For many high net worth clients, choosing a financial advisor is a critical step in their financial planning and wealth management journey. You will be embarking on a partnership that lasts multiple years, if not decades, and hence picking a financial planner/wealth manager is a decision fraught with tremendous consequences. Depending on the overall wealth and the financial and life objectives of a particular individual/family, the type of financial advisor and specific nature of the advice may vary. Irrespective, picking a financial professional should be done methodically with a multidimensional evaluation of fit, competence, the scope of services, the range of products, and access to specialized expertise.
In this ultimate guide to choosing a financial advisor, we will cover all aspects in-depth and provide you with a blueprint on how you might build an advisory team that supports your wealth management.
Content Outline of the Ultimate Guide to Choosing a Financial Advisor:
Let’s now dive deep into each of the topic areas for selecting a financial planner.
What are your wealth planning goals and objectives?
Before going into the market and evaluating the financial planner/advisor, it is essential to pause and contemplate as to what needs you have, and who might fill that role.
Are you interested in essential financial goal planning such as retirement planning and college planning for your kids and an investment strategy to get there?
Are you sufficiently wealthy to know that retirement, college education for kids, and other primary goals are taken care of, and you are looking at primarily wealth maximization?
Are you capable of managing your wealth, but looking for stock tips? In this case, a stockbroker may fit the bill.
Is your financial situation is complicated with an intricate web of interrelated investments and holdings, some liquid and other illiquid, and are looking at a coherent strategy to manage and streamline wealth?
Or after fulfilling the financial well-being needs of your near and dear, you are interested in leaving the last legacy, including philanthropy, with your wealth?
Of course, there can be several variations of the situations above, and it is essential to have clarity on the state of your wealth and the goals/objectives thereof.
For example, depending on your financial situation, and your goals, you may need a generalist in financial planning or an advisor who specializes in complex estate planning strategies, or an investment specialist who can channel your money and oversee portfolio management. Or a combination of all such skills.
Which advisors belong in your holistic wealth management team?
The wealth management team that a high net worth family needs are dependent on three factors – overall wealth, state of affairs, and the inherent complexity. The total wealth is a driver of the type of skills and competencies necessary and the relative depth in each area. The state of affairs as in how far along is the financial planning strategy and execution determines the needs for various types of financial professionals. And of course, the inherent complexity of the situation drives additional specialization and depth.
At a foundational level, the following skills and competencies are necessary, and sometimes a single professional may fulfill more than one role. Also, some specialists may come and go while the core financial advisor/wealth planner may quarterback the situations, bring in the specialists, and be the single point of coordination.
Wealth Planning: Creating a blueprint for your wealth and how to manage it is the first step.
Insurance: Protection planning is a paramount consideration for risk management. While plain vanilla insurance – basic life, disability, long-term care, vehicle, homeowner, liability et al. – is something any financial planner may help with, it may require specialization for the more difficult and complex insurance situations.
Investment Management: In most situations, the financial advisor/planner may be able to fulfill this role, but as wealth increases and type of investments grow and the complexity of portfolio management spirals into a significant endeavor, the needs may range from having an investment specialist/overlay portfolio manager on the team to necessitating a family office support.
Tax Planning: While an accountant is an essential team member, the wealth and other related complexities may necessitate a tax attorney.
Estate Planning: For most everyday situations – such as an AB Trust, QTIP Trust, Grantor Trusts – the generalist financial planner/wealth advisor will be able to create a high-level plan and leverage an estate planning attorney to draft the documents. In cases where there is additional layers of complexity, trust, and estate specialists, and tax and estate planning attorneys are necessary. (For the ultra-wealthy, expertise in overseas trusts and legal tax avoidance strategies may come into play.)
Most private banks and wealth management firms tend to have home office teams as well as allied professionals on standby on a referral basis. If it is a self-registered RIA, they may rely on a network built from scratch or the custodians/financial firms they partner with to offer the additional specialization.
What should you look for in a wealth management advisor?
The key parameters to consider while choosing a financial advisor are as follows:
Does the advisor possess sufficient educational background and professional credentials to serve clients in your situation and stature? Given the alphabet soup of certifications, it is often confusing to understand what each title means and how it relates to investing. And there are some cases, where formal education may not necessarily be an indicator of what a person does. However, for a prudent investor, the following are some signs of professional excellence:
M.B.A.: Needless to add an MBA is universal business education, but often this is a good foundation for understanding the nuances of business and finance.
C.F.P: The CFP (Certified Financial Planner) certification is rigorous and involves a comprehensive exam and ongoing continuing education requirements.
C.F.A: The CFA (Certified Financial Analyst) is an elite charter, and the holders typically have proven their ability in investment analysis and portfolio management.
C.P.A PFS: The CPA (Certified Public Accountant) is well known, and most probably your accountant has a CPA certification. For the CPAs, the AICPA offers an additional certification, the CPA PFS (Personal Financial Specialist) to signify attainment of a personal financial planning certification.
