How to Choose a Financial Advisor

Image of Text sign showing Expert Advice. Man holding marker notebook clothespin reminder with word today. wooden table cup coffee.Today’s post comes from a man named Ryan. In it, he tells his story of how to choose a  financial advisor.

In all honesty, this was not the post I had planned in my schedule. It came about from a conversation I had with Ryan on Twitter. I posted an article where I asked why some in the blogging community have such a deep seeded attitude against financial advisors.

Ryan commented on the article and spoke positively about his experience choosing and working with a financial advisor. He had recently switched from another advisory firm. That advisory firm is the darling of the do-it-yourself (DIY) investment community. Most of the personal finance bloggers use the free version of this firm’s services.

I’ve never heard anyone mention that the firm has advisors who get paid under the assets under management (AUM) structure. Many of these bloggers rant against this type of compensation in their blogs.

There’s rarely a discussion of the value received for the fee paid. To most, the benefits never add up. For many, I’m sure that’s true. For others, it does.

Investors have a choice to use an advisor or do it themselves. They also can choose how they want to compensate their advisor. There are lots of options.

I invited Ryan to share his experience of working with the above-referenced firm and tell why he switched.

Let me say at the outset. The experience Ryan tells is his experience. It is not meant as a knock against the firm from whom he switched or an endorsement of the firm he currently uses. I asked him to share his experience as an example to anyone wondering how to find or change advisors. I hope it helps in that process.

With that, take it away Ryan.

How to choose an advisor

I am Ryan, a father of 5 kids (ages range from 15 months to 12 years). I am a regular follower of various FIRE and other personal finance blogs. While I have not reached financial independence, I have accumulated a nice amount of savings. In the future, I hope it could be a possibility.

By day I am a CPA and currently, work as a Financial Analysis Manager for a Fortune 500 company. By night I am an avid fan for my kids’ sports teams and Uber driver to my kids and teammates to various games (what parents does not feel like that).

I recently read the blog post from Money With a Purpose titled Why is Bashing Advisors So Popular with FIRE Bloggers and felt compelled to write about my experience with Advisor over the years.

Background

I have always had an interest in investing. I opened my first brokerage account when I was 12 with T Rowe Price and started to invest my allowance and cash I earned from odd jobs into a mutual fund. Over the years, I continued to grow both my taxable and retirement accounts and managed the funds on my own.

In 2008 I became frustrated with my mutual fund portfolio, as most of them had gone down 40% to 50%. Even ones that were considered lower risk took a big hit. So, I moved out of all my mutual fund positions and entered into the world of individual stocks. The market was on sale, and I felt I could do better than a fund manager.

I picked stocks I was familiar with and liked the company was doing financially. At the time I built a diversified portfolio that was filled with quality stocks at a low price (Apple, Home Depot to name a few).

I took the set it and forget it approach. It was a winning strategy, for the most part. I had some winners and had some looser. Overall, l the returns were great due to the entry point (in other words, I bought them at lower prices). We started to have more kids, and I got some promotions at work. These were good things, but they took more time from my ability to do the research necessary to run the portfolio.

Enter Personal Capital

I started to read more and more FIRE and other personal finance blogs. I kept hearing about Personal Capital as a way to track your net worth and analyze your portfolio. The best part: I heard it was free.

I signed up and set up my accounts. When I ran the portfolio analysis, I became aware that my unchecked portfolio had concentration risk associated with a few of my stocks. Shortly after signing up I received a call from a Personal Capital advisor. They offered their free review and recommendations. I took them up on it, fully realizing it was a sales pitch. He asked a few questions about my risk tolerance, goals and plans. He told me a little about Personal Capital and said they would get back to me in a few days with the analysis.

The presentation

The day comes for the next meeting, and I am firm that I have no intention to sign up for their paid services. After all, they come at the cost of 89bps, and I felt it was unnecessary. I listened to their pitch, which sounded great. The advisor laid out the Sharpe ratio and the standard deviation of their portfolio. He discussed in great detail the merits of their investment approach of equal weighting and the use of individual stocks. Finally, he demonstrated an overall low cost within the portfolio since it was comprised mainly of individual stocks. I was impressed and decided to sign up.

They did not use high-pressure sales tactics with me. I never felt pushed to sign up. They laid out a compelling case. Given my time constraints, I thought it would be great to work with them as a partner. They highlighted what I would call their value-add services (i.e., college planning, tax lost planning, estate planning, etc.). The only thing that was missing from the presentation was how they would invest my money. They didn’t reveal that until I became a client.

