Guidelines for investors selecting a new advisor

Sunday, September 19th, 2010

Recently, we’ve seen lots of media cov­er­age about the num­ber of investors who are rethink­ing the rela­tion­ship with their advi­sor. Research stud­ies indi­cate that some­where in the vicin­ity of 10% of investors say they’re likely to switch advi­sors or firms in the next twelve month, up from 6% a year ago.

In early June, I wrote a col­umn in the Globe and Mail titled “Tak­ing the time to find an advi­sor may be your best invest­ment”.  While directed towards investors, it’s also impor­tant read­ing for advi­sors talk­ing to clients think­ing about a move — the arti­cle out­lined four key points that investors con­sid­er­ing a change in advi­sors should bear in mind. Don’t rush the process

Given its impor­tance, choos­ing the right finan­cial advi­sor is a deci­sion that shouldn’t be rushed. Some­times in the past, investors have selected the first advi­sor they spoke to or made a deci­sion based on an advisor’s glitzy office and appar­ent suc­cess — and then regret­ted this deci­sion afterwards.

When look­ing for an advi­sor, most investors begin by ask­ing peo­ple they know for sug­ges­tions. And while a refer­ral from some­one they trust cer­tainly increases the odds things will work out, just because an advi­sor is a good fit for a friend doesn’t mean they’ll be right for them.

Just as in any impor­tant deci­sion such as buy­ing a house or switch­ing jobs, to increase the odds of get­ting this right, investors need to gather lots of infor­ma­tion and dig deep before deciding.

Given the poten­tial impact of this deci­sion, it’s essen­tial for investors to take their time. In the col­umn, I sug­gested investors tell an advi­sor they’re talk­ing to that they’d like to sit down for a cou­ple of in depth dis­cus­sions before decid­ing if they want to work together.

Gath­er­ing information

Dur­ing these meet­ings, the first objec­tive for investors and advi­sors is to gather facts that will allow them both to get a sense of whether this a good fit.

It helps if investors are clear on the infor­ma­tion they’re look­ing for — based on recent con­ver­sa­tions with investors and advi­sors, I’ve devel­oped a list of 25 ques­tions that investors can draw from, in nine dif­fer­ent cat­e­gories such as under­stand­ing your invest­ment phi­los­o­phy, the role of finan­cial plan­ning in your prac­tice, the team that you have sup­port­ing you, how you’re com­pen­sated and what you’ve advised clients over the past twelve months.

Some­thing for both investors and advi­sors to con­sider in this fact find­ing process is to write down a list of things you’re look­ing for before­hand. After an ini­tial meet­ing, you can com­pare the answers you got to this list.

A full list of the ques­tions investors can draw from in a con­ver­sa­tion with a poten­tial advi­sor can be found at the bot­tom of this arti­cle, or go to the bot­tom of the arti­cle at: http://​www​.the​globe​and​mail​.com/​g​l​o​b​e​-​i​n​v​e​s​t​o​r​/​i​n​v​e​s​t​m​e​n​t​-​i​d​e​a​s​/​f​e​a​t​u​r​e​s​/​e​x​p​e​r​t​s​-​p​o​d​i​u​m​/​t​a​k​i​n​g​-​t​i​m​e​-​t​o​-​f​i​n​d​-​a​n​-​a​d​v​i​s​e​r​-​m​a​y​-​b​e​-​y​o​u​r​-​b​e​s​t​-​i​n​v​e​s​t​m​e​n​t​/​a​r​t​i​c​l​e​1​1​6​9​3​84/

Get­ting a read­ing on chemistry

Once you’ve got a han­dle on basic facts, the sec­ond issue for investors and advi­sors alike is get­ting a read­ing on chemistry.

For investors, are they com­fort­able talk­ing to you? Do you ask good ques­tions? Do you really lis­ten to their answers and appear truly inter­ested in their sit­u­a­tion?  Do you talk in plain Eng­lish and use terms that are easy to under­stand?  Do they like you as a per­son and feel they could be absolutely open with you? Finally, do they get pos­i­tive vibes and feel that they could be con­fi­dent in the advice that you provide?

