Determining & Choosing the Right Advisor

Step 1: Determining the Advisory Relationship For You

So, you’ve considered your financial situation and the potential benefits of working with a financial advisor.

Now it’s time to determine what type of advisory relationship is best for your individual situation, lifestyle, and goals. There are three main types of relationships you can enter into depending on what you’d like to gain from the partnership.

1. The traditional advisor: There are many types of financial advisors you could choose
   to work with—from registered investment advisors to fee-based advisors to brokers and insurance agents. But generally, in this relationship, an individual financial advisor or an investment firm manages your finances. The latter usually involves a team effort with your advisor being your main point of contact. Frequently these relationships can provide a broad range of financial services whereby your advisor will work with you to define short- and long-term goals and provide a financial plan to help you reach those goals.
2. The robo advisory: A robo-advisor is an automated, technology-driven approach to portfolio management that is designed to provide asset allocation based on an algorithm. It usually comes with a low minimum deposit requirement and typically provides you with computer-generated investment advice based on a series of inputs you provide about your risk preferences and investable assets—all without the use of human involvement.
3. The hybrid approach: In this model, a portion of your funds are managed by an advisor while the rest may be managed by a robo advisor. In some cases a robo-advisor may manage all of your funds but you will have access to a human advisor who is available to help answer questions and provide guidance when needed.

Step 2: Choosing the Right Advisor For You

If you’re just starting out, there is a lot to consider. Speaking in person with a financial advisor can help you decide what kind of advisory model best fits your style—even if you think a robo-advisor may be the best approach for your situation. Consider holding a preliminary conversation with a few financial advisors to understand what they offer and how they differ from one another before making a final decision.

Here are a few key questions to ask when interviewing an advisor:

How do you work with people my age and income?

Knowing your advisor is skilled in helping those in the same boat as you can be key to ensuring a good working relationship. If the advisor primarily works with retirees for example, they may not have the same insights into how to achieve your short-term financial goals like paying off student loans or purchasing your first home. Likewise, if the advisor works primarily with ultra-high net worth clients (and this is not your personal situation), you may not be the best fit for their business model, and as a result, you may not benefit as much from the relationship or be able to reasonably afford the fee structure.

How are you paid?

As we saw earlier, there are many different ways advisors get paid. While some advisors are fee-only, taking payment for their time and advice only, other financial advisors get paid a percentage of the amount of assets they manage for you. Additionally, some advisors receive payments from product providers in the form of commissions. Make sure to ask for a written breakdown of how you’re going to be paying for the advisor’s work and if you are unsure about any of it, just ask. A good advisor will be able to clearly explain their fee structure and answer any questions you may have.

Will you act in my best interest?

When it comes to establishing a relationship with an advisor, knowing they are committed to serving you and acting in your best interest is important. They should be able to provide a level of transparency about their services, payment structure, and advice and act as a trusted partner.

What’s your track record?

While most every advisor will tell you past performance is no indication of future returns, asking how you might benefit from the relationship can lead to important discussions about investment philosophy. For example, the advisor will likely ask you to complete a risk tolerance questionnaire—meaning, are you open to investments that are potentially more volatile if it means the opportunity to increase your earnings. Addressing how the advisor will mitigate risk and what investment mix they will use to help you achieve your goals can assure that you and your advisor are on the same page.

How often will I hear from you?

Understanding how much you’ll be in contact and what form that contact will take is important—just
make sure you’re comfortable with whatever the arrangement is. How often will you meet? What if you have a question or want to make a change? Do you prefer to get email updates? Setting this out at the start can alleviate confusion and ensure your peace of mind.

How can I monitor my investments and access my plans in between meetings?

Today, most of us expect instant access to information and the ability to execute transactions via our mobile devices—from ordering our dinner to managing and paying bills to depositing checks via our bank’s online portal. If this level of connectivity is an important part of your daily life, you should consider a potential advisor’s approach to technology. What technology tools does your advisor use to generate your financial plans and stay up to date on your accounts? Will you have access to your account and investment data online 24/7 or just when you meet to review your portfolio? Will you be able to collaborate with your advisor remotely if necessary, or will all meetings need to occur in person? If staying connected digitally and monitoring your strategy is important to you, finding an advisor who shares these values and can offer a digital experience is an important consideration.

Click here for [Part III]…