If you’re an investor, the search for the right financial advisor takes persistence and a commitment to remaining objective throughout the process.
Starting with the search, as you select advisors that meet your criteria, through to the research phase as you narrow your list down to three or four advisors you want to interview, culminating with the interviews – you can’t let your emotions run the show.
Information has to be the guiding force throughout the advisor selection process.
Once you’ve gathered all the necessary information through research and interviews with your advisor candidates, the challenge becomes using that information to choose your advisor if you have two (or more) equally qualified candidates.
If you know the right choice after the interview phase, that’s fantastic!
But if you’re torn between finalists, what’s the best way to make a final choice?
Again, an emotional choice would be the wrong move here. Whether or not you like the advisor comes into play, but only after objective analysis has taken place.
This article will show you how to evaluate the information you have on your finalists to select the right advisor, then what you should do after you select one.
Step #1: Compare the Facts
Start with the facts for each advisor: their educational background, years of experience, quality certifications, and compliance records (which should be clean).
Any verbal information you received during the interview phase should be documented and verified to the best of your ability. For example, if the advisor says he holds a CFA designation, go to the CFA Institute website and verify that the designation is current.
Again, to be safe, you should discount verbal information that was not documented by the advisors. Too often, this information is part of a finely-honed sales pitch.
A good way to objectively compare the facts about multiple candidates is to create a spreadsheet that lists important information, such as:
- Years of experience
- Education
- Certifications
- Fiduciary status
- Compliance records
- Method(s) of compensation
- GIPS-verified track records (if they have one)
If certain criteria matter more to you than others, give them a higher weight.
For example, you may feel experience is more important than education, so you might give experience a weight of 1.5 and education a weight of 1.0.
Add in your weights, then score each advisor based on their credentials.
The advisors with the highest scores are your finalists.
Step #2: Rate the Finalists
When you get down to two equally qualified candidates, there are a couple ways to break the tie without resorting to an emotional decision.
The first is to use an online advisor rating tool like the one on the Paladin Registry website. Go to “Rate a Financial Advisor” under “Investor Tools.”
After answering ten questions about each advisor, you’ll receive an advisor rating from 1-5 stars. This is an easy, unbiased way to compare advisor qualifications.
A second method is to use tiebreaker questions. Here are some examples:
- Which advisor has the best qualifications?
- Who is the most trustworthy? (licensing, employment, compliance record)
- Who was the most transparent, providing information without being asked?
- Which advisor had the best communication skills? (verbal and written)
- Which advisor has the most experience working with clients similar to you?
- Which advisor asked the best questions about your current situation?
- Which advisor provided the best, most complete answers to your questions?
- Which advisor seemed more inclined to educate you along the way?
- Which advisor promised the best ongoing services?
You should have answers to these questions from your research and interviews.
If you don’t, contact the advisor to get that information before deciding.
Step #3: If You’re Still Torn, Use Intuition
If you have one superior candidate emerge, you should choose that advisor.
If you have two superior candidates, you can use your intuition to break the tie. Which one would you be most comfortable working with?
You have done your homework, so at this point a little subjectivity is OK as long as the professionals are equally qualified to be your advisor.
Remember that the best advisor may not be the most personable one. There are a lot of numbers and analysis in the financial advice business, so the best advisors may be intellectual, quantitative, and analytical. You might even classify them as nerds.
You may not want to play golf with them, but they are excellent financial advisors.
Intuition should be enough to break a tie between two finalists. If everything else is equal, there is usually one you feel more confident in selecting.
Once you’ve selected an advisor, there a couple steps before this process is complete. If things get bumpy right before the finish line, it’s OK to reconsider your choice.
Step #4: Review the Service Agreement
You’ll have to sign a service agreement and other documents before the advisor you’ve selected can move your assets to his broker/dealer or custodian.
We’d estimate 75 percent of investors do not read these documents before signing.
While the legal mumbo jumbo and industry jargon might make your eyes glaze over, it’s a mistake not to read the advisor’s service agreement before signing it.
These agreements can include a series of conditions, disclosures, disclaimers, limitations, and procedures that may make you very uncomfortable.
Advisors use sales tactics to get you to choose them. They tell you what you want to hear. The agreement describes the real conditions of the relationship.
Remember: trust what you see and not what you hear when your money is at stake.
Be extra cautious if the agreement is long, printed in small font, or loaded with legal language. At some point you may even feel a need to have an attorney review the document or someone who is familiar with these types of service agreements.
Here are five things you want documented in the agreement:
- Who employs or licenses the advisor, and who owns the firm?
- Is the financial advisor acting in a fiduciary capacity when he provides financial advice and services? Is there written acknowledgment in the agreement?
- Is the advisor’s fee schedule published in the agreement?
- Which firm (custodian) has physical possession of your assets?
- How do you terminate the agreement?
Accountability should also be included in the agreement (see the next section).
Any open issues should be negotiated in advance and added as addendums to the document. Some advisory firms do not like addendums that protect you.
It doesn’t matter what the firm or the advisor likes.
Read the service agreement and amend it if necessary before signing it.
Step #5: Establish Realistic Expectations
During the interview phase, you should have gotten some sense of the expectations each potential advisor had for your assets and financial goals.
Now that you’ve selected an advisor, you need to sit down together and establish some realistic expectations that have a high probability of occurring.
Once you agree on a realistic set of expectations, document them in writing.
Down the road, it will be difficult to remember exactly what you were told to expect.
Advisors should set realistic expectations and be accountable to them. However, advisors do not like accountability because it can cause you to fire them.
Make sure that your service agreement includes accountability so your advisor knows what is expected and the consequences if those expectations aren’t met.
Add accountability as an addendum if necessary.
Expectations and accountability are foundational to the advisor-investor relationship.
Recap: Choose the Right Advisor
Your key to selecting the best advisor is an objective process that is based on factual information, not sales pitches or gut feelings you have.
Relying on anything other than fact is a recipe for disaster. When you choose the wrong advisor, it could be years before you realize you made a mistake.
By that time, you could’ve paid thousands of dollars in excess fees, had your assets underperform, or be forced to deter your retirement.
On the other hand, the right advisor selection can be worth $1 million dollars if the annual improvement they provide is compounded long enough.
That’s the million dollar question: who’s the right financial advisor for you?
About The Author
Jack Waymire is the author of 5 Steps for Selecting the Best Financial Advisor. After spending almost three decades in the financial services industry, he left the industry in 2004 to develop PaladinRegistry.com, a free website that has educated millions of investors about financial advisors and matched thousands of investors to vetted advisors in their communities.
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