Under­stand that the deci­sion to work together is a mutual one

It’s not just investors who are mak­ing judge­ments  — advi­sors should also be get­ting a read­ing on investors and whether they’ll fit into their prac­tice. A point I made in the col­umn was that the best advi­sors can pick and choose and are dis­cern­ing about who they work with.

In the col­umn, I talked about a num­ber of ques­tions an advi­sor might be look­ing to answer:

Is the investor really seri­ous about enter­ing a rela­tion­ship with an advi­sor they can trust and about stick­ing to their plan?

What’s their his­tory of stay­ing the course when we hit bumps in the mar­ket? Are you look­ing at pan­icked calls about going to cash every time the mar­ket drops a few hun­dred points?

How real­is­tic is the investor about the level of risk required to achieve the returns they’re look­ing for? Do they have the emo­tional equi­lib­rium to deal with mar­ket volatil­ity? When things go wrong, is there a ten­dency to point fin­gers and look for some­one to blame?

Do they have a his­tory of switch­ing advi­sors every time there’s a down­turn? A trail of past advi­sors or his­tory of com­plaints is a huge red flag

Finally, are they pre­pared to pay a fair price for the advice they receive — or will you be fac­ing never end­ing bat­tles on com­mis­sion lev­els, with the cost of exe­cut­ing trades with dis­count bro­kers as the pri­mary point of comparison?

I’ve had great feed­back on this col­umn from both investors and advi­sors. At some point in the next few days, con­sider set­ting a few min­utes aside to review this list of ques­tions — and think about how you’d answer if a prospec­tive client put these to you.

If you’re inter­ested in read­ing the full arti­cle, click here:

http://​www​.the​globe​and​mail​.com/​g​l​o​b​e​-​i​n​v​e​s​t​o​r​/​i​n​v​e​s​t​m​e​n​t​-​i​d​e​a​s​/​f​e​a​t​u​r​e​s​/​e​x​p​e​r​t​s​-​p​o​d​i​u​m​/​t​a​k​i​n​g​-​t​i​m​e​-​t​o​-​f​i​n​d​-​a​n​-​a​d​v​i​s​e​r​-​m​a​y​-​b​e​-​y​o​u​r​-​b​e​s​t​-​i​n​v​e​s​t​m​e​n​t​/​a​r​t​i​c​l​e​1​1​6​9​3​84/

25 ques­tions for poten­tial advi­sors — This is the list of ques­tions for investors on the Globe website

To investors select­ing a new advisor

Below are 25 ques­tions you could ask a finan­cial advi­sor you’re con­sid­er­ing work­ing with, bro­ken down into nine broad cat­e­gories. These ques­tions were devel­oped based on in depth con­ver­sa­tions with investors who have recently selected a new advi­sor and with finan­cial advi­sors themselves.

This list may seem over­whelm­ing ini­tially but remem­ber, it is unlikely that you will use them all — pick the ones that are the most rel­e­vant for you.

These ques­tions should not be used as a laun­dry list to blast through — to get a good han­dle on whether you and an advi­sor will work well together, exploratory meet­ings have to con­sist of a con­ver­sa­tion, not an inter­ro­ga­tion.  That said, some of these ques­tions can be a start­ing point to learn more about an advi­sor you’re talk­ing to.

It’s impor­tant to note that there are some tough ques­tions on this list and some will require real thought by the advi­sor– seem­ingly sim­ple ques­tions may need com­plex answers. Rather than focus­ing on an advi­sor who pro­vides quick and glib responses, look for some­one who really thinks about your ques­tions and gives con­sid­ered responses.

Gen­eral background

1. Tell me about your­self?  How long have you been a finan­cial advisor?
2. What did you do before you became a finan­cial advi­sor? What made you decide to pur­sue this as a career?
3. What kind of qual­i­fi­ca­tions do you have? Tell me more about those qual­i­fi­ca­tions. What do you typ­i­cally do to each year to stay current?
4. Tell me about the firm you work with? What attracted you to this firm?

