[Editor's Note: This is a guest post from Aziz Lalljee, the Co-founder and Co-CEO of Finom, a start-up company based in Chicago that provides online information about various financial advisers, attempting to match investors up with advisers who would be a good fit. All rated advisers are independent and fee-only fiduciaries. Like this one, the site and its services are free to investors, but it obviously isn't free to the advisers who pay referral fees. Although I have covered this subject before, I thought it would be interesting for readers to see how a company that actually rates advisers thinks you should choose one. At this time, I do not have any financial relationship with Aziz, although I have offered to sell him advertising on my recommended financial advisors page.]
Hiring an investment adviser is a deeply consequential life decision. It can materially affect the security and size of your retirement assets, and your ability to anticipate and navigate major life events. You should interview a few advisers before you hire one. But what exactly should you talk about?
You don’t need to know much about investment management to conduct a competent interview. You just need to ask a few, pointed questions, and follow-up with your specific circumstances and goals, to have an informed, and informative, conversation.
Who and what are they?
This applies to both the firm and its representative.
The firm: Is it a registered investment adviser (RIA), a broker-dealer, or neither? And is it independent or affiliated with a large bank or wirehouse? (Most investors should use an independent, fee-only, registered investment adviser because they are governed by a fiduciary, rather than a suitability standard.) Then ask about the firm’s nature and composition: team size and breadth; number and type of clients; and how the firm communicates and works with clients. And if you’re not given copies of the firm’s ADV Brochure and their Compliance Manual, ask for them; even if you don't find them particularly useful, this will set the right tone for your meeting.
The representative: What degrees and certifications does he/she have? What is his/her financial planning and/or investing background? And does he/she have a clean regulatory record? (For an advisory firm’s representative, look here; for a broker-dealer’s representative, look here.)
What exactly do they do?
Advisers are not created equal, and perform a wide range of (often non-overlapping) services. These divide into three broad areas: investment planning (usually coupled with asset allocation); asset management; and auxiliary services. Briefly: asset allocation is the process of allocating your investable wealth into different asset classes (stocks, bonds, alternatives, etc.) based on your financial circumstances and goals; asset management involves dividing your investments within each asset or sub-asset class among individual securities, funds, or managers, and managing them through time; and auxiliary services include financial planning, tax advice, estate planning, charitable planning, business consulting and risk mitigation, retirement plan design and management, and legal and accounting services.
[Editor's Note: If the adviser follows the typical low-cost passive investing strategy advocated on this site, the asset management portion of service is exceedingly simple. Asset allocation calls for 10% of the portfolio in small value stocks? Use 10% of the portfolio money to buy a passive small value fund or ETF from Vanguard, iShares or DFA. Done. If, however, the adviser is trying to pick skilled mutual fund managers (good luck) or individual securities himself (even more luck,) that's obviously a much more complicated process. In my opinion, the simple fact that the adviser thinks he can do that would disqualify him from consideration, whether he is listed on Finom or not. In my opinion, the bulk of the value provided by an adviser to most physicians is in Mr. Lalljee's “auxiliary services” category.]
You need to understand (a) exactly what services you need (or might need), (b) whether the adviser provides these services, and (c) in what form these services are provided – in-house or outsourced, ongoing or one-time, etc.
Ask for samples of their work.
This is trickier than it sounds, and is driven by the specific services you need.
If you need investment planning, ask for sample plans for a variety of risk tolerances and client types. Then ask about their process for determining your specific risk tolerance and target cash flows. Finally, ask how changes in your circumstances and goals will change their target asset allocations for your investments.
If, like most people, you’re looking for an adviser to both plan and manage your investments, you need to grasp how the adviser constructs portfolios and manages them for clients like you . Ask for portfolio snapshots and performance histories, after fees, for a few such clients who match your investment profile or risk tolerance (with their identifying information redacted) . Don’t be satisfied with model portfolio returns, especially using back-tested data. You want to see the actual performance of actual investors, but be especially wary of firm-wide performance numbers. Use these reports to as a starting point to discuss their investment philosophy and management style, and learn how they approach subjects like diversification and tax efficiency. Ask about any funds or other managers they might use, and their process for selecting them.
