Who should be your financial advisor?

By Steve Doster

Editor’s note: This is part two of a two-part series

Last month, we talked about how important it is to work with a fiduciary when selecting a financial advisor. This month, we will dig deeper into additional criteria to consider before making that final decision.

There are many companies creating a service generally called “robo-advising.” These software programs can manage your portfolio with no human involvement. And this can be done at a very low cost.

When looking at using these robo-advising services, though, it’s crucial to consider the importance of working with a real person. There is value in clients having a place where they feel safe talking about money and retirement. Most family members, friends and even spouses rarely talk to each other about their salary, savings and retirement goals. It is a taboo topic.

Vanguard, the largest mutual fund company in the United States, researched this area in their Advisor Alpha Study. According to Vanguard’s research, behavioral coaching is the single most impactful skill a financial advisor provides their clients. Behavioral coaching allows the advisor to know a client’s weaknesses and habits around money and use techniques to have the client make better financial decisions. A great example of this is the human fight-or-flight survival instinct. During a severe market downturn, the brain kicks into survival mode and forces investors to flee the market. Of course, this is the exact opposite of what an investor should do. With behavioral coaching, mistakes like this are avoided. In fact, Vanguard’s research study estimated behavioral coaching can add an additional 1.5% per year over a long-term investment horizon.

Morningstar, an independent mutual fund research firm, discovered that investors value their advisor mostly for the technical knowledge and expertise. However, it is the behavioral coaching that provides the most value to investors.

When you have your potential financial advisors filtered down to those that are fiduciaries and have the right experience and credentials, then it’s time to focus on the human aspect. This is where the true value of your relationship exists.

Ask your prospective financial advisor questions like these to see if they can provide valuable behavioral coaching:

How do you help clients manage emotions and stress during market corrections?
Will you educate me on personal finance issues?
What are some examples of how you can provide peace of mind about retirement and achieving my goals?
What are some ways you can save me time and make my life easier?
How will you help me avoid running out of money?

There isn’t a right or wrong answer to these questions. Allow your instincts to guide you as you listen to the responses. Trust yourself! You will be trusting this person with your financial life, so make sure it feels right.

If you would like to take things to a deeper level, you can get into specific areas of how your financial advisor will help you. Ask some questions like these:

Will you help me understand employer benefits?
Will you provide a detailed savings strategy?
Will you coordinate with my CPA and estate planning attorney? If so, how?
Do you perform year-end tax planning to implement strategies like Roth conversions or charitable giving?
Do you tax loss harvest if the opportunity arises?
Will you help with Social Security benefits and when to start taking them?
Will you help work through different long-term care insurance options?
How do I withdraw money from my accounts?

These are just a few areas that provide value beyond managing your investments. Understand what this prospective advisor will do for you. Compare services among different advisors to discover the varying level of services.

We’ve gone through a lot in two articles. This information can be an excellent resource for you when it’s time to begin the search for a financial advisor. Remember, the absolute must-have criteria in choosing your financial advisor is that they are a fiduciary (see part one of this series, which ran on May 3). Confirm they have the necessary experience and expertise. After these steps, get a sense of their behavioral coaching skills and how they align with your personality. Remember, this is someone who will get you through tough times. And finally, look to the additional areas they offer beyond investment advice and behavioral coaching. It can be a long process to find a financial advisor, but when you find the right person for you, you will see it was time well spent.

— Steve Doster, CFP, is the financial planning manager at Rowling & Associates – a fee-only wealth management and CPA firm helping individuals create a worry-free financial life. Rowling & Associates helps people with their taxes, investments, and financial planning. Read more articles at www.rowling.com/blog.