Although some 65 million Americans have financial advisors, too few know what these counselors do. Many clients tend to focus on unimportant details like: He’s a friendly guy. Or she’s good-looking. Or he has a killer golf handicap. Or my father likes him, so he must be OK. Those superficial assessments don’t serve you well.
To use an extreme example of how cursory traits can mislead advisor clients, look at Bernard Madoff – a supremely charming man who moved in wealthy circles and convinced folks that investing with him was a privilege.
But knowing your advisor well goes beyond scam avoidance. The vast bulk of advisors are honest. You can check with regulators to see if an advisor has any infractions; all the advisors on the AdviceIQ network, for instance, are free of black marks.
The real issue is that you should know your advisor and what he or she does, so you can get the most out of the relationship – or move on if you aren’t getting that. The fit has to be right. And you must be read in on what the advisor plans for you, and why.
A terrific and comical TV ad last year, from the Certified Financial Planner Board of Standards, highlighted how people can fail to understand an advisor’s capabilities. In it, various prospective clients listened to a suit-wearing man confidently throwing investment terms at them. They all said they trusted him to do a good job for them financially. Then the advisor confessed he really was a disc jockey who knew zilch about planning.
The intent of the ad was to convince the public only to patronize advisors with a CFP designation. More broadly, however, it warned prospective clients to look closely at their advisor, beyond surface appearances.
A lot of clients fired their advisors after the 2008 market dive. Should they have? Almost all investments got slammed during that horrible year. Sure, if an advisor has a consistently bad performance over several years, reexamining the relationship makes sense. One bad year does not reflect the advisor’s abilities, particularly when the entire investing world was shellacked.
If an advisor lays out why a 60/40 asset allocation (60% stocks, 40% bonds) is best for you over time – years like 2008 notwithstanding – and you fully comprehend that philosophy, then you have a healthy relationship that likely is worth preserving.
Author Simon Sinek ably describes the ideal client-advisor relationship in his book, Starting With Why. A celebrated work among financial types, it advocates that advice-givers home in on the overall intent of the strategy they provide. That way, clients are best served. A knowledgeable consumer is a good consumer, for a reason.
Clients may not always understand the intricacies of investing. While my late mother- and father-in-law were both brilliant and accomplished souls, they didn’t want to be bothered with the financial arcana that their advisor trafficked in. But they did want to know the general thrust of what he was doing.
You, as the client, should explicitly explain what you seek, and your advisor should show how you are going to meet those goals. Are you in your 30s, with a young family, and wish to grow your wealth in coming decades? Your advisor should describe just how she plans to get you there. Are you in your 60s, with a comfortable pile of assets, and want to protect them against bad financial weather? Again, you advisor should sketch out the thinking behind his plan.
Good financial advice is a powerful tool that you can use to craft your future well-being. You do well to fathom what it can do, and what the right one is for you. Forget whether the advisor has a pleasant smile and a firm handshake.
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