Get Reference Letters
I am surprised that clients don’t ask for letters of recommendation more often. References really help to understand who the advisor is and how clients have been treated over longer periods of time. Everyone has an opinion, and three references should do the trick. The references should be from different types of clients too – possibly one from a retiree, one a non-profit or one from a family that is in the midst of long-term planning. We encourage getting real life feedback because with reputations at risk, be assured that the substance of the reference is usually excellent.
Of course, one can argue that a close friend can write a letter that might exaggerate the advisor’s skills and the recommendation may not be truly independent. However, if you have already checked the trust box, then you know that the letters are probably legitimate. Of course, if the advisor has a hard time getting letters of reference for you, that’s a big red flag!
Buy or Sell? Oh Sorry I Meant Sell!
Try to see if the advisor has an understandable process and plan in place when managing your money. An advisor without a plan is bound to fail and will end up losing your money. In my experience, I have seen many highly educated people in this business fail because they don’t follow a preset plan. They try to do too much, and they tend to take on too much risk. They flip flop between this strategy and that strategy and then brag about their short-term (read: unsustainable) results at the Country Club. Short-term trading and speculation is not a repeatable strategy and should be avoided at all cost!
It is good to find an advisor who is actually making the investment decisions for you – not simply the “parrot” of some “wizard behind the curtain.” The advisor should be independent-minded and not easily swayed by the “flavor of the day.” They should undersell performance and oversell service and safety. Conservatism should always trump speculation and avoiding the big loss should be your ongoing mantra. Also, the advisor should set reasonable return expectations for you. If he is “promising you the moon” with overly optimistic investment returns, then it would be best to run the other way. There are no shortcuts in this business and investment success takes time and patience. Staying power is important – the less capable will be exposed eventually.
Steak over Sizzle
The ultimate goal of your advisor is to protect you from financial disaster. Good advisors never try to over-sell you. Preservation of capital should be the main goal. Famous investor Benjamin Graham (the mentor of Warren Buffett) wrote a wonderful book called, The Intelligent Investor that sums it all up when he wrote “The leading investment-counsel firms make no claim to being brilliant; they do pride themselves on being careful, conservative, and competent. The primary aim is to conserve the principal value over the years and produce a conservatively acceptable rate of income” and overall return. His most relevant comment was, “Perhaps their chief value to their clients lies in shielding them from costly mistakes.” Wall Street tends to promote returns over conservatism to get new clients, however. This is the exact opposite of what you should be looking for because losing money is a serious matter!
Thanks for reading Part 2 of our “Choosing a Financial Advisor” series. For Part I, click here. Please continue to check on our blog regularly!