Investors looking for a financial advisor will find an industry in a state of flux.
The rise of robo-advisors like Betterment and Wealthfront has made investment guidance available for pennies—but a robo won’t help you plan for the future. Following the repeal of the Department of Labor’s fiduciary rule, which would have required investment advisors to put clients’ interests first, how can investors gauge potential conflicts of interest? And if you’ve got decades before retirement, should you be concerned about the aging of the industry? (By some reports, four in 10 advisors are 55 or older.)
The first rule for advisor seekers: Don’t underestimate the seriousness and rigor this task demands. The quality of the financial advisor you choose—and your relationship—can have a major effect on your future well-being.
Before beginning your search, consider what you want from the relationship. While a robo can efficiently build a diversified investment portfolio, most people benefit from a human touch. From insurance to college savings to retirement planning to charitable giving, a good advisor will help you with all aspects of your financial life, and solve problems before they occur. Human advisors also earn their keep by helping clients avoid bad market-timing decisions—buying when the market is surging or selling during a crash.
Start your hunt by asking for recommendations from good friends and trusted colleagues who are in roughly the same financial position as you. You might also look for curated lists of advisors who adhere to high standards, such as members of the National Association of Personal Financial Advisors or practitioners who make the Barron’s rankings of financial advisors.
Once you narrow down the list, search for each advisor’s name in databases run by the Financial Industry Regulatory Authority (https://brokercheck.finra.org/) and the Securities and Exchange Commission (adviserinfo.sec.gov). (Barron’s, unlike some other advisor rankings, carefully vets the regulatory record of all advisors as part of its evaluation process.) Check the form ADV for red flags such as disciplinary actions and criminal convictions. The SEC database also allows you to search by firm, with access to information about the firm’s clientele, fee schedule, and conflicts of interest. The firm search turns up more useful information if you’re looking at a smaller or independent practice; big national firms have hundreds of pages of documents, very few of which are likely to be relevant to the particular advisor you’re considering.
Once you’ve ruled out advisors with lousy track records, plan to spend about two hours meeting with each of the names remaining on your list. Valerie Newell, managing director of Mariner Wealth Advisors in Cincinnati, says the meeting should include a broad overview of the advisor’s capabilities. Ask about the following items:
The portfolio management process
Does the advisor use asset-allocation models dictated by the home office, customized allocations, or a mix of the two? The more assets you’re investing or the more unusual your situation—do you have a special-needs child or big exposure to a single stock?—the greater the likelihood that you’ll want an allocation customized to your financial situation.
If you’re looking solely for investment management, this function may not be high on your list. But many people find that once their investments are sorted out, they’re ready to tackle issues such as funding their kids’ educations, planning for retirement and their heirs, and making charitable gifts. Your candidates may not be expert in each of these areas, but at a minimum they should be able to offer referrals to experienced professionals who are, whether within their firm or elsewhere.
Ask who the advisor uses as a custodian of client assets—that is, which institution will actually be holding your money. Most independent advisors are required to use a third party such as Fidelity Investments, Charles Schwab (SCHW), or BNY Mellon Pershing. (Bernie Madoff did not use a third party; you know how that worked out.) This is not an issue for huge firms such as Bank of America (BAC), Merrill Lynch, and Morgan Stanley (MS) which use their own banks as custodians.
Fiduciary versus suitability standard
Under the fiduciary standard, an advisor is required to put a client’s interests first, and must disclose and avoid any conflicts of interest. Registered investment advisors, known as RIAs, are still legally required to act as fiduciaries. Other financial advisors may act as fiduciaries voluntarily. Others comply with the suitability standard, which means they must believe that a particular investment is an appropriate choice for a client. Advisors following the suitability standard don’t have to disclose conflicts or even mention the existence of cheaper or more tax-efficient alternatives. Either option may be appropriate, depending on your circumstances and preferences, but if in doubt, go with a fiduciary.
Advisors use an array of pricing models, and the variety can make comparisons difficult. Many charge clients a percentage of assets under management. That fee is often 1%, with discounts for large accounts. Other advisors charge an hourly or project-based fee (for example, a few thousand dollars for a basic financial plan). And yet others are compensated via the commissions they earn for selling products such as insurance or their firm’s mutual funds.
Aim to reach complete clarity about each advisor’s setup in this initial meeting. “If an advisor isn’t prepared to describe exactly how they’re compensated and how they run their business, then you probably don’t want to work with them,” says Ray Sclafani, CEO of ClientWise, an advisor-coaching firm in Mount Kisco, N.Y.
Ask advisors who pass the first hurdle for a second meeting. The agenda: a deep dive into your finances, including the specifics of who exactly would manage your money and a detailed conversation about your family’s financial-planning issues. Listen for content, but also observe chemistry. “A lot of people in this business are a mile wide and an inch deep,” Newell says. “Spending time with someone helps you determine whether they’re an expert.”
Experts say a solid investment track record is the bare minimum. Increasingly, affluent Americans look to advisors for a holistic approach that includes advice on estate planning, taxes, and family matters. “The financial advisor has turned into a family advisor,” says Lyon Polk, managing director, wealth management, and a private wealth advisor at the Polk Wealth Management Group at Morgan Stanley Wealth Management. “Clients expect us to be excellent at investments, but then the conversation turns to other things: How do I help my children have a purposeful life and not be messed up by wealth? How do I create the time to pursue my dreams? Is my life running smoothly, and how do I keep from getting bogged down?”
Given the advisor’s expansive purview, consider whether he or she is in it for the long haul. Do they have a multigenerational team ready to form long relationships with your children and grandchildren? Are they investing in technology to run their business and manage your affairs efficiently and effectively? To get at the latter topic, ask how important technology is to the advisor’s practice—and only consider advisors who are enthusiastic about what tech can do for them, and for you.
These last points are particularly salient given the aging advisor population. “A lot of financial advisors have made a lot of money and don’t have the energy to invest in their business,” says Ron Carson, CEO and founder of Carson Wealth Management Group in Omaha, Neb. “They’re like doctors in their 60s who don’t keep up on the latest procedures. You don’t want rich, tired people managing your money.”
In the end, select an advisor whose credentials, philosophy, fee structure, and business approach make sense to you, and with whom you feel at ease. “You need to be willing to expose yourself to this person, almost like you would with a doctor or a shrink,” says Jill Schlesinger, a certified financial planner and a business analyst for CBS News. “If something doesn’t sit right with you, pay attention to that feeling.”
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