Finding a great Financial Advisor can help you significantly with planning for life events, and building your retirement pot. However finding the wrong one can be like getting married to the wrong person in haste and we know that divorces are costly, complicated and messy!
Here are 6 tips to finding the perfect finance partner.
1. ASK FRIENDS FOR REFERRALS
Personal recommendations from friends are a good place to start a short list for research. However, you should take caution with these referrals because:
If they are a relatively new client, it's likely that they will have a confirmation bias - it makes them feel better about their own decisions if they recommend their IFA to you. They may be well-meaning but they have not yet had time to see how it’s working with the adviser themselves.
They might not have done much due diligence of their own and therefore might not be the best choice for you, or even for them.
It’s a good starting point though - but remember this is a marriage - don’t jump on the first person who asks you to dance!
2. ASK THE ADVISOR IF THE FEE YOU PAY IS THE ONLY COMPENSATION THEY RECEIVE?
Financial Advisors can be compensated in 2 main ways: either via commission paid to them from the products they sell you, or by charging you an annual fee (typically a percentage of the amount they are managing for you).
You need to find a fee-based advisor rather than one paid by commissions. There is a greater risk of a conflict of interest when your Financial Advisor gets paid commissions as it is likely that different products pay different amounts of commission. And with the best will in the world, you’ll end up with the products that pay the most commission, rather than the most suitable for you.
3. WHAT PRODUCTS IS MY MONEY INVESTED IN? CAN YOU CUSTOMISE THE PORTFOLIO TO ONLY USE LOW-COST INDEX FUNDS OR ETFS?
If the advisor does not or is not willing to use low-cost trackers, and tells you that they use actively managed funds selected by the firm's “Chief Investment Officer” then move on to the next advisor on your list. Here’s why:
Cost: A portfolio made up of low-cost trackers will cost you less than 0.5% per year, a simple fund can cost as little as 0.1%. Actively managed funds tend to charge 1%-4% per year. At best you are paying twice as much, at worst you are paying 40 times more.
Returns: Active funds have been proved to underperform index trackers 95% of the time. New data suggests it could be 99% of the time!!
4. ASK YOURSELF - DO I UNDERSTAND THE INVESTMENT STRATEGY?
Don’t trust any investment strategy you don’t understand. Don’t trust any advisor who won’t or can’t take the time to explain exactly why and how they operate.
Most of your portfolio’s return will come from the asset allocation, diversification and rebalancing - not picking the individual funds. Therefore get the advisor to walk you through their asset allocation - and if they can’t explain it then chances are they don’t understand it either! This is a good overview of asset allocation that you can read beforehand.
5. ASK THE ADVISOR WHAT HAPPENS IF I CHANGE MY MIND - CAN I SELL MY INVESTMENTS IF I WANT TO?
“If the firm says no, run. This is non-negotiable.” is the advice of Andrew Hallam, author ofThe Global Expatriate's Guide to Investing. Life never happens in line with your 20-30 financial plan - so you need flexibility in accessing your investments, and should be free to move them to other platforms if required.
Ask who the product provider is - if it’s on this list then beware of long lock-in periods and high fees: Friends Provident, Zurich International, Royal London 360, Generali Worldwide, Hansard International, Alexander Beard and Old Mutual (Royal Skandia).
6. FINALLY, ASK WHAT QUALIFICATIONS THEY HOLD.
Strong qualifications are a CFP® (Certified Financial Planner), or CFA (Chartered Financial Planner). Minimum qualification thresholds that apply in countries such as the UK and the US aren't applied in Asia - advisors have little requirement to achieve highly qualified status and therefore could really be considered financial salespeople.
And before you head off to any meeting with a potential advisor, make sure you read my 'Beware the Coffee Chats' article first so you can understand conversations about the impact of fees on your investments.