C.I.M.A: The CIMA (Certified Investment Management Consultant) focuses on investment management and portfolio management and requires training and passing an examination.
C.L.U.: The CLU (Chartered Life Underwriter) is an insurance credential.
Ch.F.C: The Ch.F.C. (Chartered Financial Consultant) is another certification that addresses various aspects of financial planning and proficiency in those topics.
Most industry experts consider C.F.A and C.F.P. charters to be the gold standard in their respective spheres of investment analysis/portfolio management and financial planning respectively.
Financial Planning and Wealth Management Experience:
Experience counts. Whether the advisor has gone through a full business cycle and has been through a bull and bear phase of the market helps shape their perspectives. It does not mean a younger, highly qualified individual cannot be competent, but practical experiences through both highs and lows sharpen the saw.
Type of Clients:
Knowing the general composition of the clients and their wealth level is an important consideration. Of course, an ethical advisor does not drop names, but they can give you an indication of high-level demographics and financial breakdown.
It is essential to know whether the advisor typically works with clients in your wealth range? For example, an advisor who helps low-income clients in debt management and setting up a cash reserve is doing commendable work, but his/her expertise may not scale up to the needs of a high net worth family with $5 million of assets. Or an advisor who works managing a billionaire’s wealth may not step down to the rather pedestrian needs of a family with the same $5 million in assets.
The scope of Services:
Does the advisor offer services and specialize in matters that are important to your family’s goals and objectives? Despite the generic moniker of a financial planner or a wealth advisor or investment strategist, financial advisors tend to specialize in some areas, which are paramount to their current client base.
For example, some advisors work with HNW families in estate planning and wealth transition. Even there some advisors work with attorneys and accountants to plan, set up, and manage complex Grantor trusts.
Some other advisors focus on investment planning, asset allocation, conducting due diligence on money managers and then overseeing the overall portfolio on behalf of their clients.
In some cases, advisors focus on managing concentrated positions of entrepreneurs and senior executives, often in a single company, and leverage derivative strategies to manage the downside.
Another class of wealth advisors focus on broader financial planning and are generalists who tend to seek more specialized expertise through a network.
So, knowing the range of services and the depth of their knowledge in some areas that are important to your family are a critical consideration.
However, clients should weigh the current needs versus evolving needs and grasp the big picture when selecting an advisor or an advisory team.
The suite of Financial Products:
Most advisors align with either a Broker-Dealer or if they are S.E.C. registered R.I.A.s they may align with various providers for offering a slew of financial products. The typical financial products include but not limited to stocks, bonds, cash equivalents, derivatives, ETFs, Unit Trusts, hedge funds, private equity funds, separately managed accounts, insurance products, and others.
If gaining access to initial public offerings is your priority, then you may choose an advisor from a firm that typically does IPO underwriting and syndication to have first dibs on the action.
On the other hand, if high-flying hedge funds and private equity funds are where you want to invest your money, then an advisory firm that offers a vast spectrum of such products may be the right fit.
The compensation and fee are a big area. How an advisor receives compensation a critical consideration but also a complex one. Savvy clients understand that financial professionals need to make a living and all things in life do cost money. The central issues are twofold: a) How does the financial professional make money? And b) Is there sufficient transparency and clarity on the fees?
The financial services industry has been moving away from pure commissions on transactions to a fee on assets under management model. In general, charging a fee on AUM is a good thing. However, the devil is in the details
For example, no-load funds are all the rage and the mention of the word “sales load” is anathema to some. But for an investor who can invest a substantial amount into a single fund family may surpass the breakpoint and eliminate the sales load.
Or in the case of products such as life insurance or annuities, assuming they are necessary, commissions are typically how an advisor gets paid.
In other cases, the advisor and his/her firm may also be the promoters/distributors of the fund and even the custodians. In this case, there is a complex web of fee layers. Understanding the fees and ensuring there is no double dipping is essential to an advisory relationship.
As the famous adage goes, “If you want a friend, go get a dog,” it is not essential that a client and his/her advisor need to be the best pals. Or go out to lunch. Or invite to holiday dinners. But it helps to generally Sympatico. More than cultural fit, the ideas about investment, money and other critical aspects may matter more. An advisor that thrives on pushing the envelope on overseas tax structures may not be palatable to all clients. On the other hand, an advisor who does not take a principled stance on something, even if it means a polar opposite opinion from the investor and be able to persuade the clients gently may be detrimental to a clients’ long-term success.
It boils down to what matters most – some traits to satisfy the heart and more that fit at a cerebral level.
A wealth advisor who has ample time to binge on Netflix during the workday is probably a no-no. On the other hand, an advisor who serves clients beyond his/her capacity and works 24/7 is not a great option either. The capacity issue is not a hard and fast rule, but the support structure the advisor and set of clients that do not stretch the advisors mental and physical capacity is a delicate balancing act.
A support structure for a wealth advisor spans multiple dimensions. One is the support staff – paraplanners, co-advisors, assistants – who help on a day-to-day basis. The home office support is another critical aspect (assuming the advisor belongs to a private bank or a wealth manager or a Wirehouse. The other dimension is the network of experts and specialists the financial advisor can rely on and bring to the table.
