Finding the Right Financial Adviser for You
You no doubt seek out the advice and counsel of many experts. To manage your health you turn to doctors. To set up an estate plan you work with a lawyer. When you buy or sell a home you choose a real estate agent. We all trust specialists to handle tasks we aren’t particularly interested in or comfortable handling ourselves—be it gardening, plumbing or changing the oil in our cars. We turn to the “pros” because they have the experience and qualifications to give us the best possible advice and service.
A qualified financial adviser provides the same valuable services as other “experts” in your life. Given how important your investment success is to your future, settling for anything less than top-notch professional guidance doesn’t make sound economic sense. From building financial security for yourself to creating a legacy for your heirs, it is imperative to make the most of your money.
At Adviser Investments, we understand how hard it can be to search for and decide on a qualified pro to oversee your portfolio. You aren’t sure how to go about finding a financial adviser you can trust who can help you plan for the future. That’s why we produced this guide.
The Time Factor
Let’s face it, you’re busy. Between work, your family life and your desire to fit in a few hours of leisure each week, it’s hard to find the time to monitor your investments. And even if you are a buy-and-hold investor, you still need to stay actively involved with your money, the markets and the constant stream of global economic and political news. No stock, bond or mutual fund exists in a vacuum; everything in today’s world is intertwined; when something happens halfway across the globe, it can change the prospects for your investments.
There are more than 12,000 U.S. stocks and mutual funds you can choose for your portfolio. Many are terrific, but even more are duds. Moreover, a stock or fund that is doing well today could morph into a bad investment next month or next year. Staying on top of all the options available today is a full-time job.
The Responsibility Factor
In addition to everything else in our lives, we are now required to take on the task of managing our retirement assets. And that’s no easy feat. Many retirement plans offer a dizzying array of investment choices—it’s not uncommon to have more than a dozen investment options to choose from. Even more vexing is what to do with a retirement account when you retire or move to a new job.
Many people are also in line to inherit large sums in the future; expectations are that in the coming decades the U.S. will see the largest “wealth transfer” in our nation’s history.
Add it all up and it is quite common for folks today to end up directly responsible for large investment portfolios well before they reach retirement age.
Achieving True Diversification
You’re probably familiar with the theory that diversification is a key to long-term investing success. And it is. But understanding what constitutes complete diversification is trickier than it seems.
Diversification is a multifaceted concept that involves spreading your investments across asset types (e.g. stocks, bonds and cash), market cap (i.e. company sizes), geographical locations, investment styles as well as sectors and industries.
Try as you might, it can be hard for nonprofessional investors to look under the hood and make sure that they are truly diversifying their investments. For example, if you own two stock funds that purportedly have different “growth” and “core” objectives, it’s very possible that there will be significant overlap in their holdings—meaning you have not truly added to your portfolio’s diversification by owning them both. A good investment manager will look beyond fund names to make sure each piece of a portfolio serves a purpose.
The “market quilt” above shows why diversification matters. Each box represents the calendar-year return of a specific asset class or market index, ranked top to bottom. As you can see, the boxes move around quite a bit from year to year—one year’s winner can be the next year’s laggard. (The balanced portfolio is the average of every other asset class, which is why it is more or less in the middle each year.) While certain asset classes have gone on runs of outperformance or underperformance, there’s no pattern over time.
Our takeaway? Strategically owning different asset classes, stock market sectors and traditionally less risky positions like high-quality bonds means that you have a much better chance of participating in uptrends. Importantly, it also provides a defensive buffer against the funds in your portfolio that are underperforming.
How to Find a Good Financial Adviser
Choosing a financial adviser who is not only experienced and capable but also meshes well with your personality is crucial. Yes, you are hiring the financial adviser to do a job, but the stakes are high—and highly personal. You should be comfortable with the individual you intend to entrust with your financial future.
There’s no harm in asking friends and colleagues for references, but that’s just a starting point. What appeals to a friend may not be the right fit for you. Plan on spending some time interviewing at least three prospective financial advisers. Here are some shopping tips:
- Get personal. How long has the individual been a financial adviser and how long has their firm been in business? Experience has its advantages when it comes to investing; someone who has successfully maneuvered through both bad and good markets is a bonus. You also want to know how much money the individual/firm currently manages for clients and the average account size. Ideally, you want to fit right into the general profile of a “typical” client. We advise asking about the adviser’s experience, educational background and any professional associations.
Also ask for the firm’s ADV 2A. This is a document each investment advisory firm must file with the Securities and Exchange Commission. It gives general background information and gives an accounting of the firm’s services, fees and strategy.
- Get philosophical. Every financial adviser should be able to explain their firm’s investment philosophy. What do they consider success? Do they measure success month-by-month or are they focused on building financial security over the long-term? Ask a prospective adviser about their worst investment period. Down markets are a natural part of the investing process and every investor, professional or otherwise, will experience periods of underperformance in their portfolio; the adviser should be able to describe how they’ve managed their clients’ investments through falling markets. Successful investing isn’t only about making money in rising markets; it is just as much about preserving capital in lousy markets.
