Friday Finance: 10 steps to finding a GOOD financial advisor

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This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Continued from last week:

I’ve hopefully convinced you that it is not a good idea to wander into the office of your nearest financial advisor, turn your brain off and do whatever they say, any more than you would tell a new barber, ‘Do whatever you like!’  But now you may instead be thinking, financial planners are scary!  They’ll take all my money!  I’d better stay as far away from them as possible!

Relax.  Some financial advisors are excellent, most are satisfactory and only a few are downright dodgy.  Here is a step-by-step guide for finding a good advisor and for getting the most from their services:

1.  Look for proper, licensed providers.  Most countries have some kind of register:

In the US, go to https://www.sec.gov/check-your-investment-professional.  States are also involved in regulating this sector so check their websites, too.

In the UK, try www.financialplanning.org.uk/wayfinder.

In Canada, fill out the form at https://www.iafp.ca/findaplanner_detailed.php.  The main registration page was down at the time of writing.

In Australia, go to www.moneysmart.gov.au/investing/financial-advice/financial-advisers-register.

In New Zealand, go to https://www.fma.govt.nz/investors/getting-financial-advice/finding-an-adviser/.

Just because they’re licensed doesn’t mean that these advisors are awesome.  However, this simple step will at least protect you from some of the unambiguously dishonest con artists who might aim to pinch your money, as many of them will hopefully have been banned from practice for their earlier misdeeds, or were never properly registered to begin with.

2.  Look for a purely fee-for-service advisor.  That is, seek an advisor who asks for a fee upfront instead of getting a commission.  This can be expensive – about 1% of your assets under management (AUM) or a flat fee of $1,000 is not unusual – but it can definitely be worthwhile.  First, they ought not to have incentives to push you into commission-paying funds or insurance policies, and so will feel free to suggest whatever products they really think best suit your needs.  Second, if the fee is all upfront, you will know exactly what you are paying, and it will almost always be less in the long run than paying those awful trailing commissions for inferior products.

3.  Find an independent advisor.  Advisors who work for big institutions are often expected to recommend that institution’s own services.  I’ll give a little reversal to this later on.

4.  Be prepared.  Don’t wander in like a stunned mullet and ask, ‘Duh, what do I do about, like, money and that?’  Bring along your budget, a list of investments if you already have some, your questions (more on those below), and your goals.  Be ready to explain all this clearly and confidently.

5.  Interview a few advisors – at least three.  The initial meeting is usually free and is a chance to ask some basic questions and get a sense of each other.  Choose the advisor who you trust and who seems to be on the same wavelength as you.

6.  Be highly cautious of any advisors who (a) push speculative, get-rich-quick schemes, (b) recommend geared investments or any complex financial instruments that you’ve never heard of or don’t understand, or (c) who seem in any way shifty.  Go with both your brain and your gut on this.  Never invest in something you don’t understand, and if you notice these danger signals, run away.  As mentioned earlier, some complex and risky products can only be marketed to ‘sophisticated’ or ‘accredited’ investors – if you are reading this book, you are not one of those.  I suggest avoiding signing any legal statement saying you are a sophisticated investor, and also avoid the advisor that recommends you do so.

7.  Ask questions.  During the initial meeting you should ask:

a)  What are your clients like?  Are there others in approximately my situation? 

Someone who specializes in high net worth investors might be unsuitable for you if you’re not one, as might an advisor who mostly focuses on sorting out debt problems if you don’t have any.  Some advisors won’t even take you on if you don’t have enough money, so this might be a good thing to figure out over the phone or via email before you arrive.

b)  How do you charge?

Remember, an upfront and one-off fee is good, even if it is high.  An ongoing fee to manage your affairs can be acceptable as long as you understand it and agree to it, but make sure they do actually meet with you once a year or so to review your investments – sometimes the cheeky monkeys take the money for this service but then do nothing more for you!  This is called ‘fee for no service’ and was a big problem identified in that Australian banking scandal mentioned.  Commissions, especially trailing commissions, are bad.  I would almost say, don’t even bother getting advice from someone being paid on commission.

(c)  Are you free to offer any products?  What kind of products do you generally recommend?

If they mention index funds or other sensible products, that is a good sign.  Be cautious if they prefer actively managed funds or other high-fee products.  Ask them why, then refer back to my rather vitriolic argument on this issue and decide for yourself.

If you find an advisor who seems suitable, explain your financial situation and goals in as much detail as possible.  Go through your debts (if any) and where you are with paying them off, your living expenses, your emergency fund, your short and long-term goals, and your ideas for getting there, i.e. how you’re thinking of balancing growth and defensive investments.  This should be pretty straightforward if you’ve worked through this book like you were supposed to.

