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Financial Planning > Behavioral Finance

3 Steps to Selecting the Right Financial Advisor: An Advisor’s Perspective, Part 1

By Mike Patton

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Selecting the right advisor can be a daunting task for investors. The wrong choice could mean the difference between goal achievement and failure. Though all of us differ as to personality, the common ingredient of emotion is the culprit we must keep in check if we’re to succeed. Sure, some personalities are more logical and some more emotional, but no matter how logical an individual is, it’s still the emotions which rule the decision-making process. Therefore, the task of proper advisor selection is critical and should not be undertaken without a well-defined plan. How should the investor approach this task? I suggest breaking the process down into a few simple steps. In this post, I’ll discuss three such areas to explore.

Step No. 1: Get a Referral, but Then Ask Why

Clearly, a referral from a close and trusted friend is best, but even then, it is not a guarantee against failure. A satisfied client may make the referral, but what if the client’s satisfaction had little to do with the advisor’s prowess. In other words, if the client is happy with their advisor, what factors have created this belief? Is it the advisor’s personality? Is it tied to investment performance? Is it the way the advisor carries out his or her duties? In short, when an investor receives a referral, they should always ask what it is about the advisor that has caused the referring party to make the recommendation.

Step No. 2: Ask for Qualifications, but Don’t Get Dazzled by Designations

What are the qualifications of the advisor? With the plethora of designations in the marketplace, this distinction has been blurred. Moreover, some designations are so easy to attain, that it’s clear that the issuing institution has but one goal: To knight as many advisors with their designation as is possible. I recall taking a test for a very well known designation several years ago and had this very feeling. It was as if the test was geared to assure success. Then, when they raised their annual fee to maintain it, I decided not to pursue it. Often designations are as much about fee-generation as they are about education. Consumers are fairly confused about this and should be educated about the merits of various designations. Then they can use that knowledge to make a more informed decision.

Step No. 3: Find Out Their Experience, but Get Specific

Where has the advisor worked in the past? How long have they been in the business? Did they work on commissions, fees, or both? Were they an employee of a large firm, a bank, an insurance company, etc? Experience, like qualifications, is a bit vague and hard to pin down. Since it’s impractical to expect that an investor can select the ‘optimal’ advisor, by probing further, they can reduce the probability of making an error in judgment. However, the advisor’s particular areas of specialization should be discussed.

I’ll write more about this next week. Have a great week and thanks for reading!

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