What and how do they charge?
Once you understand the adviser’s practice and the service(s) you’re buying, you can make better sense of their fees. Both the level and structure of compensation is important, i.e. how much, and how, do they charge? Are they fee-only (as a percentage of your assets under management, hourly rate, or annual retainer)? Or do they receive commissions for products they buy for your account? Or both? Are there any other minimum or hourly fees applicable? Advisers typically offer both investment advisory and asset management services for a single fee as a percentage of assets under management, and 1% – 1.25% is considered standard for separately managed portfolios.
[Editor's Note: While 1%+ might be “standard” it may also seem ridiculously high once you take a look at what good advisers are actually charging. Fees for asset management can be as low as $75 an hour, $1000 per year, or 0.37% of assets under management (or less for a robo-advisor.) Rather than assuming that any AUM fee or hourly rate is “fair,” I recommend you actually calculate out how much you are paying annually so you can compare apples to apples when comparing advisors. If an advisor charges $200 an hour and does 20 hours of work in a year, that's exactly the same as an advisor who charges a flat annual retainer of $4000 and an advisor who charges 0.4% on a million dollar portfolio. Fees matter, and as Jack Bogle likes to say, “You get (to keep) what you DON'T pay for.”]
Fast-forward six months…
…and you – inherit a small fortune; get divorced; become disabled; or the S&P 500 crashes by 30%. How will your adviser handle your investments through a major market or life event? How will he communicate with you? Will he prevent you from being hasty with your savings, especially during tough times? Verbally run through a few such scenarios with a potential adviser, and see how carefully, sensitively, and creatively the adviser answers them.
What do you think? What process did you go through when hiring your adviser? What do you tell friends when they ask you how to choose a financial adviser? Comment below!
what I found
http://www.forbes.com/sites/samanthasharf/2014/12/10/doctors-beware-not-all-financial-advisors-have-taken-their-hippocratic-oath/
I almost went the AUM route with a firm that was going to do constant TLH. They have been rated number 1 with Barrons for a long time.
What bugged me for a long time was it doesn’t really take twice the work to service a client with twice the assets.
The only good thing was the auxiliary services and having one place for everything (in case something happens to me)
How about “Where will my money be kept?” If you’re going with an independent advisor (which I agree with), you need to make sure your money is held and invested by a deep-pocketed, third-party, SPIA-insured custodian from whom you receive statements directly. While some of the best advisors out there are the small, independent shops, this is also the same space where some of the worst run their clichéd, but still very prevalent, Ponzi schemes and straight-up theft.
Arthur, thanks for your comment. As I understand, it is now standard in the industry for all asset managers, even small independent shops, to custody client assets at independent third-parties like Fidelity or Schwab. Every adviser on Finom’s platform uses a third-party custodian. Happy new year!
Great Idea… Just logged on. Unfortunately, they only offer advisors in the Chicago area and there doesn’t seem to be any option for fee-only advisors, only asset management.
Thanks for your comment. All advisers on Finom are independent, fee-only Registered Investment Advisers. Many offer a range of financial planning, asset management, and auxiliary services like tax planning, estate planning, insurance, etc. We are looking to expand beyond Chicago very shortly; we’ll keep you posted! Happy new year!
Provide our compliance manual? You’ve got to be kidding. That’s the kind of client we would never agree to take on. Red flag request. I’ll let you figure out why.
I was also like, some of those questions are better be left on paper and not soken
While I’d read the ADV2 (and I wouldn’t have to ask for it because I know where to find it) I’m not sure I’d be interested in reading a compliance manual either.
