You’ve finally decided to work with a professional to help you clarify and achieve your financial goals. The decision may not have been easy. After all, you take pride in being independent and in your ability to ‘do it yourself’. But going to a financial professional is no different from seeking the assistance of any other professional. After admitting that you're not highly competent in a specific area, you simply choose to go to someone who offers both the knowledge and emotional objectivity about your finances.
But finding the right person to work with can be a challenge. Let’s assume that you’ve already navigated the usual do’s and don’ts: you received referrals from your friends and family, or you attended workshops where you had hours to appraise an individual instead of just minutes. You asked him/her about any complaints or arbitrations in their file. And you didn’t ask for or be seduced by meaningless references -- an advisor’s not going to offer a reference unless they’ll speak adoringly.
Once you’ve found someone to work with, tough questions should emerge for both of you:
What are your expectations? Are you looking for someone to just clarify matters for you? To guide you? If you would value a ‘financial coach’, is he/she willing to be proactive and help keep you on track?
They should also be able to articulate what they’re expecting from you. To what degree will they insist you follow their advice? To what degree are you willing to accept their advice? In my practice, half of my clients accept all of my advice and the other half accept most of my advice! If they don’t feel comfortable with either of those choices, I urge them to find an advisor with whom they’re willing to trust.
How will the two of you judge whether the relationship is a success? By your portfolio’s annual return? By the degree of security you achieve concerning your finances? Without standards to judge results, working together could easily become murky where neither of you know if the relationship is truly productive.
Which areas are you focusing on? Long-term investing? Saving for short-term goals? Budgeting? Debt management? Insurance products? All of these? Would you be happy with an advisor who attends to only one area of your finances, or do you prefer a broader approach?
What is the nature of their relationship to their employer or broker-dealer? Do they have a Sales Manager? Are they expected to meet sales quotas? Are they able to offer you any investment or insurance product, or only those approved by their company? If he/she calls themselves ‘independent’, what does that truly mean?
Are your social values aligned? If you're considering Socially Responsible Investing (SRI), do they have expertise? What percentage of their business is committed to SRI? How much of their own retirement portfolio is committed to SRI?
How is he/she going to be paid? Although professionals need to be fairly compensated for their work, it’s important that this element of the relationship be transparent. Are they paid by fees (usually an annual percentage of the managed portfolio), commissions, or a combination of the two? Or perhaps they charge for their time on an hourly basis. My own bias is toward fee-based work. If I find a particular investment is no longer appropriate for my client’s portfolio, or if the client and I decide that we’re no longer a suitable match, the relationship can end without the client having recently paid a large commission. A fee-based compensation schedule tends to help all parties be more responsive and accountable for their performance.
When will he/she be paid? Regardless whether it’s from commissions or fees, confirm your advisor’s compensation schedule. And remember that they will be paid through both bull and bear markets. The reason why an advisor will be compensated during a falling market is that performance is relative. Nearly all portfolios will suffer during an economic downturn, but a professionally managed portfolio’s loss should be much less dramatic than one managed by an amateur investor.
And then comes what potentially is the thorniest rose on the bush: issues of responsibility (a much more palatable word than ‘control’). Who is directing whom? What expectations and boundaries do you both have concerning your portfolio?
An apt analogy for this working relationship is a dance. In any dance, there is a lead and a follow – which, between clients and their financial advisors, shift from one to the other. In the beginning, a new client will have the lead as they define their short and long-term objectives, their tolerance to risk (how much sleep they lose during periods of market volatility) and any preferences toward socially responsible investing. But then the advisor takes the lead, as he/she implements strategies that can realize the client’s objectives while respecting their risk tolerance and values.
Of course, life is rarely as simple as an analogy. The client will often ‘retake the lead’ when it’s necessary to re-define goals, and the advisor always needs to clearly explain the reasoning behind his/her strategies. A client who needs to micromanage every aspect of relationships will be better off working with a broker who focuses on transactions versus an advisor who emphasizes shared responsibility.
A belief that you need to be highly knowledgeable about finances can also hinder your relationship with an advisor. For a layperson, knowledge can be over-rated. For example, I don’t need to know how to perform a root canal, but I do need to understand why my dentist has recommended this procedure over others. Likewise, you need to be aware of your financial standing and the possible consequences of various choices. But this is different from knowing the fine points of Modern Portfolio Theory. As is true when working with any professional: hire the best, keep aware of the process, and let them do their work!
Above all, remember that there is nothing magical about your relationship with a financial professional. Your conversations and decisions will not have the smallest iota of influence on the world economy and its effect on your finances. But the amount of commitment and candor you both bring to the relationship will have a strong effect on your overall well-being. Although prosperity is the ultimate reward of a productive relationship with an advisor, it’s how we define prosperity that will guide our life’s finances. And once you begin living with a realistic and sustainable financial plan, there’s a liberation of both your time and energy. The result? You’ll then able to devote yourself to what truly matters, whether it’s social activism, kayaking through the San Juan Islands, or being with family.
And that’s true prosperity.
Securities and advisory services offered, in states where licensed, exclusively through KMS Financial Services, Inc., a member FINRA/SIPC and an SEC registered RIA.