October 25, 2016

Choosing a Financial Advisor: It’s Simpler Than You Think

If your goal is financial independence, or at least a comfortable retirement, you may want a financial advisor to manage your investment portfolio.  Sure, it’s possible to do it yourself, but unless you have the skill, the time, and the drive to manage your own investments, you may be better off using an advisor.  Choosing a competent advisor is critical, but don’t be intimidated.  You can do this.  To start, ask each candidate these questions:

  • What is his/her approach to investing?  (e.g., asset allocation, fundamental analysis of industries or of individual companies, technical analysis, etc.)
  • How will you pay for his/her services? (e.g., hourly rate, percent of assets under management, commission on transactions, etc.)
  • How does he/she report to you on your progress?  (e.g., in person, hardcopy reports, electronically, over the phone)
  • What do the reports look like, and how often will they be provided?  Get some sample reports.

Then, you should then ask yourself the following questions:

  1. Did you understand the answers?
  2. Did the answers seem reasonable and fair to you, given your goals, objectives, and ability to tolerate risk?
  3. Were the periodic reports you saw coherent and reasonably detailed, and do they give you a clear sense of the client’s financial results?

Managing money well takes time, attention to detail, a good flow of information, and a consistent, methodical approach.  It is neither alchemy nor rocket science.  Financial management may not be in your area of skill, expertise, or interest, but it’s not beyond your comprehension.  Don’t do business with any potential advisor unless you can answer “yes” to questions (1), (2) and (3) above.

The answers the potential advisors give should be understandable, and reasonably specific.  Phrases like “We treat every client as an individual, with his or her own objectives and aspirations” sound great in a TV commercial, but how does that play out in the way this advisor will treat you?  Ditto for “We are a financial giant with a global footprint.”  It sounds good as a sound bite, but what does that specifically mean for you?

The reports you receive are also important.  They are essential for knowing how your money is doing.  But also, the way your advisor provides you information is a measure of how the advisor is honoring his or her commitment to you, the client.  If you don’t receive the reports you were told you would get, or the appearance and design of the reports is different from what you were expecting without a good explanation, replace your advisor.

Perhaps you’ve noticed that I have not included past financial performance among the questions to ask.  Don’t get me wrong – great returns are certainly better than mediocre returns, and advisors are entitled to brag about good performance.  But “past results are no indication of future results,” that mantra we hear so often, is not just cliché or a disclaimer.  Past results are hindsight and are subject to selective presentation.  People who focus too much on historical performance sometimes end up choosing advisors like Bernie Madoff.

Contrary to what you may have heard or may believe, understanding numbers – whether those numbers are about investment performance, business financial statements, or baseball box scores – is something that most of us are capable of.  Moreover, in so many professions and walks of life, the real professionals are the ones who make what they’re doing look easy, not hard.  That’s certainly true for money managers.  Keep in mind that you should be able to understand how your money is being managed, and one of the most important tests of a professional investment advisor is whether he or she can help you do that.


Randall Bolten is the author of PAINTING WITH NUMBERS: Presenting Financials and Other Numbers So People Will Understand You.  His experience includes nearly twenty years as a CFO of public and private software companies in Silicon Valley.  Please visit www.painting-with-numbers.com for more information.

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