This discussion relates to the latest Wealth Management Report and formed the basis of a discussion on The Experts blog on Dec. 18.
Make Sure Your Financial Adviser Sees Risk as You Do
LARRY ZIMPLEMAN : First of all, you should conduct interviews to find the right financial adviser, just like you'd pick a doctor, dentist or any other professional. Fees matter but other things are also important.Find out what qualifications the adviser has (certified financial consultant, chartered financial analysts, etc.). Ask how many years they've been in the business and ask for references (and check them!). However, the most important thing to evaluate is whether the adviser's view of risk and reward is identical to yours. If you are risk averse, make sure they share your point of view. If you believe in long-term, asset-allocation strategies, make sure they are in sync with that.
Finally, once you choose a financial adviser, make sure you review the results regularly and that the adviser is carrying out your intended strategy.
Larry D. Zimpleman is chairman, president and chief executive of Principal Financial Group.
Before Picking a Financial Adviser, Read This SEC Filing
MIKE PIPER : Read the adviser's Form ADV Part 2. This is a form that advisers must file with the Securities and Exchange Commission or with the state in which they are registered. It tells you all sorts of information about the adviser, written in plain English, with very little sales talk. "Just the facts," so to speak.You can learn everything about the adviser''s compensation: Do they charge an hourly rate? A percentage fee based on assets under management? Commissions? Are the fees negotiable?
You can learn about the adviser's investment philosophy to check whether it matches with your own: Are they a buy-hold-and-rebalance investor? Or do they believe in shifting asset allocation as a part of a market timing (aka dynamic asset allocation, aka tactical asset allocation) strategy? Do they prefer low-cost index funds and ETFs? Or do they use actively managed funds in the hope of achieving outperformance? Or do they use individual stocks and bonds?
You can check whether the adviser offers services that are a good fit for your needs: Do they provide comprehensive financial planning? Or do they focus exclusively on portfolio management?If they do provide financial-planning services, can you purchase such services on an as-needed basis, or do you have to sign up for a continuing fee?
Often, if you have several advisers you're considering, checking each of their ADV Part 2 brochures will be a quick way to rule out some of the advisers and develop questions to ask the others when interviewing them.
To get a hold of an adviser's Form ADV Part 2 brochure, you can contact them and request it or, if you would prefer not to give the adviser your contact information, you can look up the firm's form on the SEC Investment Adviser Search website.
Mike Piper (@michaelrpiper) is a Missouri-licensed CPA and the author of the blog ObliviousInvestor.com. He is also the author of several personal-finance books, including his latest, "Social Security Made Simple."
The Key Questions to Ask Your Financial Adviser
CHARLES ROTBLUT : Beyond doing a background check (contact your state regulators, do a search on brokercheck.finra.org and adviserinfo.sec.gov, confirm credentials with the certifying organization, and then do a Google search on the adviser's name to see what comes up), talk to potential advisers about their management style. What type of investments do they personally favor? Do they like to be more aggressive or more conservative? How often can you expect to hear from them? Do they send out regular emails or newsletters? If you call with a question, will you realistically get to speak to them or will you be directed to assistants instead? How quickly can you expect a response under normal circumstances?The greatest adviser in the world can be unsuitable for you if his or her personality and yours don't match. Every adviser has a certain approach to working with clients and every investor has different needs. This is why it is important to have a very open and candid discussion with an adviser you are considering. Talk about how often you want or don't want to be contacted. Discuss your investment style and whether you want to be aggressive or conservative. Bring up any investments you want to manage separately from the adviser and how much or how little input you want on it. Be very clear about what you want in the relationship and clearly state that you will fire an adviser whose approach differs from what he or she tells you.
It's better for both you and the adviser to identify differences in style before a formal relationship is established. A good adviser will be willing to give you the answers you don't want to hear. A bad adviser will smile and tell you what you want to hear even when he or she knows it isn't true. If you have doubts that the adviser is being sincere in answering your questions, walk away and find someone else.
Charles Rotblut (@charlesrotblut) is a vice president with the American Association of Individual Investors.
Boil Your Financial Plan Down to One Page
MANISHA THAKOR : To me, the greatest value that a financial adviser provides is helping you avoid costly missteps. The most effective way to do this is through the use of a clearly articulated written financial plan. Now, I'm not talking about an 80-page printout in a three-ring binder from some off-the-shelf financial software. I'm talking about a truly customized, short and actionable financial road map that you can refer to when making key financial decisions and/or when the markets are choppy. As such, I think the best way to assess a potential financial adviser is whether or not they provide this. (I am assuming you've already established that the adviser uses a fair and transparent fee structure and operates as a fiduciary versus under the suitability standard).As an example of what I'm talking about, for each of my clients, I create a one-page summary where we visually depict where a client currently stands financially, where they ultimately want to go, and what specific action steps they need to take to get there. This document is supported by a Monte Carlo analysis to identify optimal savings rates if in the asset-accumulation stage or spending rates if in the asset drawdown stage and a written Investment Policy Statement clearly articulating an asset allocation and cash management strategy.
The benefit of an adviser who works in this manner is threefold:
This type of customized planning requires an adviser get to know you deeply (your goals, values, dreams, fears)
The presence of a written plan ensures you have a system of checks and balances for when your emotions might come into play (think: Did you blink in 2007-2009?)
This process moves the emphasis from trying to beat the market (which study after study shows is a loser's game) to truly meeting your life goals.
Manisha Thakor (@ManishaThakor) is founder and chief executive of Santa Fe, N.M.-based MoneyZen Wealth Management LLC.
An Adviser Needs to Be Good With Both People and Markets
TOM BRAKKE : It is important to find out where an adviser is on the spectrum between a "relationship person" and an "investment person." Doubtless they have a combination of those skills, but few have the two attributes in approximate balance. Usually advisers for individuals skew toward the relationship end of the scale.Understanding the capabilities of a prospective adviser will help you determine whether you are a match in terms of communications. But it will also let you see what expertise others in the adviser's organization will need to provide to help you reach your goals.
It is as frustrating dealing with an "investment person" who doesn't understand your relationship needs as it is working with a "relationship person" who doesn't have a depth of knowledge on investment matters. Therefore, it's important to find the right fit—and to not be afraid to get a second opinion every once in a while.
(For more on this topic, see the article I wrote for the CFA Institute in 2012.)
Tom Brakke, CFA (@researchpuzzler) is a consultant, writer and investment adviser who specializes in the analysis of investment decision making and the communication of investment ideas.
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