What third-party, industry credentialed certifications do they have?
Only 17% of advisors in the industry have obtained their CFP® certification. (See letsmakeaplan.org.) Responding to the need to have a credentialed advisor could eliminate 83% of advisors from your search from the very beginning. The CFP® certification is not necessarily the end all, be all. However, it is currently the financial planning gold standard and it is a great place to start.
Did they attend a college or a university? Did their studies prepare them for becoming a financial consultant?
From our perspective, the barriers to entry in the financial advising industry are very low. Some will cite a college degree as evidence that they are prepared to direct another’s finances. However, only a limited number of college degrees provide a foundation for excellence in directing financial affairs. In some cases, because of the limitations of their studies, college students are prepared for little more than excellence in salesmanship while having gained little to no expertise in how to advise clients wisely in the complex world of investments.
What is their work history? What experience do they have? How have they been trained? How long have they been advising and through what types of markets?
Many advisors receive their training from companies that sell investment products. Too often this results in advisors bringing to their clients inadequate guidance that is limited by both a lack of experience in investing over time and by a lack of knowledge of opportunities beyond the scope of the company for whom they work. The best advisors have experienced the full range of market cycles which can take ten years or more from start to finish. Having broadly educated and thoroughly experienced financial planners who have been certified by third-party or outside processes protects investors from the loss of opportunities not available to those who reside in investment microcosms.
Are they commission-based or fee-based advisors?
There are two main ways that advisors are paid in our industry: "commission based" and "fee-based."
In our opinion, commission-based compensation can be riddled with conflicts of interest: i.e. advisors are paid from transactions—the more changes they make to an account or portfolio, the more money they make, regardless of whether or not the changes are in a client's best interest.
Fee-based investing is an "assets under management fee" where the advisor is paid a much smaller fee on an annual basis that "wraps" all costs of investing and advice into one fee, regardless of how many transactions need to happen. Therefore, advisors cannot increase their compensation unless your account grows. The assets under "management fee arrangement" aligns an advisor on the same side of the table as the client. The advisor's income increases in direct proportion to the growth of the client's investments.
Does the advisor work alone or on a team?
The financial industry is one of the fastest growing and complex industries in the world. We would venture to say that it is almost impossible for one person to stay current with its intricacies and movement. We at Divergent believe that it is prudent to engage a team of professional advisors as opposed to practitioners who work alone.
We believe that you should also consider the continuity and age of the advisors. You should consider when your advisors are going to retire and if they have an ongoing team of advisors who understand your plan and who can continue to implement your vision, monitor the processes guiding your investments, and execute the long-term plans that you have put in place.
How many clients do they currently serve?
Some advisors, driven by the idea that success is measured in terms of how many clients they have, and by how much money they can make, diminish their abilities to serve their clients effectively. An industry recommendation traditionally suggests two hundred clients per advisor. We at Divergent believe that it is almost impossible for advisors to accomplish their work effectively if they have over one hundred and fifty clients per advisor.
What is their average account size?
When establishing yourself with an advisor, you do not want to be the client with the fewest assets, but you probably do not want to be the client with the most assets either.
If you have the fewest assets, your account and plan may more easily be overlooked. On the other hand, if you have the most assets, the advisors may not have the expertise or experience required to meet your more complex planning and investment needs which results from your significant net worth.
At Divergent Wealth Advisors, we have built a service model and process that helps to control for both ends of the spectrum as well as the accounts in between.
Can they be considered true fiduciaries?
The issue of fiduciaries is currently a hot topic in the financial advisor profession and one with far-reaching implications. A fiduciary is someone who is legally bound to act in the best interest of the client. Many brokerage firms that are in the business of selling investment products cannot legally call themselves fiduciaries.
In our opinion publicly traded firms have two responsibilities. The first is the shareholder and the second is to the client. Those responsibilities will constantly be at odds with one another as they can be considered competing interests. Wise investors ensure that their investments are handled by fiduciaries who can protect their interests first and foremost and are legally bound to the fiduciary standard.
What are your advisors' personal foundational investment principles?
Investors should have a clear understanding of their advisors' investment principles. The advisors' principles should be based on universal truths and be applicable in most circumstances and situations. In our experience, most individuals, including advisors, do not take the time to articulate and document their own personal investment principles around which they have built their investment strategy.
At Divergent we outline our 6 investment principles that must be followed. Click here.
Are they educators as well as advisors?
Many advisors will say that they educate their clients. Here are some questions to contemplate as you meet with your advisors:
Do they review and discuss every assumption that was made in your financial plan? Do they give you options to change the assumptions to see what it does to the overall plan? Or, do they help you to generate options, explain them clearly, and then coach you on how to choose the best options?
Do they teach you about and discuss with you the "hidden" fees about which most people are unaware? Nearly every investment vehicle (mutual funds, UITs, ETFs, target date funds, etc.) has investment costs that should be revealed and considered, but rarely are.
Do they explain clearly how their fees and compensations are generated? Some 87% of investors don't know how much they pay their advisors nor can they articulate what they get for what they pay.
Do they introduce to you a full array of investment solutions and discuss the pros and cons of each, including the different cost structures?
Have they carefully considered their conflicts of interest and have they eliminated them? Does their fee structure, commission or fee-based, serve you or them best?
Are they true fiduciaries or are they trying to serve shareholders before or along with you?
Are they transparent about all fees? Do they demonstrate that they are worth what they charge you by showing you clearly what they charge?
Are they transparent about all fees? (If you are worth what you charge, it's easy to show what you charge.)
If they are commission based, do they disclose how much the commission is? Do they tell you where their compensation comes from? A common response is, "The investment/insurance company pays us-- not you." This response is inadequate. There are always costs which ultimately are paid by clients. It is important to understand where the investment/insurance company gets the money to pay the advisor's commission?
Are they transparent about their performance? Does their own firm calculate the performance, or do they use a third party with no conflict of interest to value their portfolio performance?
Do they discuss the pros, cons, and risks to all investments? Keep in mind that all investments have risks to be considered.
Are they paid a performance based fee if their portfolios perform past a certain threshold? This can lead to taking excessive amounts of risk to increase their own compensation.
Do they discuss any penalties or surrender fees that may be incurred to get out of investments early? Too often clients are not instructed well enough at the onset of their investments to be able to understand their costs if their needs change. A good educator-advisor will communicate the future possibilities and obligations of a client's investment given the fact that many investors' needs change as they move forward in time.
Do they have access to a full array of investment solutions or are they limited to what their company tells them to “sell”?
When all you have is a hammer, everything looks like a nail. Most "advisors" are taught everything they know by the company they work for and are limited to the financial tools and investment vehicles that their company sells. This can be a huge conflict of interest and one you should be aware of.