If you Google “How to Hire a Financial Advisor,” you’ll find thousands of articles, tons of advice and a plethora of opinions. The main theme of all of the articles seems to guide consumers to hire a CFP and they should be fee-only. You already know we feel about both of those thoughts; it may be a great fit or it might not be…it depends on the advisor.
The other piece of advice almost every article provides is a list of the questions they feel you should ask while interviewing the advisor. This is a bad idea in our opinion because it takes the advisor off the hook. It would be pretty easy to give you the answer he or she feels you want to hear and frankly, you’d probably never know the difference from one advisor to the next.
That’s why we developed this formula, so that anyone can interview a financial advisor and easily be able to separate the wheat from the chaff. The very first thing to understand is that you are listening for what the advisor doesn’t say, just as much as you are listening to what he or she does say during your first appointment. Very good advisors will have a process they utilize for every meeting. Which means they know what they are going to say, they have rehearsed what they are going to say, and they plan to deliver their very best effort because they know there may not be a second meeting unless you are impressed and feel comfortable with them. What the advisor says during the first meeting will encompass their best practices, and their unique abilities. What they say here is what they feel separates them from other advisors. In other words, it’s what they feel is their best stuff.
In other words, If they don’t tell you exactly how they get paid (you should not have to ask), the odds are that you may never know and that’s probably not a good way to start a business relationship. If the main focus of the conversation is on their investment process and reviewing your investment statements then there is a very large chance that they won’t be helping you to understand your estate plan or whether your family will be okay in the event of a premature death because they would have told you about their other areas of expertise or focus. If there isn’t talk of a financial planning process then it’s probably safe to say they don’t have a comprehensive financial planning process. If your personal net worth is under $500,000 then it may not matter to you if the advisor will be comprehensive or not. If your net worth exceeds $500,000…don’t think twice about it, find a comprehensive financial planner that will integrate all of the areas of your financial plan so that everything is fully coordinated.
They say actions speak louder than words, correct? This next cue to watch for is better than any words the advisor may speak. What documents of yours does the planner want to look at prior to taking you on as a new client? If they only ask to see your investment statements there is a better than 99% chance that the focus of their practice is on investment management and not financial planning. On the other hand, if they ask to see your wills and trusts, tax returns and business documents (buy sell agreement or operating agreement), as well as, your investment statements…I’d say there is a much better chance that they will help you with all of those things. Remember, it’s vitally important that your advisor takes a comprehensive approach because of the interactions between all of the areas of your financial life. Tax reduction strategies is just as important as investment planning because taxes can erode your returns if you’re not careful. The wrong beneficiary on your IRA or life insurance could change your entire estate plan. Financial planning is complicated and it should always be done in a holistic and comprehensive manner.
If you only did those two things…listen to what they are saying (and not saying) and watching for which documents they ask for, you’ll have a giant advantage over other consumers looking to hire a new advisor. On the other hand, if you want to hold out for the very best financial planners, then there are three other things that you can do to really know that you are hiring the best fit advisor for your family.
If they don’t offer to do this, I might walk away but you should always get a written engagement proposal. This document should include the advisors initial observations about your financial situation based on the four sets of documents we listed above (wills and trusts, income tax return, buy sell agreement or operating agreement and your investment statements). Think about how smart this is, what if the advisor tells you during the first meeting that they take a comprehensive approach to financial planning? Yet, during the next meeting the engagement proposal they prepared focuses on what they feel is wrong with your investment portfolio. It tells you they probably don’t practice comprehensive financial planning. The engagement proposal should have several items in each category of planning: estate, personal risk management, tax reduction strategies, investment, retirement and business owner planning.
If the engagement proposal has all of those areas covered then you should expect that a sample financial plan from the advisor would have all of those areas taken care of as well. A sample should be relatively easy for an advisor to produce. All you have to do is look at the recommendations of the financial plan or at the implementation portion of the plan to see whether the wealth advisor is taking a comprehensive approach to financial planning, or not.
The final thing you want to know is what the financial advisor does during an annual review. Ask to see what they would bring to an annual review. Here again, if the documents are all focused on portfolio returns and your asset allocation, then don’t you think you might be close to hiring an investment advisor? The annual review should include a visual depicting where the client’s present situation is versus the projections that were made in the financial plan. That’s what you want to hire a financial planner for isn’t it? You want them to help you create a plan and then to review your progress towards your financial goals and objectives. It would be wise to make sure they review your goals and objectives, your estate plan and your business transition plan if you own a company.
That’s it! Look and listen for those five things and you will be heads above anyone else looking to hire a financial advisor, wealth advisor or financial planner. On another note, there isn’t anything wrong with hiring an investment advisor. It may seem like we are poking at advisors that focus on the investments (okay…maybe a little) but the truth is that your financial life is complicated and you really aren’t doing your family any favors if you find the best investment advisor on planet earth and they lose most of your wealth to income taxes, estate taxes or they die prematurely before they can build the big nest egg. Or any other host of issues that can be presented to you over time. Hire an advisor that takes a comprehensive approach to financial planning so that they are watching out for all the things that you don’t even know could be an issue.