In episode 21 on the Wilson Wealth Management YouTube channel, we continue with how to find the best financial planner or advisor for your requirements. Today the focus is on the financial advisor’s personal fit and service offering. Both should match your unique needs, client type, and personality.
Now that you have found a potential advisor with proper training and experience, you need to assess the match. Is there a strong personal fit between you and the advisor? Does the advisor’s service offering meet your needs? Clients often intuitively assess the latter. But often do not consider the personal fit.
Questions to consider:
“What type of clients does the advisor typically work with?”
If a financial planner usually works with retirees on their investment and cash flow planning, is that a good fit for a 30 year old client? Perhaps. But maybe the advisor’s focus is on fixed income and other low-risk (low return) investments, where stability and consistent cash flow is important. Will they also be proficient in recommending more volatile investments for clients with 40 year time horizons?
The same applies to other areas. Life insurance. Child education funding. Entrepreneurial advise for small business owners. Not necessarily a deal breaker. But consider the type of clients an advisor typically deals with. That may give an idea of the fit with your needs.
“What is the typical size of the advisor’s clients?”
This has two aspects.
One, if I am primarily working with clients who have bankable assets of $10 million, I will implement different strategies, tactics, and investment products than I would for someone with $100,000.
The higher dollars allows for more non-diversified assets, such as individual stocks and bonds. Because the assets exist to properly diversify the overall portfolio. Whereas, for the client with $100,000 in assets, low-cost, well-diversified index funds tend to be the more prudent strategy.
Also, with more wealth to diversify, often it can be useful to invest in more niche markets or alternative assets. Private equity, for example. Or more tactics involving derivatives and hedging. Again, areas that are not cost-effective (nor usually necessary) for someone with much less capital.
The size of clients the advisor tends to work with may give you an idea of their experience and investing approach with someone of your asset value.
Two, who pays the bills? If the bulk of an advisor’s clients average $5 million in assets and you have $100,000, where do you fit in the advisor’s priority list? Usually not intentional. But in a volatile market, with a finite number of hours in the day, where will you fit in the returned phone call or email strata?
“What is the advisor’s investment philosophy?”
Another key consideration that is often overlooked to some extent.
This includes the overall approach to investing? If you want to day trade, you and I will not be a good fit. I focus on longer-term investing and achieving identified financial objectives. There are other advisors who are happy to advise on high-frequency trading approaches.
Another overall philosophical area may be technical versus fundamental analysis. I do not perform technical analysis in my own practice. I believe in fundamental as the better approach. If you want to spend your time tracking trading volumes and price trends, we will not be a good fit.
The investment process is also part of the philosophy. A buy and hold strategy tends to be my preference. For many clients, investing in passive, index funds. Minimize costs, match the market return. My focus is heavily on the investor profile and target asset allocation. Not trying to time the markets on a weekly basis, jumping in and out of stocks. If you prefer to invest in the latest hot stocks and short-term trends, with much more active trading, then we may not be a great match.
Risk tolerance is another part of the overall philosophy. If you are a low risk investor, based on your investor profile and personal risk tolerance, then recommending derivatives and venture capital is not a good fit. The wrong investments for someone with a lower risk investor profile. But also, for the stress and emotional toll that comes with a portfolio full of assets you do not understand or like.
Conversely, if you are in your early 30s, with lots of excess cash to invest, then less liquid investments may be warranted. And you will not be happy if I try and get you to invest in a 60-40 balanced fund or a 2060 Target Date investment product.
In general, I think advisors do a decent job of matching clients to suitable investments. However, if the advisor is compensated based on product sales or works in a specific sector (e.g., venture capital), there may be a potential issue.
“Does the advisor give me the warm fuzzies?”
A client-advisor relationship is best served when both parties are open and honest with each other. It definitely helps if you like the advisor on a personal level. Or, at least, respect them enough to open up about what is happening in your world that may impact your wealth plans, investing patterns, etc.
When I worked in public accounting, you would often see clients come in during tax season. After the year end was closed. “Oh, we did this and that during the year. Can you help with the tax impact?”
But, by then, it is usually too late. Having that relationship where you can discuss things before they happen can make the partnership much more effective.
“Will this advisor be a partner I collaborate with in reaching my goals?”
Another area that differs between advisors. Also, in what the client may prefer.
I believe the client-advisor relationship should be a partnership. A collaboration. Where the client is fully part of the process, understands what is being done, contributes, and buys-in on the actions taken.
Other advisors (and clients) prefer more of a one-way street. “I have a problem. What should I do?” The advisor provides a recommendation and it is implemented. Not a lot of time on the reasoning as to core concepts such as diversification, risk-return, asset correlations.
