In our last blog post, we discussed best tips for preparing for an interview with a financial advisor. This week we will be discussing best practices and also things to watch out for in the consultation itself.
The Initial Consultation
Now that you have your list of potential advisors and have scheduled time to meet with them one on one, it’s important to make the most of the meeting by asking the right questions. First and foremost you want to know about their business and who they work with. Ask what their average client looks like in terms of demographics. Also, ask what their ideal client looks like. This can provide good insight as to whether or not you will fit in. For example, if you are on the doorstep of retirement and the advisor’s average client is 43 years old, then this advisor may not be the best fit. Ask how many clients they personally work with. Some advisors work with 500 clients and in some cases upwards of a thousand. Keep in mind there are only 2000 working hours in a year. If your advisor has 500 clients, you are most likely only receiving 4 hours of attention each year!
Next, you will want to get an idea of their service offering. Find out what continued services will you receive during the course of a relationship. Ask if they will provide advice on non-investment financial issues. This is important because this will quickly help you identify the advisor who strictly manages assets and nothing else versus the comprehensive wealth advisor who oversees all aspects of your financial picture. You want to find an advisor who will provide ongoing services to advise and assist in your plan’s implementation as well as future plan revisions.
Other continued services questions to ask:
- How often do you send out portfolio reports?
- Will I continue to receive a written analysis of my financial situation and your recommendations?
- How often do we meet and review your plan?
Finally, a critical area of questioning has to do with how the advisor is compensated. At this point, your examination of services the advisor provides has given you a basic idea of the value you would receive from them. Once you understand the advisor’s fees and expenses you can determine whether you can expect to get your money’s worth by hiring them. You should ask:
- How is your compensation calculated?
- How does the advisor charge for the services?
- Hourly rate
- Flat fee
- Percentage of assets
- Commission (fee per financial product sold)
Basically this comes down to two different scenarios, commission-based or fee-based. You want to hire an advisor that is not compensated based on transactions or commissions. This eliminates a conflict of interest. If an advisor is compensated on a transaction or selling you a product, you have to wonder if that transaction or sale was truly in your best interest. A fee-based advisor, ideally fees based on a percentage of assets managed, has few conflicts. If the value of assets the advisor manages goes up, so does the proportional fee. The same thing goes if the value goes down, the advisor’s fees declines.
Red Flags
- If you are charged anything for the initial consultation. This tells me that the advisor has no interest in investing in a relationship to learn about you and your goals. They just want to collect their fee.
- If the focus of the initial meeting is more about their slick financial products than it is about you!
- Not willing to meet face to face.