Image Credit: Christophe Vorlet
By Jason Zweig | Sept. 8, 2017 9:22 am ET
When looking for a financial adviser, asking the right questions matters. How you ask them might matter even more.
In my last column, I recommended 19 questions that investors should ask a prospective financial adviser. It uncorked a flood of comments, emails and tweets — some from advisers annoyed at having to defend their practices, many from investors hesitant to pose so many questions lest they muddy the waters of a conversation they expect to keep cordial.
You can shorten the list, probably to as few as a half-dozen questions, or customize it to your own preferences. Before you decide to set up an appointment with a prospective adviser, check his or her background on Google and on the regulatory websites brokercheck.finra.org and adviserinfo.sec.gov.
Whichever questions you settle on asking, it’s also important to score the answers. I think the best procedure is what the Nobel Prize-winning psychologist Daniel Kahneman calls a “structured interview,” in which you ask the identical questions of each adviser and rate all the answers on the same numerical scale — running, say, from 1 (least satisfactory) to 5 (best).
That combats the halo effect, in which a great answer to one of your questions can end up coloring your judgments about other aspects of how the adviser does business. By scoring all the answers on the same scale, you prevent yourself from overweighting any particular response the adviser gives you.
Score each immediately after the adviser answers them. Ideally, you and your spouse or partner — or a close friend or family member if you’re unattached — should be rating the answers independently and simultaneously.
There’s no reason to be afraid of asking a lot of questions. Good financial advisers have nothing to hide and welcome the opportunity to tell you everything you want to know. Dozens of advisers have told me over the years that they wish clients would ask more questions, not fewer, before signing on.
If asking so many questions makes you uncomfortable, you can submit them in advance, says Charlotte Beyer, author of Wealth Management Unwrapped, and ask the adviser to email you the answers. But you still should rank all the responses on the same scale.
Here are a few other ideas that might be worth adding to the list of questions you choose from.
Ms. Beyer suggests asking: How do you define risk, and how do you manage it for clients? How big do you want your firm to become? How do you evaluate and provide evidence that your investment strategies are effective?
Rocklin Senavinin, president of Fiduciary Wealth Management, an investment-advisory and financial-planning firm in Little Rock, Ark., likes this question: Why should I do business with you instead of a competitor? That way, he says, you will learn what the advisers themselves think their most valuable services are.
You could also ask: In your own portfolio, what’s your favorite investment? The answer matters because, researchers have found, advisers tend to invest for others much as they invest for themselves: On average, those who take more risk in their own portfolios are more likely to put together gung-ho investment plans for their clients, too. Learning what an adviser invests in will tell you something about what she’s likely to recommend you invest in.
On open-ended questions like these, advisers should give you lots of information that you can readily rank on a consistent scale — and, in some cases, they might reveal a telltale red flag.
After the interview is done, you should assign two more grades (on the same five-point scale): one for communication and one for your overall impression.
Did the adviser communicate with jargon like “we rely on proprietary quantitative algorithms”? Did he lean on clichés like “we’re client-centric” or “we help you sleep at night”? Or did she explain fees and strategies and conflicts in simple, clear, concrete language?
Then, take a moment to capture your intuition about how likable and trustworthy the adviser is. Don’t think hard or long: Just “close your eyes,” as Prof. Kahneman says, and quickly score your gut feelings about the person from 1 to 5.
After you’ve interviewed at least three advisers, total each one’s scores. Hire the one with the highest score. Do not go on your gut feelings alone; you’ve already included that in the score.
A lot of Wall Street Journal readers have told me they think hiring a financial adviser is a waste of money. I disagree. A good adviser doesn’t only manage investments but can help you save or make a fortune through better decisions on tax, estate and retirement planning, buying or selling a home or business, and so on. Such advice is well worth paying for –and the biggest investment you can make in it is the time you put into picking the right person in the first place.
Source: The Wall Street Journal, http://on.wsj.com/2xhHFYz
For further reading:
Definitions of DUE DILIGENCE, FIDUCIARY, FINANCIAL ADVISER, and INDIVIDUAL INVESTOR in The Devil’s Financial Dictionary
Chapter Ten, “The Investor and His Advisers,” in The Intelligent Investor
Daniel Kahneman, Thinking, Fast and Slow
Charlotte Beyer, Wealth Management Unwrapped
Phil Rosenzweig, The Halo Effect