Posted by Ryan on February 20th, 2008 in Investment Planning

In Paying for Financial Advice we discussed how it is important to find out how your financial advisor is paid in order to understand exactly what their best interests are. While asking how they are paid is an important question to ask, it is not the only one. So how do you find a good financial adviser?

There are a couple of recommendations that are frequently offered, which I do not agree with:

• Ask a Friend for a Referral: Ask yourself, do your friends really know the difference between a good financial adviser and a bad one? They may have recently had a good year as a result of their advisor’s recent stock picks, but this does not measure long-term performance.
• Ask Financial Advisers How Well They Do: It is often recommended to ask for a firm’s “top advisers,” or to ask a financial planner how well he or she did for himself/herself in the past few years. The problem here is that if they are on a commission based schedule, their high performance does not necessarily mean their clients’ portfolio performed well. They could have just been very successful at selling funds that paid a high commission and convinced clients to trade frequently. Both of these have been shown to actually return poorer results than just a plain vanilla index fund that tracks the S&P 500.

So What is the Best Way to Find a Great Financial Planner?

In the personal finance world, experience is valuable. A financial planner who has years of experience and can back it up with results will cost you more money. That, in my opinion, is the cost for insurance and making more money in a good market and losing less in a bad. You can find out their track record by simply asking, but you should also do a background check with the SEC to see if he or she has any complaints on record.

While interviewing your potential financial planners, find out what their strategy is and what they personally own. This will tell you if you have the same goals and share the same philosophy. Find out how much risk they take with their clients’ portfolio. Also ask them what products they believe the most in and which one’s they would like to learn more about. This will tell you if they are honest and also give you some insight on what products they will be recommending.

The relationship you have with your financial planner is also important. If you don’t communicate well together and do not share an open, honest relationship, your money is at jeopardy. Make sure he or she is clearly able to communicate objectives, strategies and products. If you don’t understand then you shouldn’t be investing with them.

Spend enough time interviewing the financial advisers to be able to sufficiently tell if there is a personality clash. Find out how long his or her clients have been with them and ask for references. Don’t be afraid to call the references and ask how often they meet with their financial planner to review their portfolio.

What are some questions you ask when interviewing financial advisers?

Millionaire Money Habit: When shopping for a financial planner, do your due diligence. Your money and your retirement is at stake, and the process of finding a highly-qualified, highly-capable financial adviser should not be taken lightly. -RT

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• When to Fire Your Financial Advisor: part 3 of 3
• Paying for Financial Advice: part 1 of 3