Your understanding of an advisor’s process and how it corresponds to serving your needs is essential. When choosing a financial advisor, the single most important issue to consider is their compensation structure. Only independent advisors are ethically and legally required to act as a fiduciary, which means they must always put your interests ahead of their own.
What is the advisor’s compensation structure?
An advisor’s compensation structure can tell you a great deal about what your experience will be like. There are three basic types of compensation structures used by advisors:
- Fee-only: These advisors are entirely compensated by fees paid to them by their clients, usually as a percentage of the assets they manage.
- Fee-based: These advisors receive the majority of their compensation from client fees but may also receive commissions on some products such as life insurance or other insurance products.
- Commission-based: This person is someone who is not an advisor, but a broker of products. They are compensated, not for their advice, but on the buying and selling of investment products.
Does the advisor sell performance?
When an advisor you interview discusses their investment methodology, pay close attention. Do they highlight how much they have beaten the market lately? Or do they emphasize their ability to generate huge returns through a “specialized” or “proprietary” approach? If so, be wary. The promise or suggestion of consistent market-beating returns should be a red flag.
Is the advisor consultative?
The clearest sign of whether an advisor is consultative will occur during your first meeting. A consultative advisor will let you do most of the talking about what you are looking for and will ask you questions designed to identify what is important to you. By contrast, a non-consultative advisor will spend most of the time talking about themselves rather than learning about you and your goals.
What tools does the advisor use to maintain your wealth management plan?
A wealth management plan cannot be created once and put in a drawer. The plan needs to be monitored, reviewed and updated on a regular basis. Your advisor should have a systematic, disciplined method of reviewing your objectives and risk tolerance. Portfolios should be reviewed and rebalanced in order to keep the portfolio at the targeted allocation. Be sure to ask an advisor if they create an Investment Policy Statement for each client.