- Get down to basics. What does the adviser invest in? Stocks, mutual funds, exchange-traded funds? Do they use options and other derivatives; if so, are you comfortable with that added risk? If an adviser can’t clearly explain exactly what they do for clients in language that you can understand, consider it a red flag. Ask them in general terms what a client with a similar profile to you is invested in.
You should also ask what other services they offer. Can they help you with financial planning, setting up an estate plan, tax preparation or education savings? Are they a full-service wealth manager who can do all of the above? Do additional services cost extra or are they part of the fee? (See “The Compensation Conversation” for more on expenses.)
- Does the adviser have discretionary control over client assets? Make sure you understand how your money is managed. Quite often a financial adviser has discretionary control over a client’s money, meaning the adviser can make trades in the portfolio without first notifying the account owner. If that’s the setup, find out how soon you will receive confirmation of any changes to your portfolio. You want to hear immediately (within days) not once or twice a year.
- Where will your assets be held? Your financial adviser probably works with one or maybe two firms, or “custodians,” in managing portfolios for clients. What is the size and reputation of the custodial firm for your account? What guarantees or insurance, if any, do they provide their clients? Does your adviser have a good relationship with the custodian? For that matter, is your adviser just one of hundreds of advisers working with the custodial firm or are they a top client, with access to senior management should they need it?
- Are the lines of communication open? You need to know how often a financial adviser is going to be in touch with you. First, if you have questions, will you be able to talk directly to the adviser or their support staff without delay? If there is a customer service support staff, will you have a dedicated associate who will know all about you and your investments?
- How often will you get a report card? At a minimum, you should receive detailed quarterly updates. Also, ask if there is a general “letter” sent to clients that explains recent market activity; if so, get a few copies to review.
- Are they asking you the important questions? A good financial adviser will want to know a lot about your life; not just how much money you have to invest. Building the right portfolio for you requires understanding who you are and what your goals are. Is the money to be invested for your retirement or to leave to your children or grandchildren? Do you expect to need to cash out some of the account in 10 years or less to pay for a child’s college tuition? Do you have other investments that the adviser is not going to manage that might impact how the adviser will build your portfolio? What is your investment experience to date, and what level of risk tolerance do you have? Those are all crucial issues that can greatly impact how your money should be managed. If an adviser doesn’t take the time to ask you a lot of questions, move on to someone else.
- Does the adviser invest alongside you? It should boost your confidence when an adviser tells you their personal portfolio is invested in the same investments they recommend to clients. In the financial world this is called “eating your own cooking” and is something investment advisory clients should look for when shopping for advice.
The Compensation Conversation
CLIENTS PAY THEIR ADVISERS in a variety of ways.
- Fee-only. The adviser charges an annual fee based on the assets under management, commonly 1% to 1.5%, to be paid on a quarterly basis. (Adviser Investments is a fee-only adviser.)
- Commission-based. An adviser who works solely on commission makes money when you buy and sell assets. This setup creates the possibility of a serious conflict of interest: The more you trade, the more the adviser makes. Commission-based advisers also earn fees from front-end or back-end loads, hidden 12(b)(1) marketing fees and other potential givebacks from the financial firms whose products they recommend. Before working with a commission-based adviser you must thoroughly investigate and understand all the ways they are compensated.
- Hourly or project-based. An adviser who charges an hourly or project fee for service. Typically, unless you pay a recurring hourly fee, there is not constant oversight of your portfolio.
- A combination of any of the above.
MAKE SURE YOU ASK (AND GET CLEAR ANSWERS) on the following:
- Do you ever receive any payment based on the specific investments you buy and sell for me?
- How many different ways are you compensated for managing my portfolio?
- If the adviser uses mutual funds, you need to dig even deeper. In addition to the fee you pay directly to the adviser, you want to know if the firm uses true no-load funds; mutual funds that do not charge an initial sales fee (called a front-end load) or a deferred sales load (a fee levied when you sell fund shares). Investing in a fund that has those fees means less of your money is left to grow for your benefit.
- If the adviser charges an annual management fee, what is the percentage? You should also ask if there are any breakpoints: Once your assets reach a certain level, will the management fee be reduced?
Contact Us to Learn More
We know it’s a lot, but this guide should serve you well in your search. Please call or email us today if you have any questions about Adviser Investments—we’d love to hear from you. You can reach us at (800) 492-6868, email@example.com or by visiting the “contact us” section of our website.
This material is distributed for informational purposes only; and is not financial or investment advice. Speak to your financial adviser before taking specific action. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
© 2021 Adviser Investments, LLC. All Rights Reserved.
What You Need to Consider Before Choosing a Wealth Manager
Finding the right wealth manager for you is a daunting task, especially if you don’t know much about investing. But the relief of knowing you have a professional team working to help you hit your financial goals and seeing you through to retirement and beyond is priceless. This guide will help you get from point A to B.
We’ve laid out all of the key considerations for anyone searching for an adviser—both first-timers and those looking to make a switch. You’ll find the must-ask questions, the truth about what services might cost and how to thoroughly vet anyone looking to manage your money. Don’t sign a contract until you’ve read this guide!
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