Choosing a financial advisor can be tricky but it’s worth the hassle once you find the right one. People don’t give it much thought but finding the right financial advisor is as important as finding the right pair of shoes. Once it fits, it’s going to take you places but if it doesn’t, you might just fall. So, here are some tips about how to choose the right financial advisor who’ll guide you through the thick and thin of market investments.
Let’s assume you intend to make investments in the mutual funds. Which one would you select? How would you know which is the best option for you?
You would probably look around on the internet and visit a website like the Morningstar that provides information and data about different fund ratings and how to make wise decisions from those given stats. This data can be performance records, risk metrics or expense ratios.
It’s more likely that you’ll go for the fund with the best track record. According to the Morningstar statistics, a majority (82%) of investors go with the five-star-rated funds. And it’s quite reasonable since Morningstar has a lot more knowledge about how to research mutual funds than you do. Along with that you save a lot of time as well.
Now, what if you decide to avail the services of a financial advisor? Who do you think will find the financial advisor for you and how much will it cost?
There aren’t a lot of people one can trust so it becomes your responsibility to find the right financial advisor for you. And you’ll see that it’s not a piece of cake to find one. It’s full of risks and complications. Risky because there can be serious repercussions if you choose the wrong advisor — just ask Bernie Madoff’s clients.
Why is it so complicated?
Just like any other salesman, most of the financial advisors use high-pressure sales tactics to lure you into their traps. If this isn’t a con big enough, they also have minimal disclosure requirements for their business practices, services, ethics and ideologies.
Obviously, you can access the information regarding any of these advisors from online websites, but we all know that what’s in the records can never be truly trusted. One needs a lot more information than just a few records to hire a reliable person.
So, the responsibility of acquiring all this additional information about the financial advisors, lies on your shoulders. You can directly fetch this information from the advisors themselves. The trust worthy ones are usually informative and forthcoming while the low-quality ones are secretive and unwilling to share much information about them and their practices.
Always select the best financial advisor
Now the question arises- Does there happen to be an easier way to select the best financial advisor? Well, the answer is yes. There are ways to find some really good financial advisors.
But if you intend to participate in the selection of a financial advisor then you must ask the right questions and know the correct answers (for your benefit) so that you can tell them apart from the wrong ones (that will harm you).
You would also require a procedure to collect information so that your decision to choose the right financial advisor is not solely affected by the sales skills of that person.
Request for proposal
Organizations and Institutions (pension plans, endowments, foundations) use RFPs (Request for Proposal) while selecting financial advisors.
They make use the RFPs to acquire the same information from multiple advisors. And anyone who is unwilling to share or provide the information is automatically rejected.
There are three primary benefits of using RFP:
- All the advisors have to answer the same questions
- It is quite simple to compare their replies
- The institutions receive documented responses
So, it’s up to you if you wish to use the RFP method or not. At the very least, you should ask the appropriate questions and demand for documented (written) responses.
Important for financial advisors
Here are some important questions that you should ask your financial advisors during the screening process. This will help you to compare and select the best possible candidates during interviews.
Who do you work for?
For example-Let’s say the advisor works for a Registered Investment Advisory that is owned by a broker/dealer, who is further governed by a bank or insurance company. Now you must be aware of this information to avoid any potential quarrel that may arise, like the advisor wanting to sell you any products or services related to these banks or insurance companies. This is termed as cross-selling which is not really beneficial for you and you should be aware of it.
Are you an RIA or an IAR?
Registered Investment Advisor (RIA) and Investment Advisor Representative (IAR) are the “only” registrations that allow professionals and firms to aid in financial advice and other services. Any other person who doesn’t have knowledge of these registrations or does not hold these registrations is trapping you into selling or promoting services or products for money. So, make sure you select the right person.
Do you have any disclosures or secret records?
Financial advisors can have records or complaints against them that they wish to hide. In spite of these accusations, they can still hold valid licenses and sell financial services. Try to steer clear of such advisors who have bad track records.
What are your years of financial service experience?
No one is an expert without years of hard work and experience. So, make sure that your advisor is experienced enough in the financial field. For example, if you need a financial planner then the advisor should have years of experience in planning. Not some broker or salesman who has been selling products for commission.
Do you hold any active certifications or designations?
The best ways to acquire information about the knowledge of a person is to enquire about his certifications and achievements. Although there are many specializations and certifications but not each of them is genuine. Some of these certifications have been bought to build false profiles and gain more clients. Be aware of such fraud documented works.
What services do you provide?
In investment market we have a number of services (planning, investment, risk management, tax, legal) that are provided to the clients. Accordingly, we have professional who take care of these different areas for example- a Stockbroker sell products (mutual funds, stocks, annuities). Financial advisors (RIAs, IARs) assist you by providing advice in different types of investment and services.
How do you charge for your advice and services?
Now, a financial advisor would generally charge based on these three types- asset-based, hourly, fixed. For example, if an advisor is compensated by asset-based fee then he’ll be provided with some percentage of your assets (like 1 percent of $100,000 is a $1,000 annual fee). Hourly and fixed rate fee can be provided depending on the hours of their services or an agreed amount.
What communication method do you use for your clients?
Nowadays with the help of technology it’s easy to communicate with anyone, anywhere. You can have a Skype chat, video call, telephonic conversation etc. Then there is the formal writing way, using emails and reports. It’s very important to keep an eye over the weekly/monthly assessments like transactions, receipts and fund transfers etc.
What firm has physical possession of my assets?
As the rightful owner of these funds, you should have all the knowledge about how and where your funds are being used or transferred to. It’s not normal for a financial advisor to be in contact of your assets. For this, you’ll need the services of a custodian. It’s important that these custodians are well known or famous, for your funds to be secure.
Choosing the right financial advisor is very important if you wish to swim in the deep seas of investment and wish to acquire those hidden treasures. By simply asking the right questions and investing some time in research, you can assure that your funds and earnings are in the right hands. Be a smart investor, Choose Smart!