that I never wanted my personal risk tolerance, derived from years of study and experience, to bleed over into my clients’ risk tolerance. It’d be like trying to convince someone to like spicy food, despite the fact that it gives you ulcers. If you don’t want to take risks with your money, then don’t. My least favorite thing about the investment industry is that if your advisor is wrong, then you are the one that suffers. You should dictate the direction of your investments by allowing the advisor to thoroughly measure your risk tolerance.
- Reasonable fees– Did you notice that I didn’t say “fee only” or “commission only”? Why? Because, frankly, I’ve learned that it doesn’t matter. The theory in the fee-based financial planning community (advisors that either charge a flat rate or a percentage of your assets invested) is that the only way to insure objective advice is to limit compensation to the fee-based method. This is a fallacy. A commission salesperson isn’t inherently biased. Would you rather have a commission-based financial advisor that knows what the hell he/she is doing, or a fee-based advisor that simply passed a test? Compensation structure is not a tell. You can’t smoke out a crook by only looking at how someone is compensated. Some of the top Ponzi schemes of all time were fee-based advisors (Bernie Madoff, Keenan Hauke, Marcus Schrenker). During my investment career, I did both fee-based and commission-based. This is the financial industry’s pissing match. There’s no need for you to get caught up in it. Just make sure your advisor has reasonable fees. And we’ll leave it at that.
Here’s the crazy thing about these five qualities: everyone will measure them differently, just like wine. Some of my past clients may have thought I sucked at any one, if not all, of the qualities listed above. And since it’s their perspective and their perspective alone, they’d be right. This is why advisor ratings, and wine ratings for that matter, should be taken with a grain of salt. I’ve always thought advisor ratings were silly. I was once ranked as one of the top advisors at one of the firms I worked for. The rankings were based on production, and nothing else. I was rated as excellent because I produced a lot of revenue for the firm, not because I was objectively good. Oddly enough, I’ve seen several advisors at the top of several companies leave the industry due to ethical and disciplinary issues. On top of that, many advisor ratings are linked to advertising buys. You show a history of buying advertising in our publication and you don’t have any disciplinary issues? Perfect, here are eights stars for you.
This is why you should “interview” potential advisors, and not just blindly go with the person a friend recommends. I love my friends, but I hate some of their wine recommendations. Do your best to try and evaluate these five qualities during your interview. My bottom line is this: you should be treated how you want to be treated by someone that knows what they’re doing, all the while understanding your risk tolerance, and charging you moderate fees.
But maybe the bigger point is this: you need to clean up your habits before you bother with an investment advisor, anyway.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.