Fit and chemistry

1. We all have pref­er­ences in the peo­ple we work with. What’s the most impor­tant thing you look for in a new client? Describe the kind of client you find you work with best?
2. What’s the aver­age asset level of your clients? How many client house­holds do you work with — and where would my port­fo­lio fit in?
3. Tell me about the last cou­ple of clients who left you and took their account else­where. Have you had any client com­plaints to your firm in the past cou­ple of years?

Gen­eral approach

1. Do you typ­i­cally com­plete finan­cial plans for clients like me? What would be cov­ered in this plan? What would the process be to develop this plan?
2. I know that some advi­sors put their pri­mary focus on get­ting the invest­ment process right while some oth­ers also get into issues like insur­ance, tax plan­ning, estate plan­ning issues and retire­ment plan­ning. Where do you fall on this spectrum?

Invest­ment phi­los­o­phy and your portfolio

1. What’s your invest­ment phi­los­o­phy and process?  In your expe­ri­ence, how is this dif­fer­ent from other advisors?
2. What kind of changes would you rec­om­mend in my cur­rent port­fo­lio? Tell me more about about your rea­son­ing for these changes. Which of my cur­rent hold­ings would you sug­gest we retain?
3. I know that some finan­cial advi­sors build port­fo­lios of stocks and bonds for clients them­selves, some del­e­gate this to money man­agers and some do a com­bi­na­tion of the two. Tell me about your approach to this.
4. How do you go about build­ing port­fo­lios or choos­ing money man­agers? To what extent do you rely on research from your firm or out­side par­ties in select­ing stocks and money man­agers.? How do you go about mon­i­tor­ing port­fo­lios or money managers?
5. I under­stand that there are two schools of thought about try­ing to get in and out of the stock mar­ket. I know some advi­sors are fairly proac­tive about mov­ing parts of port­fo­lios to cash if they think the mar­ket is poised for a cor­rec­tion, while oth­ers believe you can’t effec­tively time when to get in and out and tend to be fully invested all the time. Where do you stand on this issue? As well, what’s your stance on mak­ing calls on get­ting in and out of indi­vid­ual sec­tors such as energy?

Com­mu­ni­ca­tion

1. How often do you typ­i­cally meet with clients like me?  How long do those meet­ings last? What do you cover in those meetings?
2. How have you been com­mu­ni­cat­ing with clients like me since last fall? What have you been doing dif­fer­ently as a result of the mar­ket events since September?
3. How fre­quently do you call clients like me between meet­ings? How long does it typ­i­cally take to return calls from your clients?

Com­pen­sa­tion

1. In ball­park terms, what would my annual fee be if we worked together, includ­ing fees charged by money managers?
2. How are you paid? What kind of money would you make on my account annu­ally? What would I get for that?

Sup­port

1. Tell me about the team that you have sup­port­ing you.
2. Would you be my pri­mary con­tact or would I be deal­ing with one of them day to day? What kinds of issues would I be talk­ing to them about as opposed to you?

The last 12 months

1. How did you posi­tion client port­fo­lios like mine going into the begin­ning of last year?
2. What kinds of changes have you rec­om­mended to clients since last fall? What kind of advice are you pro­vid­ing to clients like me today? What are you doing to man­age risk in client port­fo­lios in light of how uncer­tain things seem to be these days?
3. With­out get­ting into the actual dol­lar amounts, in gen­eral terms would you be will­ing to share what you held in your own port­fo­lio going into last fall and what your own port­fo­lio looks like today?
4. In your opin­ion, what are the most impor­tant lessons  you’ve learned as a result of the events of the past year?

    Lat­est Advi­so­r­An­a­lyst Prac­tice Growth Sto­ries

Tags: Apparent Success, Buying A House, Depth Discussions, Fit, Friend Doesn, Gathering Information, Globe And Mail, Investors, Jobs, Media Coverage, Objective, Odds, People, Referral, Relationship, Right Financial Advisor, Sit, T Rush, Taking The Time, Vicinity
Posted in Dan Richards | Comments Off