What Makes a Good Financial Advisor?
The makings of a good financial advisor can mean slightly different things to different people. However, there are characteristics underpinning financial advisor quality that you should look for in any advisor you choose to work with. The following outlines these characteristics and why they are important.
Ability to Listen
A financial advisor’s ability to listen is vital. Their patience in conversations with you and your family helps them draw out what is unique about your particular situation. This impacts their ability to understand the nuances of your financial goals and determines the quality of the financial plan they craft for you. A financial advisor’s failure to listen carefully can hurt you and your family in ways that are not immediately clear.
For example, let’s say your financial advisor fails to listen during the information gathering phase and places you into a model portfolio that is too aggressive for your risk comfort level. During a sharp market decline, your portfolio loses more value than you can comfortably tolerate and leads you to act at the wrong time. This action detracts from progress toward your financial objectives, resulting in a target retirement date that is pushed back years, the inability to fund your child’s education, or worse.
A good financial advisor possesses intimate knowledge of their field. You wouldn’t want a surgeon operating on you that has had zero training or education, would you? The immediate results are less tangible, but the same applies when hiring a financial advisor. Putting your money in the wrong person’s hands can have disastrous results.
As an indicator of a financial advisor’s knowledge level, you can look at the credentials they hold. The Certified Financial Planner (CFP) credential is one of the most relevant finance industry credentials that an advisor can hold. To earn and maintain the CFP designation, an advisor must complete initial coursework, pass an exam, and fulfill continuing education requirements.
Similarly, the Chartered Financial Analyst (CFA) designation requires financial advisors to complete three rigorous examinations. This designation is less common among financial advisors, but its presence can serve as an additional indicator of knowledge and commitment to the industry.
Additionally, there are a slew of other designations that an advisor may carry. These can certainly add to a financial advisor’s knowledge base, but none are a substitute for experience. A financial advisor’s experience level is a good barometer of their field knowledge. There is no substitute for being in the trenches.
Strong Communication Skills
A good financial advisor must possess strong communication skills. A financial advisor that communicates well will set proper expectations from the start, which sets the stage for a fruitful relationship.
Financial advisors that communicate well will also take the time to ensure you understand financial concepts that are foreign to you. Be wary of an advisor that speaks only in terms of industry jargon and is unwilling, or unable, to translate into straightforward terms. This could be an indication that they are masking their true lack of understanding.
Additionally, one important role that a financial advisor should assume is that of a behavioral coach. The financial advisor’s role as a behavioral coach pertains to their ability to guide you and your family to make the right financial decisions. Possessing a weak communication skill set makes this an uphill battle for your financial advisor.
To gauge a financial advisor’s ability to communicate, you may have to speak with several to identify one that speaks in a way that instills confidence.
Unsurprisingly, hiring a financial advisor that has a strong moral compass is arguably the most important box you need to check in your evaluation process. After all, you’re handing over assets that you likely sacrificed years of your life to save.
There are obvious pitfalls to hiring a financial advisor with questionable morals, such as outright theft. But there are more subtle actions that can hurt you as well. Some of these include:
- Promising unattainable performance. The promise of performance of any magnitude should be an immediate red flag. However, even if a potential advisor doesn’t explicitly guarantee performance, they can imply expected rates of return that are too high, which can be damaging as well. You may choose to stick with a financial advisor based on unrealistic performance expectations set by that advisor. These expected returns have implications for the financial forecasts they create for you and can cause you to fall short of your goals down the line. It can then be too late to change course.
- Failing to disclose conflicts of interest. If a financial advisor fails to disclose aspects of their relationship with you where their interests and yours don’t align, they can reap rewards for themselves at your cost. One example of this would be an advisor recommending you work with a specific attorney who offers them a benefit for referring clients, even though this attorney may not be right for your situation.
Checking the disclosures listed within a financial advisor’s Form ADV is one way to identify if the financial advisor you’re evaluating may lack integrity. This form is what financial advisory firms use to report information about their advisory business to state and federal securities regulators. Within this form, advisory firms are required to disclose instances of any past criminal, regulatory, or disciplinary actions against them. Our PennyPilot Grade (Accessible Here) scores the disclosures reported of over 5,000 advisory firms. Alternatively, you can also access the disclosures of any individual firm at no cost to you through the SEC’s website.
A good financial advisor is accessible. When you have a significant life change that impacts your finances, you’ll want guidance in the moment, not a month after the change occurs. Along these lines, you don’t want an advisor that takes on too many clients and is therefore unable to dedicate the appropriate amount of time to working with you and your family.
As with any business, financial advisors are incentivized to grow their client base. There is nothing inherently wrong with this. But you should be cognizant of it in case your advisor is spread too thin.
Our PennyPilot Grade (Accessible Here) compares and ranks how thinly advisors are spread at over 5,000 advisory firms. You can also access the number of clients any individual firm has at no cost to you through the SEC’s website.