Choosing a Financial Advisor

Why do most individual investors hire a financial advisor?

Why should most individual investors hire a financial advisor?

These are fundamentally different questions that result in radically different answers.

Financial advisors are hired for a myriad of reasons. Some investors choose an advisor for improving the investment returns while others choose advisors for helping towards some future goal. There really is no wrong answer to why you choose to work with one but the most important question is why should you choose to work with an advisor.

As an investor, we are choosing to turn over our life savings into the hands of another person. This person, the advisor, then has the ability to invest your money on your behalf. If you think about that for a minute, its kind of scary. You are handing your life savings over to a stranger for them to do what exactly? Is it your responsibility as the owner of the assets to make sure that you do your part to choose the right advisor. So how do you know if your working with a quality financial advisor or a used car salesman?

The first, and most important reason, is to focus on what the advisor is telling you to do. Any quality advisor should take time to meet with you, at no charge, to explain what services they can offer. Normally this introductory meeting involves a lot of Q/A between you and the advisor to learn about each other. I would recommend during this meeting you ask them a few simple questions.

  1. What is your investment process?
  2. How are you compensated?
  3. What is your background (licenses, certifications, educations)?
  4. Why do you do what you do?

Let’s start with the last question first, “why.”

I honestly think this is the most important place to start. I find a lot of advisors have “plain vanilla” responses to why they are in the industry. I once heard an advisor say “I really like numbers and helping people.” I’m pretty sure a 5th grade math tutor can say the same thing. Your goal from minute 1 should be to find your advisors “why.” Think about this from another angle. Who would you rather perform a surgery on you, a doctor with a passion for his work or one who cannot wait to go home.

I have learned as my career has evolved that you have to have a passion for what you do.  My old corporate finance job sucked; the multi-level management, phone call scripts, and the quantity over quality approach drove me to quit. And i’m not the only one. Still, thousands of mindless, stressed, and unhappy financial advisors sit on the other side of the desk of investors everyday. It’s terrifying to think about but your basically playing Mindsweeper trying to determine if your picking a good advisor.

Image result for minesweeper

With a job change, finally found what I enjoy. I now spend countless hours reading about the markets, listening to investment and financial planning podcasts, and spend a lot of my free time writing all these posts for the good of others.

My passion stems from being burnt once by a “stock tip.” When I was an uneducated college student, an advisor recommended me a stock, I put all my college savings into it and watched it go to $0. I originally planned to go into the technology field but losing money really stuck with me. A stupid mistake in hindsight, but since that day, I vowed to spend my time learning about the markets, how stocks work, investor psychology, and so much more. My “why” is that I want to make sure friends, colleagues, and clients don’t run into the mistakes that I made. I know the pain of losing money and want to make sure others don’t have to do the same. With the amount of stress your money can bring, I want to help my clients avoid this completely.

The “why” should be pretty easy to determine. But, if an advisor cannot simply articulate something like this, you are probably not in good hands.

money stress

Next, compensation. Your goals and the advisors goals should be aligned. I’m going to emphasize my next statement.


I cannot stress this enough. If your getting “free advice” your being ignorant. You need to have a firm understanding of how your advisor is being paid. It’s either one of two things:

  1. A commission
  2. An annual fee or retainer

Most firms charge an annual fee on assets you bring to them. The key words you are looking for is fee-based. Sometimes this cannot be avoided. For instance, if you need insurance for business or estate planning purposes, you might have to work with an advisor who is paid off the commission. There is absolutely nothing wrong with a commission but make sure its reasonable and disclosed upfront. If they cannot disclose their compensation to you, there is probably some hidden cost. You really need to make sure everything is disclosed upfront.

A few ways advisors are compensated:

  • When buying insurance, the advisor makes a commission
  • When buying an annuity, the advisor makes a commission
  • When buying a mutual fund, there could be an upfront “load” (aka commission)

You also need to look into the expenses of whatever investments are recommended to you. Sometimes the advisor does not get paid upfront but is instead compensated from a portion of your profits. These fees might be buried into the expense ratio of a mutual fund for example. I plan to dive into another post in more detail about these expenses but we will keep it high level for now.

