How to Choose a Financial Advisor

A good financial advisor is worth his or her weight in gold. Even at current gold prices! However, a bad one can be detrimental to your long term wealth. There are a lot of choices and even the most educated fall prey to having a lousy advisor. So here are a couple of good questions to ask.

1. Do they own the product they are trying to sell you? For me this is a fundamental question because if they don't own it either they can't afford it or don't believe enough in it to put their own money into it. Both of these would be red flags.

2. Why are they still working? Often times advisors will show products or portfolios that have performed well above their benchmarks for 10 to 20 years. If they have done so well over the years they shouldn't have to work anymore. Chances are they haven't achieved the same returns as what they are pitching you. Which means they didn't invest in this product or bought and sold it at the wrong time.

3. How do they get paid? Most advisors are paid on a commission basis based on the product they sell. They might tell you that the commission is paid by the company, but you will pay it over time. The place to look is in the fee section of the prospectus. Also find out if they have a management fee. Try to keep it under 1% because this is usually in addition to the fund management fees and transaction costs.

4. What did they do in the last bear market? If they let their clients deviate from the agreed upon strategy you may want to find another manager. Unless they timed it correctly...but don't confuse luck with skill. Bear markets and corrections are normal when investing in the stock market. If they change their strategy based on market movements you will see a lot of trading, but won't have the results to show for it. It would be nice to avoid bear markets. However, if you capture most of the down and then miss the up you will never catch up to your benchmark.

5. What is the performance? This one is tricky because actual performance is usually different from the performance of the underlying funds. Why? Most managers back test data to find the best performing asset classes to construct your portfolio. So in essence they are cherry picking. However, the actual portfolio they were recommending a year or two ago was very different. So the returns they are showing you are not the actual returns their clients received. Also be careful if the returns are too good. Remember questions number 1 and 2.

So your ideal advisor might be someone who is financially secure, semi-retired, fee based, big picture focused and forward looking.