And some clients do not want to invest their precious time to be educated or be a part of the process. They hired an “expert” to make the best decision. They just want to know what they should do, not necessarily why. Which is fine if that is your personal way of doing things.
However, if you prefer a true partnership, seek out advisors with the same mind set.
On the actual service offering, you should consider the following questions:
“Do the products the advisor offers meet my needs?”
If you require life insurance, does the advisor directly, or even indirectly, offer those products?
If you subscribe to low-cost, passive investing, can you get the best products through this advisor? Or does the advisor only provide in-house products? That may, or may not be, the best in class.
If “free” advice does not get you access to the best products for your requirements, is the cost worthwhile?
“Does the service offering also meet my needs and expectations?”
If you need tax advice or estate planning, can your fund salesperson provide as well?
Who does the actual work on your file? The high end advisor you met initially, with all the experience and qualifications? Or one of the junior staff, just starting out? If the latter, what controls are in place to ensure quality of work?
Is all work performed internally, or is some completed by third parties? Again, what assurance can you receive as to the quality of work performed?
Does the advisor receive any fees for referrals to third parties for additional services?
For work not performed by the advisor’s firm, is that part of the engagement fee? Or will you have to pay extra for work done by third parties?
Many issues revolve around the fee structure for work performed. And that is without even discussing the advisor’s remuneration. Something we will consider in episode 21.
In episode 20 on the Wilson Wealth Management YouTube channel, we discuss how to assess a potential financial advisor’s experience level.
In episode 19, we considered a financial planner or advisor’s technical qualifications and professional designations. But without relevant experience, to a level that meets your needs, qualifications do not mean much.
In this episode, we consider the following questions:
“How do I compare skills and experience between advisors with different designations?”
That is a challenge. Especially in today’s world where advisors often develop skills and experience in multiple areas, but may not possess official credentials in all.
You can search the internet to find the core competencies of each designation an advisor possesses. That should provide some information on their main skill sets. But then you need to discuss the specific expertise that you require. And ensure that advisor can adequately meet your unique needs.
“How can I compare the skill level within an individual designation?”
That can also be a challenge. Especially if you are not familiar with the financial services sector.
In some ways, financial services can be like the medical industry. Your General Practitioner handles your daily needs. Some or relatively better or worse than others. Some may have interests or focal areas that make you a good fit. For example, if you are young and into sports, maybe a GP who deals with a lot of sports injuries in his/her practice.
But if you have an emergency, you go to the ER. If you need specialty assistance, your GP refers you to someone who is an expert in that area of need.
Again, you should discuss your needs with your advisor. What can he/she provide? What is outside their expertise? Or what may be within their base knowledge, but not offered as a service.
In my case, I have decent Canadian tax knowledge. Something that is required in daily financial planning or investing work. But I do not provide tax services (e.g., tax return preparation, estate freezes, etc.), because I do not have my tax specialization. Nor do I consider myself an expert in the field. I explain up front what I do and do not provide clients. If their primary need is tax planning, then we are not a good fit.
Of course, some advisors do claim expertise in areas where they should not. So do not automatically assume they are completely on the level. Ask questions, do a proper review before committing.
“Should I select the most skilled advisor? Or should I try and minimize my costs?”
It all depends on your needs. If you have a simple tax return, for example, do you need a tax partner from Ernst & Young? He/she might be the most skilled person, but you will pay a huge premium for expertise you likely do not require. The tax kiosk in your shopping mall may meet your needs.
On the other hand, I do see people try to save as much money as possible on advisors. Often, it comes back to cost them much more in the long run. We will cover this a little more when we look at “free” advice from mutual fund representatives.
“Should I only worry about today’s needs? Or should I also consider my future requirements?”
Within reason, individuals should probably work with advisors they can grow with over time. The client-advisor relationship is often one of trust, comfort, and knowing each other. That helps improve planning and working together. If you have to move to another advisor in three years, as you have outgrown your current partner, then there is a learning curve involved.
In episode 19 on the Wilson Wealth Management YouTube channel, we start our look at how you should assess potential financial advisors. There is such a wide range of technical skills, experience levels, and a multitude of professional designations amongst advisors. It can be difficult to find the right financial planner or other advisor to best meet your wealth management or investment needs.
One area requires assessing an advisor’s technical qualifications. We consider the following questions:
“What is a financial advisor? Is this different from a financial planner?”
A financial planner is a financial advisor. But not all financial advisors are planners. You need to determine what skill sets you require, then begin searching for professionals with relevant qualifications.
“There too many financial designations. How do I wade through the alphabet soup of advisor credentials?”
