Last week, we shared what financial advisors are and what they can do for us. (Click here to read.) Today, let’s cover some key factors and a step-by-step process to consider when choosing a financial advisor.
Selecting the right financial advisor is not simply a matter of identifying someone who is competent and qualified. The person or firm that you select should be a good match for your specific needs. In fact, finding someone whom you can trust and who can provide you with the correct advice at the right time should be your primary objective.
Here are some points that you should consider when you start the process of evaluating different financial advisors:
What Sort Of Advice Do You Require?
A financial advisor may have strong credentials and a long list of satisfied clients, but may not be able to fulfil your needs. That’s because the advisor may specialise in an area in which you don’t need help. Further to this, are you a tax resident in a foreign jurisdiction with specific tax and superannuation considerations? You may be looking for someone who can tell you how to maximise returns on your investments while you should ideally engage an advisor who has the required tax planning expertise.
It’s important to understand what exactly you are looking for. Do you want input on insurance and retirement planning or are you looking to trade stocks on an active basis? When you have identified the exact area in which you need help, you can begin your search.
Don’t simply ask the firm that you approach if they provide what you are looking for. Instead, try and determine if they have the required expertise. For example, if you want advice regarding estate planning, you could enquire about the type of trust that best meets your requirements. The answer that you receive will help you to decide whether the person that you are speaking to is a good fit.
How Often Would You Like To Consult With Your Financial Advisor?
It’s critical that you address this issue at the outset. Some advisors will meet you only once a year to review the performance of your portfolio. There will be minimal contact apart from this. You need to ask yourself whether this level of interaction is satisfactory for you.
Some clients prefer to be contacted and updated more frequently. If you want a greater level of support and guidance, you may prefer monthly meetings. Clarify this point before you sign up. But remember that, as a general rule, you should be able to contact your advisor or someone on his or her team as often as you want. If you can’t get advice when you need it, it may be better to look elsewhere.
There are various types of charges that you will incur when you consult with a financial advisor or when you purchase financial securities through an advisory firm. In addition to transaction fees for the purchases made on your behalf, there could be additional expenses as well. These could fall into two categories, direct and indirect.
Let us first address the direct payment that you will make to your advisor. This could be charged in various forms:
- You could pay an hourly fee based on the number of consulting hours. While this cost could vary widely, a mid-range advisor in the US typically charges between US$200 and US$300 per hour.
- The fees that you are charged could also be levied as a percentage of your assets under management (AUM). Expect to pay about 1% to 2% with the percentage typically dropping for higher levels of AUM.
Certain advisors, however, may not directly charge you any sum at all. Instead, they would receive an indirect payment by way of a product-based commission, say, on account of the mutual fund that you invest in. This could include an upfront commission as well as a trailing commission. The amount would be in the region of 1% as an initial payment to the advisor and 0.25% more for each year that you own the fund.
Which payment method provides the greatest advantage to the client? That depends upon your requirements and the quality of the advice that you receive.
Consider the example of a high net worth (HNW) individual whose portfolio is skewed towards equities. A one-hour session with an experienced financial advisor may result in the client switching over to a more balanced asset mix. The benefit of this advice could be far greater than the fees that the advisor charges.
On the other hand, an advisor may recommend a subpar mutual fund because it pays a substantial amount in commission. Although this advice comes “free”, it could result in low returns or even losses.
Check Their Credentials
Do verify an advisor’s background and qualifications before you commit yourself. At the most basic level, this means that you should check the person’s credentials on the website of the institution that he or she claims to be affiliated with.
But the validation process should not stop there. Has any client ever raised an ethical issue about the advisor? You should check online to see if there has been an instance of disciplinary action or suspension in the past.
After you are satisfied about these issues, you should see if there is a good fit. You should feel comfortable talking to the person that you plan to appoint. You may not want to deal with someone who is unduly aggressive or pushy.
Ask To See A Sample Report
It’s a standard practice for financial advisors to provide you with a report that details the performance of your portfolio. You will typically receive this on a monthly or quarterly basis.
This report should provide you with:
- A portfolio summary – this will tell you the amount that has been invested in assets such as mutual funds, equities, and fixed-income securities. You will also be informed of the value of your portfolio at the beginning of the review period and at its end.
- Details about your investments – you will be provided with details about asset allocation and asset classes. Each asset that you hold will be listed separately.
- Details about interest and dividend earned – this section will list the earnings from your mutual funds, equity holdings, and bonds.
Does the sample report provide all the information that you need? Remember that it may not be possible for the report to be modified to suit your requirements. That’s why it is important to ask any question that you have at the initial stages of your interaction.
Read The Contract Carefully
You will have to sign an agreement with the financial advisor that you select. Many investors make the mistake of simply agreeing to the terms that are listed on the printed form. You should read the document carefully and understand each of its clauses.
Take a day or two to study the agreement. Does it represent what you have been told in your meeting with the advisor? One area to watch out for is the level of freedom that the agreement provides the advisor with. For example, it should not allow speculative investments unless that has your specific approval.
How To Choose The Right Financial Advisor For You
Step 1: List down the reasons that you are planning to appoint a financial advisor. What are the amounts that you plan to invest? Are you clear about your goals?
Step 2: Carry out a review of the points in the earlier section and define the activities that you would like your advisor to carry out.
Step 3: Identify the advisors that meet your needs.
- Search via WEALTH – Asia’s leading marketplace for investors – to compare financial advisors. The website’s matching engine will suggest 3-5 financial advisors that would be a good fit for you.
- Visit the websites of these firms. Do they meet the criteria that you have listed?
- Speak to your friends or associates and seek feedback about the advisors that seem to be a good fit.
Step 4: Set up a meeting with 2-3 financial advisors. During these meetings try and ascertain which of the advisors will be best able to meet your requirements.
Don’t forget to ask about the fees that you will have to pay. Your query should not be “How much will I have to pay?” Instead, it may be better to ask “What is the amount that you will make on the basis of our relationship?” The answer to the second question reflects the total revenues that the advisor will earn from your account and this is a level of transparency that will lead to a more open, and long-lasting relationship with your advisor.
When you have this information, you will be in a stronger position to negotiate terms.
Don’t be in a hurry to make a choice. Wait for a couple of days so that you have time to think about the answers that the different advisors provided to your questions.
Step 5: Choose the financial advisor that you think is right for you.
The Bottom Line
A financial advisor’s role should not only be restricted to managing your investments. Although that’s definitely important, a good advisor should be able to help you to understand and address other areas too. Insurance, Tax and retirement planning are key issues for many individuals.
For others, maximising returns may be the main objective. It’s up to you to ensure that you identify what matters most so that you can find an advisor who is able to meet your needs.
As always, feel free to reach out to us if you’d have any questions or need help in anything mentioned above. Go well!