Let’s just keep this very simple, if you ask your advisor to disclose their compensation structure and how they are paid, and it sounds half-assed, move on. There are thousands of other advisors to work with.

Background – This should be common sense but you always want to make sure you have someone working with you who didn’t “stay at a Holiday Inn Express last night!” A proper education is crucial in any line of work so make sure the person sitting across the table has a solid college degree, with a very certifications or designations.

My personal opinion, an MBA is not essential for a financial advisor but instead various certifications and designations are key. The most common credential that indicates you are working with a quality financial planner is the CFP® designation (Certified Financial Planner). You can simply go to and search for an advisor in your area. This designation is a  “promise to do right by my clients” indicator. Financial Planners with this designation normally hold themselves to a higher ethical standard which provides investors a bit of comfort. There is also a vigorous educational requirements to receive a CFP® designation so this is a good place to start.

I would also include with background, referrals. The best way to understand how a financial advisor is going to work, their process, and track record, is to communicate with that advisors existing client base. Don’t be afraid to ask for referrals and get to know people already with that advisor. This will normally bring to light how the advisors operates their practice and also some details on their planning and investment management process.

The last question to ask is about the advisors investment process. To be clear, being a financial advisor DOES NOT indicate they are competent to manage your money! If you have read any of my other posts, especially 72 Hours, you will understand how our brain derails our investment process. So are advisors immune to their Limbic brain hijacking their investments process? Absolutely not.

Just as our emotions follow the wave above, an advisor runs into the same problems. When the market is falling, and clients are all in the “panic” stage, so is the advisor. It is crucial the advisor has some either rules-based approach or hands-off approach to investing to not let their emotions roll over into their clients portfolios. If your advisor took you to cash in 2009, they have failed. If they took to long getting you back into the market, they have failed. An investment strategy needs to be emotion-less.

This is the main reason I emphasize that most advisors need to outsource their investment management. From simply a time standpoint, there are not enough hours in the day to sit with clients, running financial plans, establishing income plans, while also having time to review economic data, stock earnings reports, client portfolio allocations, and do research on new investment opportunities. It can be outsourced to another individual in the firm, provided they are qualified and investment management is their sole responsibility..

Also, an advisor holding their CFP® does not mean you are working with an investment specialist, that is a financial planning designation, not an indicator of investment expertise. I would look to see if any CFA® Charterholders (Charted Financial Analyst) are present in the firm or involved in the investment management process. This designation is the gold-standard for investment management education and a strong indicator of someone capable of managing your money. 

Another fun question you can ask an advisor is how they manage their own money. An interesting report from The Financial Times a few years back showed that nearly 7500 mutual fund managers had absolutely no money invested in the products they manage. I would consider it important that the advisor “eats their own cooking” especially when they are advocating you should eat it.

So think back about why you are hiring an advisor in the first place. If your reason to work with an advisor is for performance reasons, you might as well stop right where you are. A financial advisor CANNOT guarantee better performance and honestly should never market that they can improve your performance. Investments should aim to keep pace with general markets and match a level of risk you are comfortable with. Make sure your investment process can be held throughout good and bad markets. Simplicity is key as long as it can be maintained. It should not be the goal of any financial advisor to simply beat the S&P 500 every year.

When hiring a financial advisor, make sure you are doing it for the right reasons. If you are unsure how to get started investing, tend to get emotional with your investments, or simply need someone to guide you along to reach various goals, then hiring a financial advisor is a perfect option. Just make sure you spend your time wisely to ensure its the right financial advisor.

  • Ask the advisor about their compensation
  • Ask about their background and education
  • Ask about their investment process
  • Ask “why” they are a financial advisor

You should never hire a financial advisor for improved investment performance

You should hire a financial advisor to help keep your emotional brain in check

You should hire a financial advisor if you need help planning retirement

You should hire a financial advisor for help with college planning

You should hire a financial advisor if you need help starting to save for the future

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