Be sure to discuss your plan’s tax-effectiveness.  This is one area where jurisdictions and individual circumstances will vary wildly, and where professional advice can be of enormous benefit. 

Ask about the relative merits of national or employer retirement savings schemes like the ones mentioned in the box earlier.  Ask about the plan’s tax effectiveness, how it invests, whether you can change, when you can withdraw, if it would be safe if the employer went bankrupt, and most importantly of all, how high the fees are.  Of course, you will have already tried to figure this out for yourself from the website, but now is a chance to check and confer. 

An index fund will charge less than 1% per annum in fees – usually way, way less – so if any product is costing you more than that, you need to ask why.  I suspect that the answer will be inadequate.  Anything that will cost you more than 2% in fees is a joke and your advisor is a clown.

Usually, once you move on to paid advice, your advisor will provide you with a written Statement of Advice which will explain exactly what they recommended for your situation.  This is mandated in many jurisdictions.  It is a legal document so keep it safe.  If you think you’ve been diddled then this will help back you up.  It also protects the advisor because if a client complains, this document ought to show that all advice was demonstrably in the customer’s best interests.

8.  Cool off.  Don’t jump straight into the products recommended.  Look over the advice again later, research it all online, and consult trusted friends or relatives for an alternative point of view.  Only go ahead once you’re satisfied that it is the best plan for your circumstances.  If, even after reading this book, you still don’t understand the advice, don’t invest until you do.  It is okay to walk away.  If you don’t understand a product and the advisor says, ‘Relax!  It’s risk free!” you should still say no.

9.  If you think you have received poor advice or have been ripped off then you may be able to seek remedy through the relevant body in your jurisdiction.  Try those registers of financial advisors for each county listed above or search for the relevant authority online.

10.  If you’ve found a great advisor who’s put you on to good, low-fee products that perfectly suit your individual circumstances, be sure to recommend him or her to your friends and relatives.  Great advisors swimming in an ocean of mediocre and poor ones ought to be identified and rewarded.  But be aware that a good advisor may one day turn into a mediocre one for some reason – I know a case where this happened.  Always keep your wits about you.

Reversal

And now for that reversal I mentioned a while back.  If you are now very confident with your investment skills, you may wish to take a cheaper option – go to one of those big bank/institutional advisors and take their free advice . . . with a grain of salt.  Consider their suggestions, keep in mind what their incentives and limitations are, compare it with your own research and proceed accordingly.

Alternatively, find an accountant who offers tax advice. Once you understand the basics of long-term indexing, tax is the most complex issue that you’ll need advice on. This might cost you a few hundred dollars.

Financial sections of newspapers, radio shows etc. often provide free, general advice on specific issues for those who write or call in.  This may provide additional information if you only need to clarify a particular issue.

Don’t hate advisors.  They have to make a living, and commissions are often how they do it.  The problem is, clients often underestimate the value of good advice and are therefore reluctant to pay what it’s worth up front, not realizing that the commissions will cost them more in the long run.  Either pay properly upfront or DIY it with some lower quality, free advice to double-check you’re heading in the right direction.

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3 comments

  1. TechieDude · 20 Days Ago

    I’ve had the opposite experience with investment advisors. We’ve had two that the accountant wife picked that were anything but aggressive. Matter of fact, I’d blow a gasket every time I saw a statement, as my account seemed to languish, while my other assets, not managed by them, grew. Mine grew after time, tepidly. My wife’s did not. The group was one that her employer used to manage their plan. The old lady’s money sat for years.

    No one told her she’d have to choose investments herself, so hers sat in cash for years. Interesting because my account with them was managed. She had a hell of a time contacting them not long after our first meeting. We had two like that – talk big, then vanish, with our investments on autopilot.

    So we found a better one a few years ago and it made all the difference in the world. Their risk modeling software is stunning, and after sizing things up, they crafted a plan that has been working well. What sold them to me was they had the same paranoia about the gubmint stealing our cash as I do.

    In the US, we’re heading for a 70’s era implosion. Technically, it’s here already. But the difference is this group will be ravenous for cash. They’ve been coveting retirement and investment money since the Clinton era.

    Liked by 1 person

    • Nikolai Vladivostok · 20 Days Ago

      Recommend that advisor to others.
      I’m looking for tax advice but am worried about seeming paranoid. Not sure how to bring up certain things.

      Like

  2. Kentucky Gent · 20 Days Ago

    For me, hiring an advisor is off the table. First of all, that takes all the fun out of it. And other reasons too.

    Like

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