Assessing the Service Offering

In Finding a Financial Advisor, I recommended assessing an advisor’s overall approach to wealth management or specific services within, the products and services offered, and type of client the advisor primarily services.

Collectively, I consider this the financial advisor service offering.

Matching your financial objectives and needs with a service offering is important. Advisors tend to have different areas of expertise, emphasis, and product offerings. You want to try and get the best fit for your needs when choosing an advisor.

Fairly obvious. But I do want to make a few observations.

Financial Advisor Overall Approach

The US CFP article we originally looked at recommends you ask potential advisors, “What is your approach to financial planning?” Or insurance, tax, investing, etc.

A good question.

The article states, “Make sure the planner’s investing philosophy isn’t too cautious or overly aggressive for your needs. Learn how he will carry out recommendations or refer tasks to others.”

Three points made, with an emphasis on whether the potential advisor may be too aggressive or cautious for your own risk appetite?

Match Your Risk Tolerance to Advisor’s Strategy

From the risk perspective, find advisors with whom you have a comfort level in their approach. If you are concerned with higher risk investments or strategies, you may not be comfortable having a portfolio of small-cap, emerging markets equities, or venture capital companies. Or, engaging in grey area tax strategies or heavy borrowing for investments may also cause high stress.

Conversely, perhaps you are somewhat aggressive in nature. If your advisor advocates a strategy of low-risk government bonds and term deposits, that may cause frustration due to low returns (and boredom – yes, many clients gravitate to exciting and cutting edge investments, just because.).

Your personal risk tolerance is based on your personality and life experiences. A good advisor should be able to assess your risk profile and come up with recommendations that strive to meet your financial objectives while operating within your risk tolerance levels.

In my opinion, a better financial advisor will work with clients to develop a more systematic approach to risk. Clients who understand the investment and financial planning processes are able to make smarter decisions. We will get into developing that understanding over time in this commentary.

The other two points cited relate to how the recommendations will be implemented and outsourcing or referring work to others. Both should be straightforward. I would focus on the fee arrangements for each.

Implementation and Outsourcing Costs

If you are being sold a product or service in-house, what are the fees to implement the planning strategies? The advice may be free, but you will pay a commission or other expense to implement.

You need to ensure that your needs are driving the implementation, not the revenues from product sales.

If your advisor is outsourcing any portion of your work, either in-house or through third parties, understand how the process works.

It can be beneficial for someone else to assist with your requirements. For example, an in-house insurance expert may help with any specialized needs. However, if you meet initially with someone who is highly skilled and they dump your file on a very junior assistant, that may not be in your best interests. Again, understand who is doing what, how the different parties are coordinated, and the supervisory process for work performed by junior staff.  It is also usually a good idea to meet all in-house staff working on your file.

Outsourcing work to third parties can be good or bad. My major concern involves fee arrangements with your advisor. We will look at fees separately.

As for the outsourcing, determine how that third party was chosen? Is the third party a competent person who will perform good, reasonably priced work on your behalf? Or is just a buddy of the advisor? Or someone who may or may not be adequately skilled, but gets the business because they pay a referral fee back to the advisor?

As well, what recourse do you have against poor work by the third party? The third party? Or does your own advisor take responsibility for actions of those he outsources work to?

I have no problem with outsourcing work to third parties. Just be certain you understand who will be doing the work and any financial arrangements between your advisor and the third party.

Product and Service Offering

The types of products and services a financial planner/advisor will provide vary from organization to organization. This should be fairly straightforward at a high level.

You meet a tax lawyer or accountant. You should expect services relating to personal or corporate taxation, plus estate planning and related retirement issues. You should probably not expect the professional to sell mutual funds or develop derivative trading strategies. The broad groupings should be easy to ascertain.

But within general groupings, there is a fair bit of variation. Let’s consider financial planners.

Some planners prefer to develop detailed financial plans encompassing all of a client’s financial goals. Others choose to work in specific areas such as taxation, estate planning, insurance and investments.

