SUPER Financial Advisor Traits
What a great financial advisor is NOT
Over the last two decades, the value of an advisor (broker or independent) has changed dramatically. Back in the day, the value was in their ability to “beat the market” by picking the right stocks, bonds or mutual funds on your behalf. The reality is, however, that most investors in the world, professional or not, cannot beat the market consistently. But historically, even if you didn’t think your advisor could beat the market, there just was no other option, if you wanted to invest you had to go through an advisor. Fortunately, the tremendous growth of low-cost ETFs (Exchange Traded Funds) over the last 20 years, has provided a passive, direct option to investors. It allows investors to replicate the performance of the market for a fraction of the cost of active mutual funds that try to outperform the market.
These low-cost passive ETF vehicles have paved the way for robo-advisors over the last decade. I will write a full piece on robo-advisors soon, but in short, robo-advisors are really robo-allocators that invest your savings into a well-diversified global portfolio, which automatically rebalances and reduces risk as you get older. Because they don’t offer any human services and their solution is “cookie cutter,” they can charge a very low fee compared to a human advisor.
The combination of low-cost investment vehicles, like ETFs, and the automation of asset allocation and rebalancing of portfolios, has commoditized a large portion of the portfolio management aspect of the job. This means that it should be a given, all decent advisors should be able to manage your portfolio. So, a greatfee-only financial advisor is unlikely to talk about these tasks as THE value-added.
Financial Planning Expertise
It wasn’t long ago that proper financial planning was only provided to the ultra-wealthy. Why? Because, if done well, it is like having an elite household CFO that looks at your financial life holistically, incorporating risk management, budgeting, taxation, estate planning, and investments. This personal finance “black belt” assesses your current financial situation, considering your short and long-term goals, to determine the most efficient way of allocating resources to achieve them. In other words, only the rich used to be able to afford it since to do it well, it takes a lot of work by trained experts. As portfolio management tasks have become more automated, great advisors have focused their value-added on financial planning.
We as humans can act irrationally during times of stress. As such, a great fiduciary advisor will keep your emotions in check when making decisions about your money and help you to “cut through the noise” of the markets. They will do this using both hard and soft skills. They will have facts and historical insights at their disposal, demonstrating how emotional decisions have been damaging in the past, and they will remind you of your values and goals. Both these techniques will help you stay the course when you are tempted to make big decisions out of fear, anger, or greed.
Vanguard has written a white paper that argues that good advisors generate an additional 3% annual return* when compared to clients who invest alone, with the largest contributor being “behavioral coaching.” Great advisors protect you from yourself.
*This 3% annual return is in addition to the returns the client would achieve when investing alone, net of the fees the client pays the advisor.
A great advisor, like a great fitness coach, helps their client to honor their commitments. They keep you focused on your highest priority goals. This means regularly reviewing progress as well as providing helpful tools to make it easier for you to achieve these goals. They may call you out on excessive spending or poor decision-making. It may not be pretty, but a great advisor keeps you in check.
Empower the client
A great advisor empowers their clients through knowledge. They don’t tell you what to do but rather educates you as to the options, risks, and frameworks. Once you are on the same page and understand everything in plain language, you will be ready to make your own decisions with the guidance of the advisor.
Great advisors will not dance around how they earn their keep or what areas of their job are easily automated. Since they are not hiding anything, a great advisor will walk you through how they earn their fees and what products (if any) from which they might be compensated. A great fee-only advisor is an open book.
It may sound funny, but a fair number of advisors we interview act as if they are doing their clients a favor by managing their wealth. A great advisor uses a client-centric approach by focusing on solving problems (whatever they might be) for the client, rather than lecturing them on what they are doing wrong.
A great financial advisor will start all conversations with questions, not answers. They will want to understand what you value, your pain points, your goals, and aspirations. They will use their years of training and experience to create a thoughtful framework that will lead to a comprehensive plan of attack. This plan won’t be stored in your attic to be forgotten – the advisor will make sure it is a dynamic document that changes as you evolve as a person.
So, what do we know so far?
If you are considering hiring an RIA or broker:
- Understand how they get paid and how this payment method aligns with your best interests.
- Ensure that the advisor is truly on your side i.e. is a fiduciary.
- Make sure that they are actually adding value where it matters most.
Shore Financial is a fee-only, tax-focused financial planning firm located in Monmouth Beach, NJ.
Joseph Vecchio CPA, CFP®, MBA is the firm’s President and has dedicated his professional life to the finance and accounting professions.
Joe believes that people are being exploited by financial salespeople who are merely motivated by quotas, product sales and commission-based income! Shore Financial Planning was founded to provide peace of mind through conflict-free, value-added advice.
When you work with Shore Financial Planning, the financial advice we provide is ALWAYS in your best interest.
As a Certified Financial Advisor, NAPFA Professional, and Fiduciary Advisor, Joseph Vecchio offers unbiased and conflict-free financial advice & retirement planning services.