In 2008 and 2009 investors got pounded and lost a huge amount of money. It’s basically easy to make money in a good market, but tough to manage things in a bad market. Many folks were able to observe how their Financial Advisor handled this tough road, but were surprised to find out that their advisor was inexperienced or not capable of handling it at all.  In some cases there was no one behind the wheel at all.

Investors should be concerned with the quality of investment advice whenever an investment’s performance diverges from the investor’s perception of the riskiness of the investment.  When performance wildly diverges from the expectations it could be a sign of trouble and in the last year we got a whole lot of trouble. It was a very scary time for many of us.

Investing and planning should involve a professional, and it’s been proven that people who work with good Financial Advisors are more likely to achieve their goals. The problem is that most people take more time selecting a box of cereal than they do their Financial Advisor. It’s a very important decision and below are some great tips to help you with this process.

10 quick Tips when selecting a Financial Advisor

It’s not easy to find good help. There is no set of questions to ask or guidelines to follow when searching for a Financial Advisor. The most important thing is to know the different types of financial services offered by the various types of advisors. If you are thinking about changing brokers or advisors, or if you are wondering whether your current advisor is the right one, you can probably use some suggestions about how to find a competent investment advisor.

1. Experience – An advisor should have an appropriate amount of education and business experience. An advisor’s level of education is important, but experience is even more crucial. Advisors who have not experienced at least two market cycles probably don’t have enough perspective or insight. So ask them how long has he or she been actively managing finances for their clients. What market experiences have they been through and how has their back ground supported their clients.

2. Condescension – Beware of any advisor who belittles your concerns about risk, or who encourages you to buy investments you don’t fully understand. Fancy, complicated, or outside the box strategies are rarely good ones. A good advisor really tries to understand you and your needs to help chose investments that take in mind your risk, time-frame and goals. They also take the time to help educate you in your decision making process.

3. Writing - -An advisor should give you something in writing that describes the investments the advisor will recommend or make. Beware the advisor who tries to push a single product, or who says you have to decide right now or you miss an opportunity. How often will you meet and what reports will be used to track and monitor your progress.

4. Compensation — An advisor should tell you how he or she will be compensated. Advisors use a bunch of different compensation structures. They may get a commission on the securities they sell; charge fees, either flat or a percentage of the assets they manage for you; work at an hourly rate; or a combination of all of them. Ask advisers to detail exactly how they work and the total compensation picture from managing your portfolio. Also what are the services you will receive for the compensation?  How many times per year will you meet or review the account(s).How will they help you with your particular goals. Be wary of anyone who shies away from answering these questions or focuses your attention elsewhere.

5. Scale of Business — An advisor should be apart of a large organization, group or team (like a bank, or a national or regional brokerage firm), or, if they are from a small firm, they should carry “errors and omissions” insurance. When dealing with local firms, small firms or solos, you must ask about insurance like FDIC & SIPIC coverage. Who does the advisor check in with? The Madoff deal was largely about checks and balances so try to find out who oversees the advisors work.

6. Track Record — Past performance is not an indicator of future profits, but it is definitely an indicator of risk. Avoid managers and advisors who claim to way out-perform the market or their peers. It probably means they are taking more risk. Also be leery of Advisors that guarantee returns or promises better returns that what is normal.

7. Referrals — A referral from a close friend who has worked with someone over a long period of time 3-5 years or other professionals (e.g. a lawyer, or CPA/ accountant), especially when accompanied by statements like “I’ve sent other clients to this person, and they’ve been happy,” or “I’ve known this person professionally for 15 years.” It can be helpful to ask for references from past and current clients in life situations similar to yours. When talking to the clients, get specific about their experiences. How often did the advisor communicate with them? Has the advisor ever admitted to making a mistake? How often do they evaluate their goals with the advisor? Has anything about their relationship surprised or disappointed them? Has the advisor performed well in bull and bear markets? How easy are they to reach if you have a question? Is the adviser ethical?

8. Internet Search — Conduct due diligence. Run a Google search. Check the FINRA Web site (www.finra.org) under “Broker check.” Ask for examples of what the advisor has done in the past for clients, and ask how that worked out, especially in bad market conditions. Be curious. If anything makes you uncomfortable, go elsewhere.

9. Be Alert – If you are not capable of or inclined to review periodic account statements, employ another professional to keep an eye on your advisor, even if you must pay for that service. Most CPAs are familiar with account statements and certain financial transactions or your local bank may have a financial representative. It’s like getting a second opinion before surgery–you may need to do this.

10. Risk/Reward — Beware of advisors who tell you they can increase your income without increasing risk. What most investors don’t realize is that a small increase of just 1% per year in the yield on a bond portfolio means taking significantly more risk. The more that an investor “needs” the income, the more important it is to make sure the investor’s principal is secure. “Chasing yields,” as it is known, can be a dangerous strategy. On the other hand if you have limited investment funds and a greater need for growth risk maybe unavoidable. There’s an old saying no “risk” no reward.

 

You cannot afford to put blind trust in an advisor, financial services company, or firm. When selecting an advisor, investors cannot be shy or complacent. They must know the questions to ask, and be able to spot the warning signs when something is wrong. It’s a tough task, and even smart people too often get it wrong. The only thing harder than finding a good advisor may be making investment decisions without one.

The trouble is many folks don’t have the time or expertise to make all of their own investment decisions. So, having a professional on your side is crucial. How do you guarantee that your expert is reliable? The short answer is that you can’t. There are no guarantees. However you can be a lot surer than many investors are today.

You need to realize that you’re ultimately responsible for your family’s money — you’re the chief executive of your own investment company. Your financial adviser, mutual-fund manager, wealth manager and anyone else who handles your investments should report directly to you. Even if you don’t understand the ins and outs of investing as well as they do, you’re responsible for ensuring that they handle your money properly.

If you have any questions or would like more information on how to select an advisor, just click here to shoot us an email.  We also work with many well qualified Financial Advisors in your own home town and could refer a couple to you to interview.