This should have been a red flag for me, I can understand on the one hand you don’t want to do the work and give it away. On the other hand, it is my money, and I should know what you are doing with it.

Why I left Personal Capital

After about a year with Personal Capital, I started to rethink my relationship with them. I began to review my portfolio performance. The S&P 500 was up approximately 10% since I started to invest with them. My portfolio was only up 3.9%. After deducting their management fee, I just returned 3.1%.

I chose an aggressive portfolio and had the expectation the return would be at least the market rate or slightly better. Based on this discovery I called my advisor to discuss. The conversation felt very canned and scripted and a bit condescending at times.

The reason it underperformed the index was due to the equal weighting strategy. Most of the growth on the S&P came from technology companies. If you don’t have the same weighting, you will miss out on growth opportunities.

On the flip side, the merits of the strategy will shine in a down market since you can limit losses due to the lower weighting. There was no flexibility for your approach. For instance, I wanted my taxable accounts to have a different risk profile than my IRA accounts; they would not accommodate this request.

The website

On their website, all the performance seems focused on the day. Being a long-term investor, I honestly don’t care what happened today. I am more concerned with long-term performance. You can get to this info, but you have to dig for it.

Throughout the year I was with them I also was not happy with the level of service I received. They did not proactively reach out to set up any meetings on a regular basis or reach out to discuss my insurance levels or college savings plans. I had to initiate the discussions. The discussions over the year our meetings were very scripted, and I felt there was no real advice. They relied on the tools on the website to illustrate various items.

They offer this free. So, I was not seeing the value of paying them if they couldn’t deliver some additional advice or value.

One of the reasons I wanted an advisor was to bridge the gap if something would happen to me and have someone there to assist my wife. They never appeared to have much interest including her in any discussions. At this point, I started to feel I should have gone with the services of a robo advisor like Betterment or Wealthfront. I would be paying a lower AUM and have similar service level and flexibility.

When I went to transfer my assets to my new advisor, the hard sell tactics came out. They told me how their process would yield superior results. I asked him where those results were for me since they were underperforming the market. They didn’t have an answer. I had to firmly ask on the call three times to liquidate my positions for the transfer.

Next Steps

After nearly a year of disappointing results, I knew I had to do something. Many of you may say that one year is a short time to measure results. I underperformed the market so much I felt I had to make a change.

At this point, I came up with two action plans. One was to open an account at M1 Finance and build a 3 or 4 index fund portfolio with them. The other options were to find another advisor. Given my time constraints, having more risk now that my portfolio was larger (small missteps could cost me large amounts for the future), having a partner to use as a sounding board made sense. With my desire to make sure there was someone there for my family if something should happen to me I felt an advisor was the best option.

The search process

To kick off this quest for a new advisor, I did what many do; asked a friend who they use. Ironically, I got a few recommendations, but no one came back with that glowing recommendation. Also, I found few of them used a fee-only advisor. Most were with the big brokerage houses.

Therefore, I turned to the Internet; more specifically I looked to the XY Planning network (www.xyplanningnetwork.com). They are a network of fee-only advisors. Since that’s what I wanted, their site made sense.

They have an excellent site. You can locate an advisor based on various attributes that best fit your circumstance. I found three on the site and set up initial discussions with them. I also found one I wanted to meet with based on an article they wrote.

Due diligence

Before meeting with any of them, I reviewed their ADV filings on the SEC website. These are some great reads as you can find out how big or small the advisor’s practice is (# of clients, AUM amounts, etc.) and their general investment strategies. The important thing in my interview was finding a good fit with the person. After all, this is a personal relationship in which you need to be able to work with the person.

During this process, I learned of the various fee models, AUM, Subscription, % of salary/Net worth, etc. I also focused on the value-add services, i.e., beyond the investment management, what services of value can you offer me. That gave me an understanding of how their process would work, the frequency of meetings, the overall plan for the portfolio and expectations I had from them.

From there, I gained confidence in all of the advisors I met. They all had great presentations and addressed my concerns. I ultimately picked the one which my wife and I felt the best personal connection with and could easily have conversations around our needs and goals. While the relationship is still young (3 months in) we are pleased with our choice.