I’ve been reading about robo advisors like Betterment, Wealthfront. The costs are very low and they offer low cost investments like Vanguard funds and ETFs. However, they are all start ups that will not be profitable until they have about 75 billion in AUM which is probably impossible. So they may not be around for long. Schwab is supposed to roll out a robo advisor in 2015 that will have no fees. Any thoughts?
Seems to me this is a rather small niche. It isn’t a big jump from a roboadvisor to doing it yourself. Most docs who want an advisor want a full service one. Vanguard and Schwab are definitely moving in on these guys.
Do you think Vanguard will offer TLH? and do you have an article on TLH?
I do my own TLHing. It’s pretty darn simple. If the market drops, you exchange your Total Stock Market Fund for an S&P 500 fund, book the loss and use it to deduct up to $3K in regular income for that year (and an unlimited amount of capital gains). Hopefully, at some point down the road, you’ll give the appreciated shares to charity or your heirs (at death) and no one will ever pay those capital gains taxes due. Basically, you exchange an investment for something highly correlated with, but substantially different from, the investment with the loss. So, how much should you be willing to pay for that service? Not very much. Here’s a good article on the subject from Harry Sit:
http://thefinancebuff.com/schwab-intelligent-portfolios-game-over-for-betterment-and-wealthfront.html
There is a bit of a paradox with this offering. Finom is an investment advisor, and they are pretty much the opposite of fee-only. None of their compensation comes directly from the clients they advising. It is essentially a commission, a percentage of the revenue paid by service they recommend. And their compensation is contingent on recommendations being followed. They are financially incentivized to only recommend advisors with whom they have a solicitor (a.k.a. sales) agreement in place. The fact that the advisors they recommend are fee-only doesn’t negate that particular conflict of interest. In fact, they will only be recommending advisors whose fees are high enough to pay a revenue share. Low fee advisors that don’t revenue share will never be on the platform.
There is a principle in business that all costs are paid by the final consumer, whether directly or not, in the form of higher prices. But if the best advisor you can find on your own is charging 0.6%, and hiring a service to find an advisor of the same quality can get you one with 0.5%, you come out ahead.
Either way, it’s important to follow the money and understand financial conflicts of interest so you can make decisions accordingly. But don’t expect to hire anyone in financial services (or just about any business) without some type of financial conflict of interest.
Dylan – thanks for your comment.
A few clarifications:
1. While Finom is registered with the SEC as an investment adviser for regulatory reasons, we do NOT provide any ongoing investment advice to any users of our platform. If a user hires an investment adviser that they meet through us, they sign an investment advisory agreement directly with that adviser. We are a third-party, independent platform committed to transparency and choice for individual and small institutional investors.
2. We do NOT recommend advisers. We vet, feature, and rate advisers specific to a user’s asset level, risk tolerance, and other criteria. We facilitate informed, unbiased meetings between advisers and prospective clients.
3. We are NOT compensated through commission revenue. If a user hires an adviser that they find through Finom, we charge the adviser an asset-based, recurring fee, NO PART of which may be passed on to the user/investor; this is specified in our contracts with the adviser. Our service is ENTIRELY FREE to users of Finom. Separately, advisers never pay to join Finom, and our asset-based fees are uniform across all advisers.
We started this business to empower and educate investors, and have taken great care to minimize conflicts of interest in the adviser search and selection process.
Thanks again for your comment, and happy new year!
Anyone has any expericience with northwestern mutual? Have a meeting set up this week with one of there guys. Good friend of mine states this guy really helped him out when he was going there his divorce. I figured can’t hurt to go listen
I have yet to see a financial plan come out of a NML office that I thought was worth paying money for. NML “advisors” are usually undertrained salespeople masquerading as advisors pushing products made to be sold, not bought.
I got into it with a NML “advisor” earlier this year where I basically told him that. He emailed me a few months later saying he had left the firm, obtained a CFP, noted that I was right, and apologized to me.
Good luck with your decision.