Imagine learning how to cook from someone who only knows how to operate a microwave oven. Yum! Those frozen TV chicken dinners sure taste good!
Imagine learning about stock investing from someone who doesn’t know how to calculate a dividend discount model or a WACC. Psssst, I hear Zynga is a good buy! Why? Because I heard it on the news!
Imagine learning about real estate investing from someone who has never owned nor understands the concept of cap rates. Here are the keys Mr. Bank! I cannot pay my mortgage no more.
We call these scenarios, “Talking out of your a$$.” It’s a way of life for so many in the advisory business because we have to start somewhere and it’s a competitive world out there. Furthermore, I do believe most of us inherently want to help people. But, sometimes we end up hurting those we care about during the fake it, until you make it process.
I’ll be providing some questions in this post that you should consider asking when it’s your turn to get an overview with your free financial consultation with Personal Capital. They have the best free financial tools online to help track your net worth, analyze your investments, and check for excess fees.
Only after you are satisfied with your advisor’s answers should you consider paying for financial advice. In fact, I recommend spending at least a couple months managing your finances on your own before making a decision. Who knows. You might discover your own financial guru inside after utilizing their tools!
Let’s start with an interesting situation between advisor and client in order to give them advice on how they can help us better.
SHOULD YOUR FINANCIAL ADVISOR BE WEALTHIER THAN YOU?
Imagine a financial advisor who has a respectable net worth of $250,000. He’s 32 years old, hungry, went to Penn State and generally an all around nice guy. He owns a home, has $100,000 in his 401K, majored in English and likes football.
Meanwhile, you are a Big Kahuna with a net worth of $2.5 million at the age of 38. You own multiple properties, trade derivatives, have $700,000 in your 401K, another $600K in your E*Trade account, went to UPenn, created and sold a business, and have little debt!
How on earth is the financial advisor who has 1/10th his prospective client’s net worth convince he’s worthy? Clearly, Big Kahuna should consider an advisor with more experience, who invests in similar circles, and who has a higher net worth. So how does the financial advisor ever get started? Through hustle, loyalty, and trust.
* Demonstrate your hustle. The main promise you can give your clients is that you will work harder than any other advisor on the planet. When you don’t know much, you’ve got to provide service. Promise respond to all e-mails, return all phone calls, take your client out for meals, watch investments he’s interested in, and look out for new opportunities. Work ethic is the number one thing you can control.
* Demonstrate your loyalty. Loyalty is vital in the service business, yet it is one of the most underrated topics of discussion. If you are job hopping left and right or schmoozing other clients while your client is standing right in front of you at a party you are being disloyal and disrespectful, frankly. It’s important to make your client feel like you will stick with him/her during the good times and the bad times.
* Build trust. Trust is gained through a consistent demonstration of hustle. Trust is similar to loyalty, but is based more on the simple things that go down to the very core of a good relationship. When your client rings in to place an order, can he hang up the phone to watch his kid play soccer and trust you to press BUY instead of SELL for the exact number of shares he mentioned? Once you gain someone’s trust, make sure you never lose it.
Questions To Ask Before Hiring A Financial Advisor
Due to my experience of interviewing literally hundreds of candidates over my career, I’ve developed somewhat of a ball-busting, bullshit detector for folks looking to pitch themselves. If there’s one thing you can accuse me of, it’s being thorough with important decisions. The last thing you want to do is hire someone who is a total disappointment. Once they are in, due to stringent labor laws, it’s a very arduous process to get them out!
Here are a list of questions you should consider asking your prospective financial advisor. The goal is to get a better understanding of their character, trustworthiness, and financial acumen. You need to know that your advisor is as smart, or hopefully much smarter than you financial wise. You also need to be able to rest easy knowing they are always looking out for you.
Basic Background Questions
Are you a registered investment advisor (RIA)? An RIA has a fiduciary duty to do what’s best for their clients. RIA is different from a broker-dealer.
* How long have you been a financial advisor?
* What are your credentials? (undergrad, graduate school, certifications, online presence)
* Do you believe credentials matter if one has proven they can properly manage their finances over time?
* How long have you been in your current job?
* What were you doing before your current job and how long were you there?
* How are you incentivized?
* Give me an example of where you helped turn around a client’s financial situation for the better.
Investment Philosophy And Financial Acumen Questions
* What is your fundamental belief on asset allocation? How often? Why should we do it? What signals do you use?
* How would you go about building the right investment portfolio for someone 5 years, 10 years, 15 years, 20 years, and 30 years from retirement?
* If history has shown time and time again that the majority of active fund managers underperform their benchmarks, why do actively managed mutual funds still exist?
* What is your current outlook for the housing market and why?
* Where do you see the 10-year risk free rate going over the next several years and why?
* What do you think is the proper withdrawal rate during retirement?
* Do you think annuities a good idea for someone my age with my income stream and assets?
* Why do so many people bash whole life insurance policies?
* What is the S&P 500 currently trading at in terms of forward P/E and why do you believe the earnings estimates are achievable?
* Where do you see the S&P 500 or Dow Jones over the next 12 months, 24 months, and 36 months and why?
* If there’s a mile-long track and you completed the first lap at 30 mph, how fast do you have to go on the second lap to average 60 mph?
Character Discovery Questions
* Please explain why you are different from other financial advisors?
* What is an area of weakness you need to work on, and how do you plan to get there?
* What was your biggest financial mistake and how did you recover?
* Why do you think people spend more than they earn?
* If you were not a financial advisor, what would you be?
* What is the best means of communication? (to end on a soft note)
With the above questions, you should be able to get a good idea of your financial advisor’s character and financial IQ. You don’t have to ask them all these questions obviously. But, you need to ask enough questions so that you know you are getting your money’s worth. The financial advisory business is a service business, not a stock guru business. You want to be able to get along with your advisor and hopefully build a friendship over time.
Because I’ve spent my entire career in the finance industry, financial acumen comes second to trust when it comes to taking on a financial advisor. I want to know that when the market is crashing while I’m fishing on a boat somewhere off the Gulf of Mexico that my financial advisor is looking for opportunities based on our pre-discussed guidelines. I don’t want to have to worry about picking up the phone to keep tabs on him or her.
Trust is tantamount when it comes to having someone look out for your finances. Trust has to be earned through hustle and consistent demonstration of purpose over time. The last thing you want is to pay for financial advice and have an advisor lose you more money than you otherwise should. At the end of the day, you should use your advisor as a sounding board for ideas and plans. The ultimate financial decision is up to you.
Stay Involved With Your Finances
I don’t mind if my financial advisor is not as wealthy so long as s/he provides amazing customer service, is trustworthy and follows my investment risk parameters. However, the more I pay for advice, the more seasoned an advisor I require. There’s no reason a wealthier advisor with 20 years of experience can’t be as hungry as someone with only two years of experience.
For those of you who don’t want to pay a fee, sign up for Personal Capital’s free financial tools to at least keep track of all your wealth. Run your investment accounts through their Investment Checkup feature to see if you are paying unnecessary fees and whether you have the proper asset allocation.
After you link up all your accounts, run the Retirement Planning Calculator to see whether you are on track to generate enough income in retirement. There’s no better free tool online to help you track your net worth. That which can be measured can be improved. Don’t gamble with your financial future because there is no rewind button.
About the Author: Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2017 and beyond.