If your priority is to learn how to better budget and save, look for someone who emphasizes those aspects of financial planning. More so than someone who provides pure investment advice.

You should find someone with the qualifications, experience, and service offering that best meets your primary financial objectives. Both now, as well as in the shorter to medium future.

Type of Client

Why is the type of client an advisor normally deals with important?

And by type we can consider both client “needs” and “size”.

Match Advisor to Your Needs

As stated above, obviously match your needs to an advisor on a general basis. Tax specialist for tax requirements. Insurance specialist for insurance needs.

But even within your general groupings try and find a good match to your specific needs.

Often an advisor can deal with clients having different needs and objectives. A fund salesman should be able to handle most investors’ needs. Whether they be 20 year olds beginning to invest, all the way to retirees winding down their portfolios into cash flow generators.

That tends to be true for lawyers, accountants, planners, insurers, etc. In an advisor’s particular area of expertise, they should be able to handle the requirements of most client types. The exceptions resulting from the skill and experience of the advisor versus the complexity of the client’s needs.

For example, a fund salesman may be able to handle most investors’ needs. But if you are an investor seeking advice on options trading strategies, a fund salesman might not be the advisor for you.

There may also be synergies in finding an advisor who focusses on your specific requirements.

For example, a young adult may desire a higher risk investment portfolio with a significant percentage of non-hedged international equities. Possibly some relatively less liquid and/or higher volatility assets. Actually not a bad portfolio for individuals with long time horizons. On the other hand, a retiree may seek currency hedged investments, with more emphasis on liquidity and low volatility. Again, prudent strategy.

Investment advisors or planners probably can handle both client types. But perhaps the ones that specialize in your personal situation may have a better grasp of current products, strategies, etc. for that client segment. Or maybe it brings you greater comfort knowing that your advisor works with people who have the same issues as you more regularly.

Match Advisor to Your Asset Size

This is similar to matching an advisor to your specific needs.

Perhaps your potential advisor focusses on clients with less than $250,000 in assets. Their financial needs are usually different than a client with $50,000,000 in assets.

You want to match your needs resulting from asset size with the right advisor.

Not necessarily that one advisor cannot assist, but an advisor who deals with your asset level may be more up to date in products and strategies in that market segment. Same as the client market segment above.

Optimal strategies, tactics, and investments may differ by client asset size.

If you have $100,000, it is extremely difficult to create a highly efficient and effective portfolio of individual stocks and bonds. Low cost funds are a better investment path. If you have $10,000,000, then it is possible to create a well-diversified, efficient portfolio with individual stocks and bonds. The greater the economies of scale, the better the flexibility.

Also, the larger and more complex the client, the more sophisticated (and expensive) the advice. Perhaps you have a salaried job, a few investments, some interest and dividend income, etc. H&R Block or a small tax practitioner may be able meet all your tax needs for a reasonable cost. Sure, the head tax partner at PwC could also meet your needs. But at 5 times the cost (or more).

Conversely, if you have $50,000,000 in assets you may need the higher end tax expertise that a small tax advisor cannot provide.

Look for advisor’s that work with your asset size and related requirements. Find quality advisors, but do not spend money on expertise you do not need.

Be on Same Page as Your Advisor

As a client, you need to be on the same page as your advisor. If you do not agree with the advisor’s approach, then it will be a poor match.

The key is strong communication.

A good advisor will be able to explain clearly why a recommended approach is preferable. The client, in turn, must buy in to the recommended course of action. Note that buy in is not simply acquiescence. The client must understand and accept the reasoning behind the strategy and agree.

Do not just defer to the advisor’s “expertise”. It is your money, make sure you understand and agree.

On the other hand, it is equally imperative that the client be honest, open, and explain what he or she wishes to accomplish. And the advisor needs to listen and understand.

Communication both ways is crucial. In my opinion, good financial advice is a collaborative process between advisor and client. If both advisor and client are not on the same page, results will be suboptimal. So find someone who is a good fit, then work together over time to build your wealth.