When it comes to personal finance and investments, you need not only the time but also the expertise to do it well. When you align yourself with an advisor who is tailoring the plan based on your goals, they can guide you across a range of financial issues, helping improve means and quality of life. For many individual investors, the question is not whether a financial advisor is needed, but how to find the right one.
Taking Inventory of Your Wants and Needs
A qualified financial advisor can understand the intricacies of the financial and investment industries and has the experience to help you navigate a unique path that is customized to your financial goals, be they wealth accumulation, preservation or transfer. The right advisor can build a relationship with you that goes beyond traditional financial planning or attaining short-term gains. Instead, a good advisor can work with you to build a long-term partnership that focuses squarely on putting your lifetime financial goals within reach.
Every day, we rely on professionals with the experience and knowledge to accomplish tasks we’re less qualified for or too busy to do. Think of the barista who foams your milk, the tailor who alters your suits, or the accountant who files your taxes. We may not stop to consider the rationale behind our daily decisions to hire outside experts, but these relationships enable us to achieve more and focus on matters we deem most important. However, there are some services we keep “in house.” For instance, you may be more likely to mow your own lawn, paint your living room or cater your own party. This gives rise to a conundrum we all face from time to time: How do I know when it’s time to partner with a professional or go it alone?
And from this one question, others quickly arise: Do I have the time? Do I have the expertise?
If you’re considering a partnership with an advisor, you’ve already taken the first step in acknowledging the importance of managing your finances and investments properly. Your next step should be to assess your current financial state and ask yourself these questions:
Have you identified your financial goals?
What concerns you the most about your finances?
How involved do you want to be in decision-making?
What are you looking for from a financial advisor?
The answers to these questions will give you insight into how engaging with the right advisor may be an asset to your financial life.
The Advantage of a Financial Professional
There are several ways in which a financial advisor can add value to your investment efforts. Among these benefits are guidance on developing an overall investment strategy, asset allocation, minimizing taxes, rebalancing, and how to structure and time withdrawals from your retirement accounts. Another valued benefit in working with an advisor is behavioral coaching — helping you manage counterproductive biases and behaviors with fact-based advice and reassurance when markets are stressed.
When you align yourself with an advisor who is tailoring the plan based on your goals, they can guide you across a range of financial issues, helping improve means and quality of life. That can mean avoiding costly mistakes that are difficult to recoup down the road. Savvy investors understand that the power of compounding returns is just as important when it comes to avoiding losses as it is with making gains.
A growing body of research has established quantifiable metrics on the value of more intelligent financial planning decisions for households who use professional advice. How much? The numbers differ based on the studies, methodologies and focus of the research, but Morningstar, in its focus on retirement income, concludes that “intelligent financial planning decisions” can add the equivalent of 1.59% in annual arithmetic returns.1,2
Furthermore, State Street’s research with individual investors3 suggests that in addition to the financial rewards that may accrue to those working with an advisor, it also provides increases in confidence and security that are no less valuable. Case in point: Individual investors not working with a financial advisor reported that they have less well-developed financial plans, have done less advanced wealth management planning, are less confident in reaching their financial goals, and feel less prepared should there be a downturn in financial markets.
Figure 1a: I Have a Well-Developed Financial Plan
Figure 1b: I Have Confidence in Reaching My Financial Goals
Finding the Right Financial Advisor
A relationship with a financial advisor can be about more than just making a return on your investments. It is also about protecting assets.
Selecting the right advisor for your financial life is key. If you want a solid working relationship that helps you manage your portfolio and make smart financial decisions, it pays to understand how their offering aligns with your objectives. Furthermore, there is a financial advisor for every budget and financial situation so be confident in your exploratory outreach; this relationship is ultimately an investment in your future.
To help you make an informed choice, in addition to the previously posed personal financial status questions, consider asking the following questions when speaking with prospective financial advisors.
1. What are your qualifications? Find an advisor who is qualified and certified.
To get the most value from hiring an advisor, find one who is not only qualified, but also listens and works collaboratively to develop a customized plan. Interview two or more potential advisors. The initial consultation should be complimentary, and this is your opportunity to ask questions, talk about your financial life goals and current money priorities.
You can research financial advice professionals online by using a free search tool to review the background, registration status and experience of financial brokers, advisors and firms:
An important note: Financial professionals have multiple governing bodies depending on what type of firm they work for, either a broker-dealer (FINRA) or a registered investment advisor (SEC6 or the state). Broker-dealers are held to the suitability standard7 set by FINRA, which requires them to reasonably believe that any recommendations made are suitable for clients, in terms of the client’s financial needs, objectives and unique circumstances. Registered investment advisors have a fiduciary duty to their clients according to the Investment Advisors Act of 1940,8 which means they have a legal obligation to provide suitable investment advice and always act in their clients’ best interests.
2. How are you compensated? Find an advisor who is transparent about fees.
No matter which type of advisory service you choose, take the time to understand what the expenses are. How is the advisor compensated? Are there any other fees for your investments?
When it comes to a fee structure, advisors typically fall into four categories: flat fee, commission-based, fee-based or a hybrid model. Ask which model your advisor uses and how fees are assessed.
