Wednesday, April 07, 2010

I Avoid Financial Advisors with These Characteristics

In my experience, I have found it challenging to connect with a person that matches what I expect in an excellent financial advisor. Many candidates have what I consider a "fatal flaw" in a financial advisor. Here are some of the key misses in my expectations:

  • Insufficient financial mastery. When I was in my twenties I interviewed my first financial advisor. From the interview, it was clear to me I knew more than him about managing money and investing. The only difference was he was working for a brokerage on commission. I definitely wasn't going to pay someone who knew less than me.

  • High cost. The same financial advisor wanted to charge me 4% of assets for his services, which was primarily enabling me to invest in three non-public mutual funds. From the data he shared, I quickly determined the mutual funds were not beating market returns by 4%, which meant I was being overcharged. In addition, he wasn't offering any other financial services which I considered useful.

  • Slick sales pitch. I've met financial advisors who take pride in their ability to sell anything, including ice to Eskimos. They seem to have no interest in my needs, my goals or my financial situation. Their only goal is to sell me product A, whether I really need it or not.

  • Significantly different financial values. I prefer to work with an advisors that have similar financial values., e.g. frugal living, debt avoidance, and saving bias. For example, I would have difficulty relating to an advisor who lived beyond his means :-)
  • So far, I've only met two financial advisors who I feel do not exhibit these "fatal flaw" characteristics. The first one I met seven years ago and have hired to manage part of our retirement funds. I am happy to refer friends and acquaintances The second I met three years ago in my part time seasonal financial services job. Our work requires us to refer clients to an financial advisor in a partner company when needed. From my evaluation interview, I decided that he met my criteria for referring my clients.

    For more on The Practice of Personal Finance check back every Wednesday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2010 Achievement Catalyst, LLC


    Daddy Paul said...

    The slick sale pitch will make me run. I got sick of not doing well in the market so I put some time into being a great investor. Now my friends are all asking me for advice.

    Belmont Thornton said...

    A really nice and informative article.Asking for reference and look for prior track record of an advisor before appointing one.

    Bret @ Hope to Prosper said...

    I have been investing on my own for almost 25 years and I don't need an investment salesperson at this point. In the future, I may hire a fee-based advisor who has specialized knowledge of trusts, taxes and wealth management.

    My first investment experience with an "advisor" led me to a couple of conclusions:

    1) You can pick your own no-load mutual fund and do much better than the fee-based products.

    2) Most advisors, especially those who are younger, don't even have investments or a portfolio. They blow all of their money on status stuff to appear sucessful.

    The financial services industry always reminds me of the movie Wall Street, where Charlie Sheen is broke and cold-calling widows.

    Financial Uproar said...

    Nice post.

    I'm with Bret above. I think that most financial advisors just care about selling your products, and therefore an investor is much better off to manage their own portfolio.

    I'm reminded of what an older friend of my dad's used to tell me about his advisor. Whenever his advisor would recommend a product/stock, he'd ask how much of the advisor's money was invested in it. If the answer was none, he wouldn't buy the product.

    Of course, the advisor started answering that he did have money in the product. So Ed would say "great, next week show me a statement that proves it (with the amount of money whited out to protect the advisor's privacy) and I'll buy some."

    He ended up being a do it yourself investor. I wonder why.