Consider that an elephant’s tail and trunk have roughly the same verbal description–cylindrical, flexible, long appendages. But these adjectives leave out important elements: the former is located on the elephant’s posterior while the latter is not only on his head but is also hollow, prehensile, and located between two tusks!
In the same way, I’ve been thinking about the potential pitfalls in the relationship between a financial advisor and his clients and between a client and his/her financial advisor. One may think he has the trunk when he really has a tail!
This liminal space is prone to grave misunderstanding, painful for both client and financial advisor. (Since everyone is involved in some kind of client relationship, stay tuned as this client-advisor relationship could also apply to you).
This week’s blog examines the relationship from the client’s perspective. Next week, I’ll cover the relationship from the financial advisor’s perspective.
When looking for the right financial advisor for yourself, ask the following four main questions:
Question 1: I don’t know what I don’t know. I think I’m here for investment advice (or a financial plan, life insurance, tax planning, etc.). What can you help me with?
Answer: A good financial advisor will get to know you, help you set priorities, and identify your financial gaps. THEN, and only then, will s/he a recommend concrete course of action. Because there are so many areas of financial expertise, you may need a specialist to address other needs.
As you meet with this person, ask yourself, “Is this person focused on my needs, or in love with his skills and products?”
When looking for a good advisor, monitor whether they focus merely on impressing you with their experience and skill or if they listen to you. Is the meeting centered on them or on you and your needs? You should not feel you’re being steered toward particular products. Great advisors will want to get to know you and what matters to you. A thorough professional will ask for more information and be able to do a better job for you.
Question 2: What is your background? What will our professional relationship look like?
Answer: You can find many excellent objective criteria at the Financial Planning Association.
Ask about credentials and experience. Working with an advisor with the CFP designation will provide you with someone with the training to take a comprehensive view of your financial situation. In addition, you should ask about the approach of both the firm and the advisor. Ask for references.
Also ask them, “What experiences have you had that qualify you as a financial advisor?” Great advisors are in touch with their own money story and have developed through personal challenges an awareness of the interplay between life and money issues in their own life. Having dealt with personal losses/tragedy can likewise be a powerful foundation for good financial advising.
Question: How are you compensated? Why did you choose this business model?
Answer: I found that melding two key principles helps in navigating the landscape. First, from international relations, I learned that where you stand is where you sit: whom you work for shapes what the world looks like. Another important business maxim to remember is “follow the money.”
Since the 1999 partial repeal of the Glass–Steagall Act of 1933, banks, insurance companies, and brokerages increasing look alike. The constant mergers and realignments make it increasingly difficult to discern where a person stands.
Against this backdrop, remember that any financial professional deserves to be compensated for the work s/he does for you. And you deserve to understand how his/her compensation works.
A few other questions you might ask are:
How do you get paid? Do you earn commission on the initial transaction only? Or do you have ongoing commissions that encourage long term service?
Do you get paid for developing a financial plan? Or do you get paid from managing assets?
What other companies or intermediaries also derive payment?
What potential conflicts of interest I should be made aware of?
(A good advisor will acknowledge that conflicts are always present and be open to your asking).
Question: How do I know we are a good fit?
Answer: Go into the meeting knowing what you are looking for in a financial advisor. Ask yourself what range of services you are interested in. An excellent financial advisor will consciously keep in mind the various dimensions of an excellent plan within the context of your:
- Personal profile (risk tolerance, family/life values and goals, etc.)
- Income projections and tax planning
- Insurance planning needs
- Retirement planning needs
- Estate planning needs
Check on their succession plans and who else in the firm you’ll be working with.
Ask questions like: Who will I be working with when I call or set an appointment? Do you adhere to a fiduciary standard? What do you mean by that term? What might make that challenging for you? (See questions above on compensation).
As my own financial planner says, do a “tummy check:” ask yourself, how does my gut feel when I’m with this person?
Jon Hokama is the Principal and Founder of Jon Hokama and Associates, LLC.
Toolkit:
You may be asking, where do I start in picking a financial advisor? Be sure to check out the Financial Planning Association website to see what additional questions you should ask. Additionally, a number of mutual fund giants have powerful complimentary tools to get you started.
For objective, low-cost financial planning advice, visit My Financial Advice. (Full disclosure: I have an informal relationship with this organization because I believe everyone ought to have access to affordable and objective financial advice. See also Emily Glazer’s 3/21/2012 article, Financial Planning on a Limited Budget in the Wall Street Journal.)
