I’m linking to a piece penned by MarketWatch senior columnist Chuck Jaffe. It is from his latest book, “Getting Started in Finding a Financial Advisor,” which is just out from John Wiley & Sons. By way of disclosure, Chuck and I go way back. In fact, I think I first met him in the early 1990s when he was an ink-stained scribe at a newspaper in Boston.
In terms of this book, I have not read it so I’m basing my thoughts on this excerpt as well as on my knowledge of Chuck’s work over a number of years. As a fee-only financial advisor for the past few decades, I also have my thoughts on the topic, so I’ll include those as well.
Here is a portion of Chapter 3: The Seven Big Mistakes People Make When Hiring Advisors. I’m going to highlight three of the seven mistakes he covers [emphasis added]:
7 mistakes investors make in hiring advisors (MarketWatch.com, May 20, 2010, Chuck Jaffe)
Big Mistake #3: Focusing the search on cost or payment style
…If you save a few hundred dollars in fees to the adviser, but wind up with someone who is incompetent and whose decisions cost you thousands of dollars down the line, you did not get a bargain. Likewise, if you go for more expensive counsel but can’t get the quality of service you desire, you’ll be unhappy no matter how respected the adviser and how sound his advice.
As investors we know that price and value are not always the same. It is very important that you know what you are paying for and how you are paying. If you are working with or considering a fee-only financial advisor, understanding the cost of the investment advice and/or financial planning or retirement planning advice you receive should be easy. Chuck does not limit his points to fee-only advisors, but I think you should.
Fee-only financial advice
Fee-only investment advisors or financial advisors charge clients directly for advice. They do not take commissions on the sale of investments. Someone once asked me what our firm’s fee policy was. I replied that it was simple, we give you an invoice and you pay it.
Conversely, with Wall Street brokerage firms, banks, insurance companies or financial planners that earn commissions for selling investments or insurance, figuring out what you are paying is more difficult. That’s one reason why I believe in the fee-only financial advisor model so strongly.
A long-term relationship
This next point is also important. If you are hiring an advisor, then your goal — in my view — should be to have a long-term relationship that encompasses setting and achieving your investment goals along with other goals such as retirement, educating your children and contributing to a church or charity you support. Obviously, you need to get solid returns to make everything work, but the quality of investment advice is just one aspect of the overall advice you may need to achieve your goals.
Jaffe continues:
…Big Mistake #5: Setting expectations and viewing results based entirely on returns
…If you are an average investor, you’re looking for a partner, someone who will help you develop strategies that enable you to reach your long-term goals. In most cases, achieving that success requires participating in stock market gains during good times without losing your shirt when the market sours. For most consumers, it’s more about avoiding surprises and losses than it is about getting rich quick.
And yet, when push comes to shove, advisers get dumped because they “failed to beat the market” each and every year.
What most people want from their adviser is long-term performance that allows them to ride the market rollercoaster and get off at the end with a big smile on their face.
Alas, too many financial-services customers want to jump off mid-ride. Despite what they said when they signed up to work with an adviser, they want to change the criteria for judging their counselor mid-stream, typically at just the wrong moment.
Looking in the rear view mirror while investing
Doing this is like driving while staring in the rear view mirror. Though it is tempting to make portfolio changes based on recent history, a better approach is to stick with a patient, disciplined, long-term strategy.
Next, Chuck suggests it is a bad idea to hire friends or relatives. In my view, the key point is not whether you hire a friend or someone who is part of a club you joined or belongs to your church or is married to your sister. The question is: did you do a good job of checking this firm out? That goes double if the advisor is married to your sister. Yikes.
Jaffe continues:
Big Mistake #7: Hiring friends and relatives
…For years, industry surveys have found that more than 40% of all people take financial advice from friends, family, and business associates, and an AARP Financial study from 2009 confirmed that more than half rely on people with close ties when they’re going through a life crisis.
Doing business with a friend or family member spells trouble for one big reason: You let your guard down.
…many of Bernie Madoff’s victims were folks he met at his country club, on the golf course, at charity functions, or through some personal affinity; he counted on those ties raising trust and lowering resistance.
Working with friends adds emotions on all sides. Ask your best childhood friend to provide a written history of his business experience and credentials, and he may take offense; fail to ask a full set of questions, and you can’t be sure you have the right expert.
There is more than money at stake when you do business with friends and family. Factor the extra value of your friendship into your decision making; you’ll lose a lot more than just money if a financial relationship with a friend or relative goes bad.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from “Getting Started in Finding a Financial Advisor” by Chuck Jaffe. Copyright (c) 2010 by Chuck Jaffe
These are good ideas. Additional points to consider when selecting an advisor are the investment philosophy of the firm, the minimum account size and the availability and cost of other services such as financial planning.
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Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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