Financial Planning

3 Critical Factors to Consider When Hiring a Financial Adviser

Be sure your adviser is putting your best interest first and keeping fees and expenses low.

The decision to hire a financial planner or adviser (or to keep the one you have) is not an easy one. For all the talk of regulation within the industry, there are very few common standards, so it's easy for someone to say they are a financial adviser or to obtain many of the profession's meaningless credentials, for that matter.

Over the last 20 years or so, firms like mine have proven that you can be objective, independent and true client fiduciaries (serving the client's financial interests first and foremost) and do well by doing things the right way. This has frightened the traditional players (Wall Street firms, banks, insurance companies) and encouraged them to try to offer the same types of services to their clients. However, they have avoided the requirement to be client fiduciaries as their existing operations allow them to say they are financial advisers when in fact they are still licensed as salespeople and earn income from conflicted advice.

Why, you might ask? Quite frankly, there's way more money to be made by creating a financial plan for a client and then implementing that plan with commissionable products such as annuities, insurance policies, high-expense mutual funds, etc.

This creates a conundrum for the typical investor looking for unbiased, conflict-free advice, so I've created a 20-point checklist to help people make the right decision when hiring a financial adviser or planner. (If you'd like a copy of the full checklist, I'd be happy to send it to you.)

Following are three of the most important criteria:

1. The firm must be a fee-only firm.

In other words, the firm and the advisers receive all their compensation directly from their clients and not from any other source. They do not receive commissions from mutual fund companies, insurance companies, brokerage firms or any other provider.

Why is this so important? You cannot be in the business of providing objective advice and also sell a product that fits that advice. Have you ever gone into a Lexus dealership and thought maybe they would recommend a BMW after listening to your preferences in a car? Of course not. Now, if you hired an "automotive consultant" to help you decide which car to buy based on your criteria, you'd expect that person to give you the best answer for your situation and help you find the best deal, all things considered. Imagine how you'd feel if your consultant recommended a Hyundai Genesis, and you found out that he or she received a $500 finders fee from the dealer after you drove off the lot.

In my world, it's a given that people come to us for objective advice. Most don't know or have the inclination to make the decision on this mutual fund versus that or this insurance policy versus that one or which strategy is the best for retirement, and they rely heavily on their adviser for unbiased advice.

2. You did not meet this adviser at a dinner "seminar" or an "educational series" held at a local college or university (and not presented by university staff).

Both of these activities fall into the "con game" category and are vestiges of the "advice by brokers" world. I'm sure you've gotten invitations to a dinner at a nice local restaurant sponsored by an adviser or advisory firm, or maybe you've received a multi-page brochure on "Successful Money Management" or some such nonsense with a University logo on it.

Unfortunately, most of these seminars are in fact packages purchased by commissioned advisers or brokers who then go to the school to hold the seminar on their campus. It looks like something the university put together, but it most often is not. Many times, the presenters follow up with the attendees to solicit them as clients. I cannot believe that a quality institution would allow these, as it amounts to an implicit endorsement in my opinion.

In reality, you should have more to do in life besides go to a financial seminar anyway, but let's assume you have a keen interest in learning more about retirement planning or investments, and you do attend. Rule number one: don't buy anything. Rule number two: remember rule number one, and enjoy your meal. And take anything said there as potentially highly conflicted advice.

3. The adviser exhibits a consistent focus on keeping your expenses and fees low.

I know you've heard about this ad nauseam, and I don't want to beat a dead horse, but most people don't realize the carelessness of many advisers regarding this point.

One of my newest clients hired us after many years at a Wall Street firm. When we reviewed his statement together, I was shocked to find that he was being charged 1.5% for the advisers fee, plus the underlying mutual fund management fees, some as high as 1.5%. So, his costs for someone to assemble a portfolio of high-cost funds was at least 3% per year.

Considering that many fee-only advisers charge no more than 1% as an advisory fee and implement portfolios with firms such as Vanguard, T. Rowe Price and Dimensional Fund Advisers, who have average expense ratios of less than 0.4%, a typical brokerage firm client could save at least 1.5% per year and get better advice. On a $100,000 portfolio, that's a savings of $45,000 over 30 years, assuming no growth.

Yes, Virginia, fees do matter.

As I said, there are several additional items you should watch out for when selecting an adviser, such as demonstrated competence, attitude and philosophy, experience and worthwhile credentials. The bottom line is that this is your money, so choose wisely.

Doug Kinsey is a partner in Artifex Financial Group, a fee-only financial planning and investment management firm based in Dayton, Ohio.

About the Author

Doug Kinsey CFP®, CIMA®, AIFA®

Partner, Artifex Financial Group

Doug Kinsey is a partner in Artifex Financial Group, a fee-only financial planning and investment management firm based in Dayton, Ohio.

Doug has over 25 years experience in financial services, and has been a CFP Certificant since 1999. Additionally, he holds the Accredited Investment Fiduciary and Accredited Investment Fiduciary Analyst certifications as well as Certified Investment Management Analyst.  He is a graduate of The Ohio State University and also the University of Chicago Booth School of Business Investment Management Education Program.

Most Popular

Tax Wrinkles for Work-at-Home Employees During COVID-19
taxes

Tax Wrinkles for Work-at-Home Employees During COVID-19

Are your home office expenses deductible? How does going out of state to work for a while affect your tax picture? There are some interesting wrinkles…
November 9, 2020
Retirement: It All Starts with a Budget
personal finance

Retirement: It All Starts with a Budget

When you’re meeting with your financial planner, do you talk about your budget? If not, you should.
November 10, 2020
Will Joe Biden Raise YOUR Taxes?
taxes

Will Joe Biden Raise YOUR Taxes?

During the campaign, Joe Biden promised that he would raise taxes for some people. Will you be one of them?
November 10, 2020

Recommended

How to Vote for Social Change with Your Investments
investing

How to Vote for Social Change with Your Investments

Want to invest your money in companies that care about climate change, racial equity or other issues important to you? Consider “Socially Responsible …
November 23, 2020
Stock Market Today 11/20/20: Market Slips as Federal Reserve, Treasury Squabble
stocks

Stock Market Today 11/20/20: Market Slips as Federal Reserve, Treasury Squabble

The Treasury said late Thursday that it would let some emergency lending programs end, provoking a response from the Fed and disquieting investors Fri…
November 20, 2020
Have Equity Compensation? Strategies to Handle Stock Market Volatility
Employee Benefits

Have Equity Compensation? Strategies to Handle Stock Market Volatility

The stock market can be volatile, as we’ve all seen recently. To make the most of your equity compensation and manage your income tax bill at the sam…
November 20, 2020
Stock Market Today 11/19/20: Flicker of Stimulus Hope Lifts Stocks
stocks

Stock Market Today 11/19/20: Flicker of Stimulus Hope Lifts Stocks

Reports that Sen. Mitch McConnell is willing to negotiate with Democrats on COVID stimulus helped stocks climb back into the black Thursday.
November 19, 2020