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Seeking Investment Advice: 2. Finding a Good Advisor.

Continued from Seeking Investment Advice:  1. “Free” Financial Advisors.

Financial Advisors can potentially offer you a great deal of value.  Having someone expertly craft a portfolio of investments for you that reflects your risk tolerance in the context of a financial plan that supports your goals (often using financial planning software) can be the difference between sleeping well and success vs. stress and failure.

budgets, retirement planner and personal finance blog
Finding the best adviser
for you can be hard.

The hard truth though is that like any profession, some financial advisors are great, some are adequate and some can do you more harm than good.  Not all advisors are a good fit for all investors either.  So how is a person to tell?  There are no guarantees, but I think there are some things you can look for in your first interactions that can slant the odds in your favor.

Finding a good advisor who is good for you can be hard.

  • Red Flag:  Financial Advisor is focused on telling you about his or her great mutual funds and ETFs.
  • Better:  Financial Advisor spends most of their time learning about your goals, risk tolerance and overall financial circumstances.
  • Best:  Financial Advisor asks about your tolerance for volatility and willingness and ability to suffer short term losses.  Advisor talks about how diversification within kinds of investments (e.g. a number of different stocks in your equity portfolio) and across kinds of investments (e.g. domestic stocks, international stocks, bonds, real estate) lets you get the best return you can for a given level of risk and is able to suggest specific funds with no loads and low expenses that can accomplish all of this.
  • Red Flag:  Financial Advisor recommends you invest all of your savings without knowing about your income, debt or monthly living expenses (including budgets).
  • Better:  Financial Advisor suggests that paying off most or all debt is a better idea than investing and helps you decide how much to set aside for emergencies based on how long of a cushion you are comfortable with.
  • Red Flag:  Financial Advisor talks about how his funds or his companies funds have beaten the market over the last 1,3,5 or 10 years.  This is a marketing tactic usually used by advisors with access to several of each general kind of fund so that they can always find one that’s performed well to date.  This tells you little or nothing about how it will do in the future.
  • "Better:   Financial Advisor presents options for different kinds of investment funds emphasizing diversity, low annual percentage expense ratios (low is under 1% and in some cases 0.1%.  Some funds are 2.5%, 3% or even more) and no or nominal loads (fees for buying or selling).
  • Red Flag:  Financial Advisor is Free or charges a small planning fee and takes commissions from investment product companies.
  • Better:  Financial Advisor charges you a percent (not more than 1%) of the amount you are having him manage for you per year and takes no commissions from investment product companies.
  • Best: Advisor charges you an hourly rate or flat fee consistent with the value they are providing and this is their sole source of revenue for helping you.
  • Red Flag:  Financial Advisor is a specialist in an area like retirement planning (decide when to retire, how to retire), estate planning or tax planning that does not really apply to you.
  • Better:  Find someone who deals with clients like you as their primary business.
  • Red Flag:  Financial Advisor meets with you then makes a set of recommendations and that is the end of the relationship.
  • Better:  Financial Advisor recommends an on-going relationship where your investment choices are discussed and reviewed on at least an annual basis and where you contact them when your goals change over time or financial circumstances change in other ways.
  • Red Flag:  Financial Advisor has little experience and advertises no relevant credentials.  The term Financial Advisor is not indicative of any specific training, certification or licensing.  There are responsibilities (generally to act in your interests to the best of their ability) that go with using it but none of them have anything to do with competence.
  • Better:   Look for a Financial Advisor with relevant certifications (CFA, ChFC, CPA, CFP) or at least a relevant educational background (BS Finance, MBA) or years of experience in the field.

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