How to choose the right financial advisor
With so many different flavors of financial advice to choose from, figuring out who to turn to for help with your money can be daunting. Here are some tips from a former insider.
Do you want someone to manage your investments, a holistic financial plan, help with a specific concern, or some combination of the above?
Many financial advisors are forthcoming about whether they focus on managing investment portfolios or financial planning. Be wary of individual advisors who claim they do it all, as many do, particularly if they also spend time hunting for new business and nurturing relationships on the golf course. Technology-driven DIY solutions have emerged across all areas of personal finance and, if used properly, can be more cost effective and reliable than any self-proclaimed human generalist.
A money manager who spends their day watching CNBC, pondering whether they should cut back on their Apple position, and calling clients to let them know they’re making a tactical shift into bonds because of their special “insights” about the yield curve (a common breed of advisor) is in no way going to have a solid grasp of complex insurance products, new regulations about inherited IRA distributions, the 2,728 rules governing the 13 different Social Security benefits, and a range of other nuanced financial planning concepts that may be of great significance to you in certain stages of your life. At the same time, an advisor who diligently stays on top of said planning topics will be the equivalent of a little leaguer going to bat in the majors if they’re also in the business of trading stocks and bonds for you.
If you value the personal touch of a human advisor and decide the DIY route is not for you, try to hire a professional who’s an inch wide and a mile deep in their dedicated field. If you have a variety of needs, find a firm with a team of specialists who can collaboratively serve you.
Do you want an ongoing relationship or a periodic check-up?
Financial advisors generally want to manage your money and, out of self-interest, aren’t usually open to giving advice on a one-off basis. It’s not always easy to find a quality advisor to conduct a one-off planning exercise for you, but they do exist and have fewer conflicts of interest. Above all, your priority should be avoiding the slow bleed of recurring management fees. Just know that management fees you pay advisors and/or mutual fund managers are rarely worth it, especially if you’re paying 1% or more for vanilla exposures that can be easily accessed through an ETF for a fraction of the cost.
For most people who aren’t ultra-wealthy (>$5MM in liquid net worth), the best path is to seek out a holistic planner who charges a flat fee to review your entire financial picture and, among other things, helps you determine an optimal long run asset allocation based on your existing exposures, values, and ability & willingness to take risk. Armed with a strategy for your portfolio, you can then turn to one of many high-quality robo-advisors to help you construct, monitor, and rebalance a diversified tax-efficient portfolio of low cost index funds. If and when your life circumstances change, rinse and repeat.
The level of investment in fin-tech over the past decade has been staggering. Robo-advisors like Wealthfront, Personal Capital, Betterment, and SoFi are some of the best and are worth checking out. From a risk-adjusted return perspective, these services are likely to outperform 9 out of 10 mutual fund managers and armchair analyst financial advisors over the long run, net of fees.
Qualifications are important, but not everything
For better or worse, anyone is able to call themselves a financial advisor. I recommend you look for an advisor with the CFA (Chartered Financial Analyst) and/or CFP (Certified Financial Planner) designations, depending on whether you need an investment expert (CFA) or planning expert (CFP). Seeing either set of letters should give you some confidence you aren’t dealing with a fraud or a complete hack — a good first step in your search!
That said, the CFA designation, which demonstrates a mastery of highly academic security valuation and portfolio management techniques, by no means implies an advisor with these credentials has an edge in the real world when it comes picking stocks or identifying major market moves in advance. Take it from me, I’m a CFA charterholder and spent a decade as a professional stock picker, and I’m not afraid to admit that my wife, who enjoys playing the market and doesn’t know the difference between free cash flow and operating income, has been markedly better at picking winners than me in the 10+ years we’ve been together.
The CFP program covers a wider swath of topics falling under the categories of retirement planning, insurance analysis, tax planning, estate planning, and investments. The CFP continuing ed requirements are rigorous, so you can assume you’re planning needs will be reasonably well-served as long as your situation isn’t super complex. Be mindful, though, that planners are not always willing to accept of the limits of their knowledge. Some may be reluctant to refer their clients to specialists — estate lawyers or CPAs for example — in situations that warrant greater expertise.
There are countless other certifications you’ll find on the business cards of financial advisors. Many are legitimate, and others can be “earned” with minimal effort and a couple hundred bucks. A quick Google search can help you figure that out. If you see a prospective advisor’s online presence feature a long string of unrecognizable letter combinations, it’s a pretty good indication they’re overcompensating for some less visible weakness.
If I were to pick one other letter combo to keep an eye out for it’d be the PhD: poor, hungry and driven. If you ask me, professionals who grew up in less financially secure environments and managed to pull themselves up by the bootstraps are naturally more inclined to be in tune with strategies that will grow your wealth compared to those who’ve never had to learn to hustle. An advisor who grew up with a silver spoon is likely going to be better at teaching you how to spend money than save money.
Experience isn’t all it’s cracked up to be
Another final bit of advice to consider: be cautious about hiring a money manager who has decades of experience and an impressive roster of clients. Those who fit that bill are more likely to give you less attention after the honeymoon phase of your relationship passes, to rely on heuristics that have worked for them in the past, and to overestimate their ability to know what will happen next. I’d be retired on a beach right now if I had a dollar for every vacuous investor letter I’ve read that features Mark Twain’s quote “history never repeats itself, but it often does rhyme” as a way of proving that grey hairs can be equated with prescience.
The reality is that throughout history, a small number of events that almost no one has been able to anticipate — the Great Financial Crisis, the pandemic, the invasion of Ukraine, and so on — have accounted for the majority of investment outcomes. Preparing for the unexpected and recognizing that the future might not look anything like the past is an essential component of sound investment advice, and a skill that’s more likely to be found in someone with an open mind and a fresh perspective.
Best of luck out there!