They have proactively reached out to us for all meetings. I have asked for a few analyses to be prepared and have had discussions around them. I know many point out with AUM present a conflict of interest with some services. The example often used is paying off a mortgage. Conventional wisdom says they don’t recommend doing that with assets they manage because it will cost them money.

That wasn’t my experience at all. I asked them to do an early payoff analysis for my mortgage. They pointed out the pros and cons of doing it. They never told me I should not do this.

Why I Use an Advisor

While many in the FIRE community advocate a DIY investment strategy,  I have opted to use a fee-only advisor for many reasons.

I have the abilities to do this on my own, yet I chose to use a service. Why?

At the end of the day, I have five children and work full time. I don’t feel I have the time to do it right. Plus I like the idea of having a partner to consult when needed. I can challenge my advisor, and he will give me his opinions and listen to mine. It is an excellent and active dialog. They can also save me from myself by pointing out if I want to take on too much risk.

Most importantly, I want someone that can help my family if something should happen to me. I feel this is an essential role of an advisor and was a crucial part of my decision on who to use. My wife had to be comfortable. I like who we chose to manage our investment and provide financial planning advice. It’s still early, but so far it looks like we hit a home run here.

Keep in mind what is right for one person may not be right for another. For some DIY is the right way to go. For others, it is not. There is no one right choice. Who to use is an incredibly personal decision that has to do with the ability of the two parties to be able to communicate. In some ways, it’s like a marriage. What you put into it is what you will get out of it.

If you decide to use an advisor, choose a fee-only advisor. They are a fiduciary and commit to act in your best interest.

Final thoughts

Thanks, Ryan for sharing your experience. My goal here at Money with a Purpose is to provide education for those seeking help. That help comes in three primary areas:

Personal finance, Lifestyle, and Overcoming Adversity.

Personal stories are a big part of the articles. Real life stories offer the first-hand experience on how others do things. Their experiences make the points much better than me writing my opinions. Don’t get me wrong, I offer my views a lot here. However, I think the best content comes from others stories.

Everyone should do their own investing and planning if they’re so inclined. I also want people to know how to choose an advisor and what kind is best. As an advisor myself, my opinion comes with bias. I believe working with a fiduciary advisor is the best choice.

But it’s not the only choice. As I’ve said before, there are good advisors not bound by a fiduciary standard, and there are bad advisors who are. I hope Ryan’s story will help anyone struggling with choosing or changing advisors.

It’s not an easy process. But it’s work worth doing if it puts and can help keep you on the path to hitting your financial goals.

Now it’s your turn. Do you use a financial advisor? Or are you a DIY person? Was Ryan’s story helpful in offering a process to choose? Do you take issue with anything you’ve read here? Let us know in the comments below.

5 thoughts on “How to Choose a Financial Advisor

  1. Ryan, thanks for sharing your story. It was helpful to hear about your process. The one thing that really stuck out to me about not going the DIY route is that you want something that your wife feels comfortable should anything happen to you. It’s very responsible and something most people don’t consider since they assume nothing will ever happen to you. Unfortunately, that’s not always the case. Thanks for highlighting that.

    1. Thanks, It really was hard choice but the piece of mind it provides is worth the fees. In addition they brought some EFTs and mutual funds I was not aware of.

  2. This is a helpful perspective. Two key points are that the advisor is there in case something happens to him and the advisor serves as a neutral, emotionally detached sounding board. As I’ve experienced this month, losing money in a $40,000 portfolio is a lot different than a $400,000 portfolio. Helps to have someone to talk things through but like a marriage they need to have the same bedrock values as you, even if you disagree on some points.

  3. This was a great perspective why to pay for a financial adviser. Ryan does point out the pitfalls of managed money but also covers the benefits as well. A lot of people are not comfortable with picking stocks, mutual funds, ETF’s, etc but know they want their money working for them. It’s also nice to have a professional look over your portfolio and give sound advice.

    1. Hi Gregory,

      I thought Ryan did a great job of that as well. The thing I think bloggers and those who criticize advisors fail to understand that most people need help and don’t know where or how to find it. Ryan explained that very well. Another key point for me was his concern to take care of his wife if something happened to him. In my practice, I’ve had breadwinners who took care of everything die, leaving the wife devastated. Helping them sort out things and taking care of them in the spouse’s absence is one of the more rewarding parts of being an advisor. I applaud Ryan for thinking about that important aspect of his family.

      Thanks for reading and the thoughtful comment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top