Financial advisors are not cheap. For many people, the fees paid to their financial advisor represent the single biggest expense in their household. So what should a good advisor do to earn those fees? Let’s first start with what they should NOT do.
If your advisor does any of the following, maybe it’s time for a conversation:
Picks individual stocks or bonds for your portfolio
If your financial advisor is picking individual stocks or bonds for your portfolio, then they are trying to “beat” the market, whether they admit it or not. Otherwise, why bother spending time choosing individual securities when they can just buy an index fund? The odds of your advisor successfully outperforming the market are slim. Especially when you consider that they spend most of their time meeting with clients or potential clients, and not researching investments.
Sells life insurance, annuities, or investment funds
If your advisor sells insurance or annuities, they have major conflicts of interest. Commissions and surrender charges can offer nasty surprises for you as an investor. The same goes for advisors receiving compensation from selling high priced mutual funds. Many A-class mutual fund shares cost 5% or more. So if you put a $100 into the fund, you instantly lose $5 on day one. Ouch.
Avoids discussions around advisory fees
Avoiding discussions around fees = red flag. Your advisor should be transparent about fees and be willing justify them without equivocation.
Ignores other vital planning areas
If your advisor only focuses on investments, then they are not giving you full value. Ignoring areas like tax planning, estate planning, and risk management can lead to serious issues down the road.
Now let’s take a look at what your advisor should be doing:
Get to know you
The number 1 goal of any advisor should be to get to know you and develop a deep understanding of your financial goals. It might sound cliche, but setting goals can make a real difference. It can help you clarify your thinking about what’s important and what’s not.
Getting to know you can also establish a firm relationship in advance of difficult times. Market corrections are painful, and also inevitable for a long-term investor. If your advisor knows you well, it will help her provide you the best support possible so you can endure the financial pain, stay disciplined, and play the long game.
Set up a plan
After getting straight on your goals and where you want to go, your advisor should then help you set up a financial plan. The plan should be written down and as specific as possible. The plan should be comprehensive and cover all relevant areas including retirement, investments, taxes, cashflow, debt, and insurance.
Help you avoid bad decisions
Panic and fear are the worst enemies of a long-term investor. There’s an old saying in the investment world: “risk resides between an investor’s ears.” As humans, we are all emotional creatures. Our feelings are important and serve us well in many aspects of life. But not in the world of investing. Abandoning your investment plan in the midst of a bear market ranks high among the worst possible outcomes you can have as an investor. In 2008-09, I witnessed investors sell everything and go to 100% cash in their portfolio, and then wait YEARS trying to figure out the proper time to invest in the stock market again. By the time they got comfortable enough to reinvest in the market, the initial losses combined with the lost opportunity for gains forced them to take drastic actions such as delaying retirement by 5+ years and skipping payments for their kids’ college.
A good financial advisor can help you avoid this sort of outcome. By providing a dispassionate, third-party viewpoint, your advisor can refocus you on your plan and financial goals and help you maintain discipline. Your advisor can also offer alternative measures to help reduce some of the financial pain that you’re experiencing, while still keeping you on track to achieve your goals.
Do what works
At the most basic level, your advisor should do what works and follow the evidence. On the investment side that means long-term passive investing, broad diversification, and low costs. On the financial planning side that means comprehensive planning, developing a thorough risk management strategy, tax planning, and regular updates.
I believe that any advisor who can get to know you, set up a plan, help you avoid bad decisions, and do what works offers reasonable value. If your advisor can do all that, and charge a fair and reasonable price, that’s even better.
