Important Things to Consider When Sizing up a Financial Advisor
The majority of investors are hesitant when looking into using a financial advisor. This is in part due to the fact that the financial service industry does not have the best track record. For example, many financial advisors work off commissions from certain businesses which they receive for selling the products of that company. This creates an incentive for some financial advisors to sell certain products that will help them financially but may not be the right move for an investor.
Getting referrals from acquaintances and friends for financial advisors is a good place to start but you should also look into each advisor on your own as you must ask as many questions as possible to make sure you are comfortable letting your financial advisor handle your investments. Below are some of the points which you should make sure of before choosing a financial advisor.
- The financial advisor should work for you on only a fee basis not on a commission based compensation structure. Advisors who work on commissions are generally more likely to recommend frequent transactions which may not be in your best interest. Also, an advisor who works on commissions may have ulterior motives because they make money both when you buy and when you sell securities.
- A financial advisor working for you must know the risks you are willing to take and stick to those terms. A good way to do this is to look at historical performance of the potential portfolio in bear markets to get a feel for how the value of that particular asset mix can fluctuate. An advisor who knows what risks you are willing and not willing to take will adjust your portfolio as need be to keep it focused on your financial goals. An advisor should work with you to set goals for your target rate of return. A fee only advisor can show you different models and different types of investments that have the potential for reaching the goals that you have set.
- Make sure the advisor writes a policy statement for you. A policy statement should have well laid out instructions that cover the following goals and risks: target return, tolerance of risk, time horizon, tax restraints, and also encompass any regulatory issues.
- The advisor should be active in rebalancing your portfolio. If there is a situation where an asset does not sit well with the originally specified target allocation, then they should either sell it or at least modify the exposure of your portfolio to it until the target, which you specified, is achieved.
- The advisor you choose should give you a quarterly report of your financial portfolio's performance and its market value. They should determine if the market value of your portfolio is growing at a rate which will allow you to achieve your set financial goals. They should also be up front in telling you changes that they think you should make.