Many investors ask family and friends for a referral when looking for a financial advisor. The innate thinking is if someone I trust is happy with that financial advisor, well then, they should be good enough for me.
There is a fundamental flaw in this theory: most of the people you will ask really don’t understand advisors themselves and it is usually a classic case of the blind leading the blind. There are some typical comments you hear when you ask your uncle, friend or other family member about their advisor. “I’ve been using him for years, he’s great”, “She is lovely and I’ve been working with her for years on our church functions”, “I think I’m doing fine, no complaints”.
It is of course a good thing to hear positive comments about the advisor your friends use. However, what you really want to hear with some specificity is exactly what this advisor does for her clients, what she does not do for her clients and if she is right for you and your situation.
Here are some questions to ask your uncle, friend or other family member when they are giving you a referral:
- Check their record: This is not a question, but the very first thing you should do when someone gives you the name of their advisor.
Before ever speaking with an advisor, you should check the FINRA website where all advisors’ backgrounds are disclosed. There is an additional link to the SEC website for those advisors that are regulated by either the SEC or state. You want to evaluate if the advisor has any disclosures, and if they do, understand those disclosures as part of your due diligence. Most advisors have no negative public record items, but if they do, understand well what penalties, disputes or fines have been made against the advisor.
2. Is your advisor an asset manager, financial planner or both (wealth manager)?
It is vital to know exactly what the advisor does all day long. Do they only pick investments? Then they are an asset manager. Do they only create a financial plan for you? Then they are a financial planner. If they do both, the jargon most often used to describe them is a wealth manager. Your situation will dictate which of these types of advisors you need.
3. How do you know they are doing well for you? What objective measures do you use to weigh the results of their service?
If your friend’s advisor is an asset manager, often the portfolio performance will be measured against some market index. If the advisor is a financial planner, a set of goals like saving for college or retiring at a certain age are set, so are they on track, ahead of goal or behind?
4. What does this advisor not do?
Advisors, like doctors and attorneys cannot possibly offer every conceivable financially related service, so what do they not offer? It can be very helpful to know what the limits of an advisor’s services are to help determine fit for you.
5. What do you not like about their service?
Every relationship has room for improvement, so what does your uncle wish his advisor did better? This feedback may or may not be relevant to you but it can be beneficial to understand where this advisor has potential weaknesses.
6. How often does your advisor review your portfolio/plan with you?
Regular reviews are common, so understanding the frequency of these reviews is helpful. Also, how your friend answers this question will be informative in that if the reviews are structured and detailed, your friend will likely go into detail when you ask the question.
Considering a relative’s financial advisor for your own accounts and planning can be a part of your plan when looking for an advisor. Being prepared with specific questions can help you better understand how good a fit that referral might be.
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