Yes, it is difficult. There are many different specializations, most with their own individual credentials.
If I require tax expertise, perhaps I seek out a CPA who has completed the in-depth tax program. If I require detailed investing advice, perhaps a CFA is best.
But even within an area, there are often many designations. In Canada, CPAs merged financial, managerial, and general accountants a few years ago. Now, when I meet a CPA, I need to ask for specifics on their training. Much different in skills whether the accountant was trained in audits and tax work as CAs. Versus if they have a cost accounting background by going the CMA route.
Or, Canadian financial planners. Technically, one does not require a professional designation to call themselves a “financial planner”. But there are actually three different certifications for financial planners who do pursue credentials. Certified (CFP), Registered (RFP), and Personal (PFP). Given the nature of financial planning, there really is no difference between the designations. Yet when you are assessing potential planners to hire, you will have three options to ponder. Four if you do not care about certifications.
“Does a credential equal competence? If so, why? If not, why should I care about letters after an advisor’s name?”
A credential does not guarantee competence. However, with so many available certifications out there, I would like to see my advisor have at least one. In the specific skills I require. If an advisor cannot be bothered to attain even one certification, how much effort will they take to ensure their skill set is strong.
And most members or professional organizations are required to take a certain number of education hours each year in order to retain the designation. That may provide some comfort that the advisor remains current in their expertise. Or not.
“Will any credentialed advisor meet my needs? Or do I need to dig deeper?”
You definitely need to dig deeper. We will discuss relevant experience in our next episode.
“What does it mean if an advisor is ‘in good standing’? Is this good or bad? What, if anything, does this tell me about them?”
If an advisor maintains a professional designation, you do want to ensure it is current.
Many professional organizations maintain databases that people can search to assess if an advisor is in “good standing”. If not, the advisor should be able to provide documentation to prove that there are no issues with the designation.
In episodes 16 and 17 on the Wilson Wealth Management YouTube channel, we looked at diversification. How properly utilizing asset correlations can improve portfolio diversification and better manage investment risk in a portfolio.
Because of this, investors often obsess in finding the “perfect” correlations when adding assets into an existing portfolio.
In this episode, we consider the following questions:
“Should investors fixate on finding the optimal asset correlation when selecting new investments?”
Asset correlation is an important consideration. But investors cannot prioritize over the quality of the investment. The risk and expected return versus other investments being assessed. Nor its fit in the investor profile and target asset allocation, so financial objectives may be achieved.
“Why do investment advisors recommend low return bonds in a portfolio? Is this part of the whole diversification issue?”
Yes. Sometimes lower return asset classes can provide effective hedges against risks inherent in some higher risk classes. But it is about the relationship between two asset classes, not necessarily a function of just finding low risk, low return investments to add to the portfolio.
“I have the optimal asset correlations in my portfolio. Is it time to sit back, relax, and reap the benefits?”
No. Correlations between assets tend not to be stable. Over time, there may be permanent shifts. As with emerging markets and U.S. domestic equities. Or, the change may be temporary. As with domestic stocks and bonds over the decades. Correlation coefficients between investments should be monitored. If necessary, portfolio adjustments may be required to re-optimize the mix.
“I have read that roughly 30 stocks can achieve useful portfolio diversification. This mutual fund has 100 holdings. That should be ample for diversification, right?”
Maybe. Maybe not. It all comes down to the asset correlations.
In episode 17 on the Wilson Wealth Management YouTube channel, we continue our review of portfolio diversification. Our focus today is on asset correlations and the real-world correlation coefficients between different investments and asset classes. Specifically:
How does the asset correlation between investments impact portfolio risk and return?
We cover a simple real world example of correlation between two global oil companies. How, even in very similar businesses, there is still diversification potential to help manage overall portfolio risk. But by adding a dissimilar asset to the mix, especially one with a low to negative correlation coefficient, the diversification benefit greatly increases.
Investopedia talks about having a “wide variety of investments” to achieve proper portfolio diversification. Is there a right number and mix of assets?
In our example, we see that the right number of assets reflects the asset correlations between the investments. The lower the correlations between portfolio assets, the less number of different investments is needed to properly diversify. The higher the correlations, the more investments will be needed to achieve useful diversification. How you build your portfolio is more important than the sheer number of assets.
Investopedia added, “that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security.” Is this true?
We also see in our example that diversification does not impact portfolio return. Overall portfolio return is simply a weighted average of all individual asset returns. Whereas, the overall portfolio risk does fall as new assets are added in the mix.
However, this latter effect may allow investors to invest in higher risk assets, with higher expected returns. So, while I would not agree with Investopedia’s statement from a completely factual perspective, I understand what they mean.