When assessing potential financial advisors you should consider the advisor’s wealth management philosophy and general approach to financial planning.
An extremely important point to review, but one that many individuals overlook.
Being comfortable with the philosophical approach of your financial advisor is crucial for a few reasons.
Philosophical Agreement
Perhaps you are the sort of investor who wants to day trade and/or jump in and out of individual stocks based on tips from buddies and television talking heads.
If that is your approach, fine by me.
But maybe your financial advisor advocates a portfolio of low cost index funds using a buy and hold approach. If so, the two of you will have difficulty agreeing on an investment strategy. That may lead to unhappiness and frustration for both you and your advisor.
When assessing potential advisors, be certain that you share a common philosophy or there will be problems ahead.
Risk Tolerance
Part of the investment strategy should relate to one’s risk tolerance. That is, what level of risk is acceptable to you in your investment portfolio or personal planning (insurance, wills, emergency funds, education savings for children, etc.).
You also need to be on the same page as your planner with respect to risk.
For example, you are 35, single, with solid employment, and no major debt. Given your investment time horizon and situation, perhaps it makes sense to invest 75% global equities, 20% fixed income, and 5% cash reserves. But if you are the sort of person who cannot tolerate any real or unrealized losses in a calendar year, this may prove too volatile a portfolio for your desires.
This may be the “right” asset allocation in theory, but given your low risk tolerance it may not be the “right” allocation for you. If your planner pushes you into this asset allocation, you may have many sleepless nights, not to mention developing an ulcer.
In addition to investment philosophy, make sure you agree on a risk approach.
But Be Flexible
By “agree” with your planner, I am not saying that you simply acquiesce to the planner’s methodology. You need to reach an agreement on the approach that will be taken. One that gets the full buy-in of both you and your advisor.
Your planner should have no issue with developing a strategy in conjunction with your thoughts. It is fine to have your own views on investing. But hopefully you can be open-minded to the opinion of your advisor.
You are paying for financial expertise. Listening to a competent advisor can expand your own knowledge levels and bring value.
As well, your advisor should have a degree of flexibility.
In general, I espouse a passive investment strategy. Minimize costs. Create a well-diversified portfolio or index funds that meet you’re the client’s target asset allocation. Use a buy and hold approach with periodic reviews and rebalancing. And hopefully I can properly explain to the client why this is usually the optimal approach for their wealth management needs.
But some clients have other investment objectives. They wish to trade derivatives. Or focus on individual securities in creating a portfolio. Or create a risk-free portfolio. Or want to do something else. They will never take a passive management approach with a strongly diversified asset mix. Trying to fit them into one will not work.
So the planner has two options. One, decline the business. Two, meet the client’s objectives. Most advisors go the latter route. The key is to ensure the advisor has the expertise to meet those needs.
If you want to focus on insurance strategies, an advisor with an insurance background may be preferable to an investment analyst. But if you wish to focus on investing in individual equities, the converse may be true.
When assessing potential financial advisors it is important to review their qualifications and experience. But also be certain to ensure that you are comfortable with their philosophical approach to wealth management. Otherwise, all the designations and expertise will not make you a happy client in the long run.