How to conduct due diligence on a financial professional?
Before selecting and working with a financial advisor, each client should conduct thorough due diligence.
Here are a few authoritative sources to check the background of a financial professional you may consider working with:
FINRA BrokerCheck: FINRA (Financial Industry Regulatory Authority) is an industry self-regulatory organization and offers a free tool to check the backgrounds of brokers/advisors.
You may go here https://brokercheck.finra.org/ and search for a financial professional.
FINRA will provide a snapshot of a broker’s employment history, regulatory actions, and investment-related licensing information, arbitrations, and complaints. It also verifies the registration status of the individual and the firm.
SEC Investment Advisor Information: The SEC (Securities and Exchange Commission) offers a way to check the public information and disclosures of investment advisors, mainly as reported in the Form ADV.
You may go here: https://adviserinfo.sec.gov/
The SEC Advisor Info site also searches the FINRA BrokerCheck and provides both the results.
Referrals: While a friend, family member, or a colleague is not going to be a great source to learn about the compliance history of a financial advisor, they can be a good source of due diligence – particularly about stylistic aspects, their approach to planning, and general client service.
Meetings/Interviews: If proximity is not an issue, meeting the financial professional in person to conduct a face-to-face interview before hiring him/her as a financial advisor is an excellent step in the due diligence process.
What questions to ask your prospective financial advisor?
- What licenses do you maintain and what are your background and educational qualifications and professional certifications?
- How much experience do you have in the field and related fields in the past?
- Why did you choose to become a financial advisor?
- What are the types of clients you serve regarding wealth, goals and objectives, and geographical focus?
- What are your focus areas within financial planning and wealth management?
- What types of products and services do you offer (and can offer)?
- What are your approach to financial planning and investment strategy?
- What types of compensation do you receive?
- What conflicts of interests do you have, if any?
- What portion of your AUM (Assets under Management) are in proprietary products?
- What does the decomposition of your AUM look like – in terms of investment vehicles, asset and sector breakdown, and discretionary versus non-discretionary assets?
- Do you manage money on your own in conformance with an approved list of securities by your firm or do you rely on a network of professional money managers?
- How strong is your specialist network – regarding fields of specialization, depth of experience, geographical spread, and availability?
- Who else will be working with me/my family?
- What is your support staffing ratios?
- How clean are your compliance and regulatory record?
- Would any of your existing clients be willing to provide a reference?
- How long are you with the firm and what happens if you leave? (This question is for advisors who belong to a Wirehouse or a private bank or a wealth manager.)
- What happens if you sell your practice or choose to retire/leave the profession? (This question is primarily for financial planners who are SEC-registered RIAs (Registered Investment Advisors).)
- Why should I choose you as my financial advisor?
How and where do I find a Financial Advisor?
Private Banks and High-end Wealth Managers:
Sometimes you may choose a firm – a private bank or a high-end wealth manager – and they, in turn, will assign an advisor (or most often an advisory team) who might fit your needs. This is the typical way firms work in the upper echelons of private banking and wealth management. Of course, as a client, you will have the veto power to change an advisor that may not be to your liking.
A referral from a friend, family member, a colleague, or a peer will always be a stronger basis to engage and select a financial advisor. (You must still do the due diligence and interview the advisor.)
Companies like SmartAsset.com and BrightScope publish directories of advisors which allows for searching for a financial advisor with various filters. (These are private firm directories and may get a referral fee.)
Furthermore, companies like Garrett Financial Network, Ameriprise and LPL, and others provide a list of the financial advisors and wealth planners that work with the firm. (Please note these are company specific directories.)
What are some Warning Signs and Red Flags while selecting a financial advisor?
- If a financial advisor promises you a particular portfolio performance or return, that’s a big red flag.
- If a financial advisor is dropping names of clients left, right, and center, that is a warning signal. It is a violation of client privilege and privacy and a warning sign that he/she may do the same with you.
- If a financial advisor is unwilling to provide you with disclosures such as Form Adv, that is a reason for caution.
- If an advisor is vague about the practice’s AUM composition, as a prospective client that should be a concern.
- Regulatory and Compliance issues are a definite red signal. But more than one innocent mistake, the key is to look for repeat offenses. (Of course, we don’t blame you if you consider one blemish is one too many.)
- If the advisor says, she/he is not subject to SEC regulations or FINRA guidelines. (This may mean she/he is not the U.S. registered financial professional.)
In summary, choosing a financial advisor is a significant decision, and hence it is essential to take the process of selecting a wealth manager seriously and conduct thorough due diligence before signing the dotted line. All the very best in your advisory selection processing and picking the right financial advisor.
Disclaimer: The Ultimate Guide to Choosing a Financial Advisor is for informational purposes only. While we strive to provide accurate and up-to-date information, it is essential you validate the data and consult your professional advisors for making personal financial and investment decisions.