For many individuals and families, choosing the right wealth advisor is a tricky decision. There is a lot to consider, from the services being provided to matters of trust and confidence. Because many people evaluate their advisor as the year turns, we offer a few questions and considerations to help you be sure you’re working with the right team.
1. Is your advisor a fiduciary?
First and foremost, your advisor’s compensation should be perfectly clear and transparent. Is it by fees alone or are there other sources of payment? If commissions are involved, there could be conflicts of interest in the investment recommendations you receive. Fee-only compensation aims to remove such doubt and ensure alignment between your interests and your advisor’s incentives.
The big idea: if you want an advisor who is required to act solely and always in your best interests, you’ll want to work with a fiduciary. Ask your advisor about his or her fiduciary status. If you don’t get a clear answer, ask whether the firm is regulated by the SEC (as fiduciaries are) or FINRA (which oversees broker-dealers, who need only meet a lower standard of “suitability” in recommending investments).
2. Is your advisor’s focus on picking stocks and forecasting the market?
Market history and a huge number of academic studies have shown that picking individual stocks typically detracts value when compared to investing in low-cost index funds. If your advisor touts the stocks of individual companies or attempts to time the market with “tactical” allocations, beware – he or she may be playing a losing game with your money. An investment approach that isn’t rooted in low-cost and broad, global diversification is unlikely to capture your share of long-term market returns. At Truepoint, we embrace an evidence-based investment approach.
3. Is your portfolio structured in line with your goals?
High fees and outdated investment approaches prevent many investors from fully benefitting from global market returns. Warren Buffett estimates that wealthy investors lost $100 billion to active management just in the last 10 years. That’s a lot of client money wasted.
Beyond low fees, portfolios should be designed to reflect your goals, time horizon and risk capacity. They should also be rebalanced opportunistically. Additionally, loss harvesting can reduce your tax bill and boost net, after-tax performance.
4. Does your wealth advisor offer all the services you need?
Simply put, people look to advisors to simplify their lives. But many wealth advisors are not built to deliver the full range of services – such as estate planning and tax planning and preparation – in an integrated fashion. As a result, you end up playing the time-consuming and inefficient role of middleman among a host of different advisors and specialists.
Your wealth advisor should be like a “personal CFO” who takes work off your desk and helps navigate every aspect of your financial life. All wealth management services should be offered through one team working together on your behalf, with easy and convenient access to specialty expertise when you need it. And we strongly believe that focusing on what matters most to you—value, goals and dreams—can create peace of mind and possibility.
5. Do you fully trust your advisor?
Many people lack full confidence in the financial services industry, which is understandable given recent crises and historical scandals. But a lack of trust in your wealth advisor can be a serious barrier to meeting your financial goals. After all, trust is the foundation of any great relationship.
For instance, do you trust your advisor to look after your spouse’s finances after your death? Would you turn to your advisor for support in challenging times or when making difficult decisions? What about educating your children about financial matters? Negative answers to any of these questions could indicate you’re not working with the right advisor.
Your relationship with a wealth advisor can be complicated, given the sensitive nature of financial matters and the emotional and psychological factors involved. (The prevalence of media that often covers the market like it’s a sporting event doesn’t help either.) But building the right relationship can bring great value, both to your portfolio and to your life.