How are you compensated?
What does that fee cover? Are there other costs associated with your services?
Do you have a web page or document that outlines the fee(s) and shows what I would pay for specific services as well as ongoing guidance and money management?
In addition to paying the advisor, other fees are associated with your investments. Some investment products, including mutual funds and exchange traded funds (ETFs), commonly include both transaction and ongoing fees9 as part of the structure of the investment vehicle. While minimizing fees tends to maximize performance over time, it is important not to let fees dominant your investment decision-making process.
What are the total fees to purchase, hold and sell this investment?
A trustworthy advisor will want you to understand your investments and the value of the services you are getting. You also should feel comfortable asking for information from your advisor on the topic of fees — or anything else.
3. What is the Client Experience Like? Find an advisor with values that align well with yours.
You are engaging with an advisor for their expertise as well as the objective view they can bring to your financial life. The holistic view of your finances is based on more than just your income level or the asset classes in which you invest.
Your finances, along with your financial circumstances, are always evolving. When selecting an advisor, it’s important to choose one who is attentive to your personal goals and will work with you on a plan to achieve them. Success along the way should be measured by sustainable returns, defined in terms of meaningful value to you as the client, and communicated to you with full transparency.
Figure 2: The Majority of Investors Working with an Advisor See Financial Goals As Equally Important to Personal Goals
For many investors, the client-advisor relationship is about collaboration and the experience, not just about investment performance. You should enjoy working with your advisor, trust that they understand you as an individual — not a statistic or lumped into a group — and know that you can have a comfortable rapport.
How does the financial planning process work?
What financial services do you offer?
What type of clients do you work with?
Communication and access to your advisor is a key part of the client experience. Inquire about their availability, both for regular business and extenuating circumstances. You should also seek to understand if they will collaborate with any other financial professionals, you may be working with such as a CPA or attorney.
Figure 3: Investors View the Advisor Relationship as a Partnership
Reliance on an Advisor: Nearly Two-Thirds of Investors Work with Their Advisor and Make Investment Decisions Together
4. What Is Your Investment Philosophy and Process? Find an advisor who has a process and strategy that resonates with you.
You want an advisor who takes a holistic approach toward your finances. They should look at the big picture, focusing on today, tomorrow, and the future. Your goal should be to integrate all of your financial assets into a complete wealth management plan.
When asking an advisor about their investment process, you are seeking to learn more about the guiding principles that inform their process of choosing appropriate investments for your situation. The answers to these questions will potentially help you:
Verify if priorities and values are in alignment
Be assured investment selections are based on a solid foundation (evidence-based strategy that can be clearly communicated)
Learn more about the investment management tools and resources being put to work on your behalf
Complexity doesn’t necessarily mean better — and you do need to believe in the process to stay the course over the long term. Furthermore, gaining clarity on how the investment management process works will help prevent misunderstandings.
The development of a personalized, long-term, disciplined investment strategy should include the following four items:
Your financial goals and comfort level when it comes to risk
The ability to help you make rational — rather than emotional — financial decisions
The ability to navigate complex, ever-changing market conditions and economic trends, as well as the ability to handle life events that may affect the performance of your investment plan
The ability to deliver a portfolio that is updated over time and keeps in step with your life stages.
Successful financial plans are disciplined, follow a well-thought-out process and are objective. When done well, they can typically reduce behavioral biases and emotions.
1Blanchett, David M., and Paul Kaplan. 2013. Alpha, Beta, and Now… Gamma. The Journal of Retirement, vol. 1, no. 2: 29–45. 2Arithmetic returns are the everyday calculations of the average. You take the series of returns (in this case, annual figures), add them up and then divide the total by the number of returns in the series. To view the calculations in the Morningstar research, please see Alpha, Beta, and Now… Gamma. 3State Street Global Advisors Individual Investors 2019 Study, a global survey on consumer sentiment, purpose and behavior in wealth management. 4The Financial Industry Regulatory Authority, or FINRA, is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry — brokerage firms doing business with the public in the United States. FINRA is overseen by the SEC (U.S. Securities and Exchange Commission), writes rules examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. 5Investor.gov is brought to you by the U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy (OIEA) and is an online resource to help individual investors make sound investment decisions and avoid fraud. The IAPD database provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms. The OIEA is dedicated to serving the needs of individual investors. 6The SEC is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. 7FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile. 8The Investment Advisers Act of 1940 is a US federal law that regulates and defines the role and responsibilities of an investment advisor/adviser. An adviser’s fiduciary duty means the adviser must, always, serve the best interest of its client and not subordinate its client’s interest to its own. 9In addition to compensating an advisor for their time and services, there are various other investment charges you may encounter. The SEC’s Office of Investor Education and Advocacy offers an Investor Bulletin, “How Fees and Expenses Affect Your Investment Portfolio” to educate investors about how fees can impact the value of an investment portfolio. That material is available here: Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio (sec.gov).
A fee structure that incurs charges when an investor opens an account or sells a financial product.
A fee structure that is based on assets under management.
A fee that is not impacted by the amount of work performed or market fluctuations.
A fee structure that combines the aforementioned structures.
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