Scott Wood is the Co-founder and Chief Executive Officer of True North Advisors.
In my years of working with hundreds of clients, most don't have a strategy and process for how to hire an advisor.
We often ask the question, "What is your process for choosing a financial advisor?" We usually get shrugged shoulders, and "I’m not sure," or an enlightened look expressing the realization that they actually should have a process.
Fortunately, we provide a process to make this easy— but if you were to tackle this on your own, a simple road map might help.
1. Is the firm structured as a fiduciary or broker-dealer?
This is critically important to understand. In today's marketplace there are a plethora of financial advisors to choose from, including big institutional firms, boutiques, self-service brokers, and robo-advisors.
The critical question to understand is whether the firm is operating as a fiduciary advisor or a broker-dealer.
For fiduciaries, client interests must come first. For broker-dealers, client recommendations must simply be suitable.
This means a firm can be positioned in opposition to you. Your firm can be trading and in competition with you. Is this what you want? A further nuance is that many broker-dealers use dual registration. They put on a fiduciary hat when they need to wear it; alternatively, they put on a broker-dealer hat when it is convenient to do so.
A key question to ask your advisor: Are you operating solely as a fiduciary on my behalf without a broker-dealer (product) platform in place?
2. How engaged do you want to be in the process?
It is important to understand yourself in this process. Do you prefer to give input but delegate the decisions? Or do you want to make all investment decisions with little supervision? How much time are you willing to commit to this part of your life?
Managing your finances can take considerable time. It is also not an event but rather a long-term commitment.
If you have an active life and your passion falls in other places, it makes sense to lean toward a more full service offering.
If you want to be actively involved, it may be better to find a firm that can execute your ideas. If this is the case, you may want to consider a brokerage platform through Schwab or Fidelity.
A key question to ask yourself: How much time are you committed to spending on managing and supervising your portfolios each week?
3. What conflicts might exist in the firm I choose?
What businesses is the advisory firm involved in—and could this create potential conflicts?
Many large financial institutions both manufacture and market their own (or others) investment product to clients. They make money independently of the client fees they charge. This creates an extra layer of fees and creates a conflict with your best interests.
While most firms have some level of conflicts, it is important to understand what they are and how they might influence the advice you receive. The best situation is to identify a firm whose compensation is not influenced by the investments that end up in your portfolio.
Key questions to ask your advisor: 1) How is your individual compensation structured? 2) What product incentives do you have? 3) Do you receive credit for opening lines of credit or checking accounts?
4. What is your investment process?
Understanding how your advisor selects investments is critical to understand how they choose investments for your portfolio. Are their best ideas based on a centralized research group that scours the marketplace? Or is there an internal division that is responsible for manufacturing or creating product?
A client-centric firm will begin with your specific goals and objectives and then find the best ideas on your behalf. Ideally, there is no change in the compensation that an advisor receives—whether you invest or not.
Key questions to ask your advisor: 1) Is there an investment policy committee to actively review my portfolio? 2) Is there a sales credit or incentive paid to the advisor based on recommendations made?
5. Do you offer holistic wealth management?
Another critical questions is to understand if there is a formal process for financial planning. Many firms respond with "Yes, we do that too"—yet there is in reality no formalized structured process in place.
If this is case, you may not get the full value you deserve. Wealth Management, by definition, blends the two disciplines of asset management and financial planning. One without the other will likely leave a hole in your overall plan.
Key questions to ask your advisor: 1) Do you include financial planning in your services? 2) Do you have people dedicated to either the planning or investments beyond my relationship manager?
6. What is your firm's service model?
Our industry's sales process was initially built on the model of an individual producer at a large brokerage firm. Over time, however, firms have encouraged individuals to team up in focused or siloed broker teams.
While this has likely improved the service offering to many clients, this was not the motivation. Rather, it was to make it harder for teams to depart their firms—and take clients with them.
The problem is that these organizations still have silos. Your overall experience is only as good as the individual team you are working with.
An organization where the entire firm is unified and working together to serve you is a more optimal structure. It allows you to draw on the expertise of the organization vs. the expertise of an individual or siloed team.
A key question to ask your advisor: Will I be served by a siloed team within the larger organization—or will the entire organization be committed to delivering the best financial advice and service to me?
7. How do you make money?
The simple question is how many lines of revenue does a firm have. A firm with one line of revenue (the fees clients pay) is going to be much more focused on you than a company with multiple lines of revenue. Examples of other forms of revenue are: fund distribution fees, investment banking fees, and trading desk revenue.
A key question to ask your advisor: What percentage of your revenue comes from activities other than client advisory fees?
8. What is your sales process?
Most firms have some kind of sales process. But is the process top down or bottom up?
For example, does the sales process focus on product and all the great investment ideas first or last?
Think about it this way: If you wanted to get in shape, you would start with goals and objectives—then gradually get more granular and think about how many days a week you want to exercise. Then you would move to types of activities like running, yoga or lifting weights. You would ultimately end up with a specific plan of activities, frequency, duration, reps and sets. If a trainer showed up and said do squats and run without understanding your goals you might not hit your goal.
The same is true for the financial advisory industry. The industry often gets it wrong because they focus on product and performance without understanding your goals and objectives.
Make sure the firm you are interviewing spends more time on high level goals and objectives, big picture strategy and ultimately settles on tactics (or investment ideas in this case), not the other way around.
Key question to ask your advisor: 1) Will you make all decisions about my investment portfolio based upon my individual goals and objectives? 2) What is your process for ensuring this?