Finding the Best Financial Advisor for You

We are constantly asked, “There are so many options and companies to manage my money.  How do I select the best one?”  This is a difficult question because there is such a wide variety of individual needs, but we will try to present some basics to help guide you through your options.

To start the thought process let us state equivocally we are a big believer in the separation of powers.  What does that mean?  It means that even though your brother-in-law is a financial advisor, insurance salesman, CPA, and estate planning lawyer, you should not let him take over all these critical elements of your wealth management.  There are individuals that specialize in each of these important areas, and they are happy to work with each other on your behalf.  So our first basic concept is that choosing a financial advisor is only one piece of the puzzle to secure and grow your wealth.  You will need a team of professionals to get you where you need to be.

There are two basic types of financial advisors: transactional managers (stock brokers) and fee-based managers.  Here is the major difference.  Transactional managers don’t make money unless you trade your assets.  They receive commissions on a per transaction basis.  If you do not possess a sophisticated knowledge of stock trading and investing, you can leave yourself vulnerable to be taken advantage of under this scenario.  However, if you have a solid understand of investing and actively take control of your individual investments, this might be a good option for you.  The other type of financial advisor is a fee-based manager.  They charge a percentage of your portfolio on a quarterly basis whether your assets grow or decline.  The shortcoming with this type of manager is whether or not he/she is focusing on your accounts in a proactive manner.  There are two key questions to ask when determining whether your financial manager will fulfill you needs.  The first is, “How do you decide on what investments to place my assets on both a portfolio percentage and individual basis?”  And the second is, “Can you tell me what defensive strategies you utilize to protect my investments?”  Listen to what they have to say, and ask for their answers in writing.  Many large brokerages will tell you they have full-time money and hedge fund analysts in New York focusing on the market and your investment selections.  That sounds great, but should the economy indicate a major downturn, will this mega brokerage advise all their clients to exit the market?  This could be detrimental to the entire economy should they start to divest a trillion dollars from the stock market.

You can see there are quite a number of competing and conflicting elements to consider when selecting a financial advisor.  For the average middle class investor, we would advise you select a fee-based money manager.  Then the decision comes down to their knowledge of investment options and research of market conditions.  You may feel comfortable with an individual that manages a $100 million in assets and has only 25 clients.  However, will your needs be addressed by individual that manages $100 million in assets and has 325 clients?  How much personal attention you receive may be a deciding factor.  A good benchmark is $750,000.  If you have more than this amount to invest, then you should be entitled to personal service and proactive account management from a seasoned advisor.  Below this amount you will need to seek out a financial advisor early in their career, as they are trying to build a practice.  Many times these young advisors are a good option for small investors.  They are hard workers and want your business for life.  As your wealth grows they will benefit, so they want to make sure you are satisfied with their services during this time.

To recap, decide how involved you want and need to be in managing your wealth.  Ask potential advisors to communicate their investment strategies, both as a percentage of your entire portfolio and on an individual investment selection basis. And, ask them for their defensive strategies.  Once you think you have narrowed your decision down to two or three advisors, ask them for at least five references ranging from less than a year on up to how long they have been in business.  This will help you feel more comfortable when placing your wealth with an advisor.

Secondly, we believe a critical compliment to a financial advisor is an experienced insurance provider.  Insurance providers (salespersons) get a horrible wrap.  We have seenmany instances of seven-figure portfolios being wiped out due to unexpected situations.  Special needs children or other relatives, disabilities, long-term care, extended medical care, early passing of both parents.  A seasoned insurance provider can help you safeguard your future against calamity.  A good insurance provider will also have a thorough understanding of trust agreements and will be able to recommend options to secure a lawyer to ensure they are established correctly.

We highly recommend that you sit down with your financial advisor and your insurance provider together to decide what your needs are and the best manner to protect yourself, your family, and your assets.