How Do You Select a Financial Advisor?
Selecting an advisor is tough because we all tend to offer something a little bit different, but for most people, the differences aren't so obvious.
So we've provided a list of selection criteria that can be used to help differentiate prospective advisors.
1. Conflicts of Interest: Your advisor's only job should be to protect your best interests. If they're also an insurance agent, broker-dealer, or have any other incentives that could influence their advice; watch out! - Read More
2. Fees: You'll first want to be aware if there are any minimums or annual fees (other than management fees), then check if the advisor offers a wrap fee. A wrap fee has the management and transaction fees bundled together. If not, you'll need consider that in your cost comparison. Secondly, advisors will typically recommend Exchange-traded funds (ETFs) or Mutual Funds (MFs), each has it's own fee which is in addition to the Advisor's fee. MFs have significantly higher fees due to their management.
3. Advisor's Age: Age is rarely a factor that's considered when selecting an advisor; however, it can have big implications. First, you certainly don't want your advisor to retire (or worse) before you do, right? Well, that's much less likely to happen if your advisor is younger than you. Secondly, the proliferation of at-home computer technology has drastically improved the spread of information and data analysis in Finance over the past decade alone. Depending on an advisor's age, they're more or less likely to have adapted to these changes.
4. Robo-advisor VS. Human Advisor: In our opinion, a Robo-advisor is perfect for someone who has a basic financial situation, a fundamental understanding of investments, and is prudent in researching their financial decisions. The major benefit of robo-advisors is their low fees; however, a robo-advisor won't be there to stop you from making mistakes due to misinformation or recommend alternative solutions that could make you better off.
5. Investment Strategy: Advisor's offer all kinds of different investment strategies and each one tends to be unique to their own methodology. First, see if their strategy is passive or active. Passive investing (buy & hold) is a perfectly valid strategy, but it should cost less than active management. Passive management should never cost more than 1.00%/year. Then, you may also want to consider what asset classes they recommend, you'll typically want a combination of domestic/foreign stocks, bonds, commodities, and real estate. Finally, keep an eye out for alternative investment offerings (i.e. derivative strategies), these may end up being a good investment, but are generally much more risky.