Choosing a Financial Advisor: An Investor's Checklist

Before you start researching advisors, ask yourself these five questions

Christine Benz 15 August, 2017 | 16:00
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Why are investors so laissez-faire about finding financial advice? A key reason is that the financial advisory profession is an awfully big and confusing tent. It encompasses people who are focused primarily on investments and those who construct comprehensive financial plans. The good news is that selecting an advisor who's a good fit for your needs doesn't have to be an overwrought process. A lot of guides to choosing an advisor focus on questions you should ask the advisor--compensation schemes, designations, and whether the advisor is a fiduciary. The real first step when seeking an advisor is to think through what you're looking for: your goals in seeking an advisor, what sort of relationship makes sense given those goals, and how much help you expect to need on an ongoing basis, among other issues. Armed with that information, you can then seek advisors who fit your self-made description. Here are the key questions to ask yourself.

Question 1: Are you seeking help with your whole financial life or your investment portfolio?

Many financial advisors--often called investment advisors or wealth managers--devote a lot of time and energy to managing portfolios: determining asset allocation, selecting investments, and so forth. In fact, that may be the one and only thing they will handle for you, or they may tackle non-portfolio aspects of your financial life, but do so only tangentially.

Another big contingent of advisors--financial planners--concern themselves with holistic financial planning: setting and quantifying financial goals, paying down debt, determining insurance needs, and investing appropriately for college and retirement, among other tasks. Financial planners know investments, too, but investment selection and portfolio monitoring aren't all they do.

Those distinctions may seem obvious to people inside the investment industry, but many consumers aren't aware of them. They might think of financial planning as interchangeable with investment management and advice. And it's true that the lines between the professions have grown blurrier in the past few years. Investment advisors are increasingly focused on providing holistic financial planning, as some consumers consider the investment-advice piece to be more or less a commodity and are seeking broader expertise.

If you need investment advice first and foremost: If you think your financial plan is in good shape overall but you need help selecting and overseeing your investments, an investment advisor may be the way to go. If you're seeking holistic planning advice: A financial planner is appropriate if you're seeking broad financial-planning guidance--on your investment portfolio, but other parts of your plan as well. Seek out someone who calls him/herself a financial planner and ask prospective planners if they've earned the certified financial planner or chartered financial consultant designation. Many financial planners are also fiduciaries; to be sure, ask the planner about that before hiring him/her.

Question 2: Are you seeking advice on a few specific issues or do you need help with your whole plan? Do you need one-time/periodic help, or ongoing assistance?

Once you've determined whether you're looking for investment advice or financial-planning advice, the next step is to consider what specific items you need help with. Decide if you're seeking advice on a few specific issues, or problem spots, in your plan, or if you expect to need ongoing assistance. Knowing whether your needs are surgical or more encompassing can help you be an efficient consumer of advisory resources.

If you're seeking broad and ongoing financial help: If you expect that your advice need will be ongoing, paying a recurrent fee--say, annually--may be more cost-effective than paying for advice on an a la carte basis. Most advisors who charge in this way levy their fees as a percentage of your assets; the percentage may decrease the more assets you have under management with an advisor.

Question 3: How hands-off (or hands-on) do you wish to be?

In a related vein, ask yourself how much of a role you'd like to play in managing your finances going forward. Do you want to be part of the planning process and handle certain parts of your financial plan yourself, or would you like to delegate most of the decision-making?

If you'd like to delegate: This setup can make sense for very busy people who simply don't have the time or inclination to participate in the planning/investment-management process. It's also something to consider for older investors who are concerned about the possibility of cognitive decline and its impact on their ability to manage their own finances or investment portfolios. Paying an advisor a percentage of assets annually or hiring one on a retainer basis can make sense for delegators. If you're willing to handle certain aspects of your plan on your own: obviously, the more work you're willing to do yourself, the more you should be able to shave off the advisory fees you pay.

Question 4: How comfortable are you with technology?

While many advisors still meet face to face with their clients in their offices, technology is changing the advice industry fast. Robo-advisors employ computer algorithms to deliver often-very-low-cost investment advice. Most human advisors also rely heavily on various software programs to craft their client plans. Many advisors are also employing technology to facilitate interactions with their clients. If you're very comfortable with technology: You may be able to shave your investment-management fees by employing some type of technology-driven advice such as a robo-advisor.

Question 5: Do you have a specific investment philosophy you'd like to see your advisor employ?

Are you a believer in the benefits that can accrue to index funds and ETFs thanks to their often-low costs? Or do you like to employ actively managed funds and/or individual stocks in the hope of beating the market? Do you want your advisor to be strategic in managing your asset allocation (i.e., long-term and hands-off), or more tactical in his or her strategy? Thinking through your investment beliefs and articulating them to a prospective advisor is a crucial step, especially if you're leaning on the advisor for ongoing investment guidance.

If you're open to allowing the investment advisor to ply his or her own strategy: Even if you don't have a strong view of how you'd like your assets to be managed, it's still important to ask some questions about strategy. Is the advisor clear and transparent about his or her approach? Does the advisor employ low-cost funds or more expensive ones? Taking the time to understand your advisor's strategy can help you stick with the program through varying market conditions.

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About Author

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

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