Picking a Financial Advisor, by Scott Stolz, CFP, RICP (week 45)

 

 

There’s plenty of advice online on how to find a financial advisor that fits your needs.  And quite frankly, all of it is rather good.  You should most certainly understand what services any financial advisor does and does not provide, how he or she is compensated, and what credentials he or she has.  Understanding the advisor’s process and investment philosophy is also important.  The Financial Planning Association will most certainly tell you that you should select only Certified Financial Planners (CFP®).  Registered Investment Advisory Firms will tell you that you should only choose an advisor that always serves as a Fiduciary (someone that must put your interests first).  One such firm constantly runs commercials that claim “we do better when you do better” and “we never sell commissionable products.”  While I fully agree that any advisor should always put your interest first, just because an advisor does not receive a commission, does not automatically make that advisor a fiduciary.  It might eliminate a large potential conflict of interest, but it alone does not meet a fiduciaries duty of care – giving informed, well-considered decisions.  In other words, a fiduciary must know what he or she is talking about. 

So, here is my advice.  Find an advisor that knows what he or she doesn’t know and has a well thought out process to fill those gaps.  Early in my career I was in the audience when a financial advisor spoke to a group of home office executives from a wide range of financial services firms.  I’ll never forget what that advisor said.  I’m quite sure this is a direct quote:

“What you need to understand is that I’m ignorant about how much of this stuff actually works.  That does not mean I’m stupid.  It just means that there is too much for any one person to know.  Therefore, your job is to allow me to be ignorant without my clients knowing I’m ignorant.”

Now that’s an advisor that knows what he doesn’t know.  He realized that he couldn’t know everything about how every product works, what the income and/or estate tax implications might be, how economic changes might impact these products and still provide great service to his clients.  He needed help.  A lot of help.  Help from others on his team, his firm’s back office as well as help from firms that his company chose to partner with.  And that was 30 years ago.  The financial world is much more complex today. 

I think a lot of pre-retirees and retirees would be shocked if they realized just how little their financial advisor knows.  In all probability, that advisor might be an expert in one or two segments of the wealth advisory world, but even that would be a small percentage of the knowledge that would be needed to properly advise a client.  And that’s OK.  Your advisor does not need to be an expert.  They simply need to surround themselves with a team of people that know what that advisor doesn’t know.  Before you hire a financial advisor, meet the team.  Understand each team member’s area of expertise and how that person will support you.  Ask them what they don’t do.  There will be something.  Then decide if that something is important to you.  The more the advisor positions him or herself as an “expert,” the more skeptical you should be.

Over the years I’ve heard many clients say that I am just looking for a financial advisor I can trust.  I certainly get that.  No one should hire a financial advisor they don’t fully trust.  And while I’m a big believer that every individual should make an effort to understand their finances, the more you leave these decisions to your financial advisor, the greater the need for trust.  I would simply ask one question.  Who are you most likely to trust?  A financial advisor that claims to be an “expert” or one that freely admits to what they don’t know?