(This is the first in a two-part series on the things you deserve to know from your financial advisor.)
All successful financial relationships are based on trust, but this creates a dilemma for those offering financial advice. Many of the structures and practices in financial services are designed to benefit the service providers and can be in direct conflict with the best interests of the client. And even perfectly sound financial tools can be rendered inappropriate when applied too broadly or driven by aggressive sales methods.
This leaves the consumer in the difficult position of deciphering and evaluating industry practices and determining whether these practices fit his needs. Regardless of whether they call themselves a broker, advisor or planner, here are things you deserve to know from the person you are considering or with whom you are working.
Who is the advisor? As with most professions, the background and experience of the advisor significantly affects the service provided. You simply have to ask to determine the advisor’s work experience, professional designations, how long the advisor has been in the business and whether that experience includes different functions. A broader knowledge of the business could support a more personalized relationship rather than narrow, standardized solutions.
Is the advisor a salesperson or “asset gatherer” or does he continue to serve as the ongoing contact for sales and service? Is he able to directly deal with your problems or simply refer them on to someone else? Finally, what is his involvement or influence with the investment decisions or recommendations?
Much, but not all, of this information is available through required disclosures or regulatory agencies. Registered investment advisors must provide clients with a Form ADV disclosure or similar brochure and annually offer to provide an updated copy of that disclosure. For any broker licensed by the NASD, a background check, including any investor complaints, can be easily conducted through the NASD website (www.nasd.com/InvestorInformation/InvestorProtection).
Does the advisor want to know me? This is the two-way street aspect of the relationship, and most investors ignore this question, assuming that the advisor will ask for everything he needs. Obviously, an overemphasis on getting you to write the check or grant access to your funds is a bad sign, but there is much more to it.
A competent advisor needs to know a great deal about your overall financial situation that extends well beyond your investments. Your goals and your tolerance for risk are also critical. Advisors may use a variety of tools to extract and analyze all this data, but if they don’t bother at all it will be left to chance that your needs are met.
It is just as important that you be completely honest and open with the advisor. Too often clients are embarrassed to admit their true feelings or goals, or say what they think is the “right” answer, or repeat what they have read or heard, or embellish their situation if it is unpleasant or difficult. The advisor can’t read minds and can work only with what the client gives him. If during a physical examination the doctor tells you to take off all your clothes, you do it. If you’re not willing to be equally forthcoming about your finances, you’re wasting everyone’s time.
What is the investment approach? If the advisor has a narrowly focused approach (small growth stocks, for example) it should be clearly disclosed with the caveat that it might not be appropriate for everyone. All other advisors will likely say that their philosophy is to create a portfolio commensurate with your goals and tolerance for risk, which is a standard but perfectly legitimate answer.
The challenge is to get beyond that broad philosophy. What type of investments will be used and how will they be chosen? To what extent will the portfolio be personalized rather than an off-the-shelf construction? Will the investor have an opportunity to influence or direct any of the investments? How will the portfolio change over time with changes in the investor’s circumstances or the market? Who are the real investment decision makers, and how are they accessible?
If the advisor is unwilling to discuss these questions, offers vague responses or is somehow offended that his expertise would be questioned, the investor should proceed with great caution. Once a portfolio is constructed, the investor still has the responsibility to confirm that it is consistent with the promised investment philosophy. Too many advisors say one thing and do another, either from inattention or lack of investment discipline, leaving their clients at unanticipated risk.
(Coming in Part Two, more on the advisor relationship, fees and compensation.)