Mistakes to Avoid When Hiring a Financial Advisor

I am well-acquainted with mistakes and shortcomings.

Fortunately, I’ve made my fair share of them throughout both my traditional and non-traditional career.

You may think I made a typo and meant to write Un-fortunately instead.

Nope, that wasn’t a mistake 😉

However, repeated mistakes are.

I value errors in my judgment, failures in my processes, and the occasional kick in the teeth. Not because I’m a sucker for punishment, but for the knowledge it forcefully instills on me.

Every error I make is tuition I have paid, as long as they are not catastrophic ones ( I try to guard against those), I grow more anti-fragile.

You may have heard me say that a quote I have written in chalk at the front entrance of my house that I look at every day

“Fear kills more dreams than failure ever will”

That quote is even more salient in today’s blog. The fear of failure will cripple most people into inaction that morphs over time, into regret.

Fortunately for me, I have failed a few times, especially in selecting a competent and aligned financial advisor.

I will spend the next few paragraphs reviewing the mistakes I’ve made in selecting a financial advisor (not for the purpose of self-flagellation) but for most people, mistakes are where growth stems from, especially when it’s not their own mistakes. Allow me the opportunity to entertain you.

But first, let’s lay the groundwork on what a financial advisor is.

A financial advisor is a professional who provides individuals, families, and businesses with expert guidance and recommendations regarding various aspects of their financial life. Their primary role is to help clients make informed decisions about managing their money, investments, and overall financial well-being. Financial advisors can offer a wide range of services and advice, tailored to the specific needs and goals of their clients.

The key roles and responsibilities of a financial advisor include:

1. Financial Planning: Financial advisors assess a client's current financial situation, including income, expenses, assets, liabilities, and financial goals. They then create comprehensive financial plans that outline strategies to achieve these goals, which may involve budgeting, saving, investing, retirement planning, tax optimization, and estate planning.

2. Investment Guidance: Advisors help clients navigate the complexities of investing by recommending suitable investment options based on the client's risk tolerance, investment objectives, and time horizon. They can provide insights into different investment vehicles such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and hopefully some sort of exposure to bitcoin 🙂.

3. Risk Management: Financial advisors assess a client's insurance needs and suggest appropriate coverage to mitigate risks associated with life events, such as health issues, accidents, disability, and death. They may advise on life insurance, health insurance, disability insurance, long-term care insurance, and other risk management strategies.

4. Retirement Planning: Advisors assist clients in planning for their retirement by estimating retirement expenses, determining how much they need to save, and recommending retirement accounts like TFSAs and RRSPs

5. Tax Planning: Financial advisors help clients optimize their tax situation by suggesting tax-efficient investment strategies and advising on tax deductions, credits, and strategies to minimize tax liabilities. For most of this, I refer to my accountant, Kevin Mouscos.

6. Estate Planning: Advisors work with clients to develop an estate plan that ensures the smooth transfer of assets to beneficiaries while minimizing estate taxes and other potential complications. For my estate planning has been developed by a real estate lawyer.

7. Education Funding: For clients with children, advisors may provide guidance on saving for education expenses, such as college tuition, through options like RRESP plans or other education-specific savings accounts.

8. Regular Reviews and Adjustments: Financial advisors regularly review and update their clients' financial plans and investment portfolios to ensure they remain aligned with the client's goals and changing life circumstances.

It's important to note that financial advisors can operate under different models. Some may offer fee-only services, where they are compensated solely by fees paid by clients, while others may earn commissions from the financial products they recommend. It's essential for clients to understand their advisor's compensation structure and potential conflicts of interest.

When choosing a financial advisor, it's advisable to look for individuals who are qualified, experienced, and trustworthy. Common professional designations for financial advisors include Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), and Certified Public Accountant (CPA), among others.

Mistakes to Avoid When Hiring a Financial Advisor

1. Failing to do research beforehand: Many people skip researching the advisor's credentials, experience, and track record. It's essential to check their qualifications, licenses, and any disciplinary history. This was me when I selected my first advisor. I trusted my parent's advice blindly. What I didn’t know was that my parents didn’t fully understand investments and how to optimize returns. I ended up keeping my money tied up in underperforming assets with high fees.

2. Focusing solely on fees: While fees are important, choosing an advisor solely based on the lowest cost can lead to subpar service or mismatched expertise. Then I transitioned to an advisor with low fees, but also with poor alignment, which lead to poor overall results.

3. Not understanding the advisor's approach: If you don't grasp the advisor's investment philosophy or financial planning process, it can lead to misunderstandings and unmet expectations. This cannot be understated! I finally found an advisor with the same investment philosophy as mine. Something that is also discounted is the advisor’s age and runway. For me, finding someone who is at a similar stage in their career is important, as that person is more likely be alongside me through their career and won’t retire in a few years which will force me to search for another individual. Once compounding is underway, it’s best not to disturb it.

4. Overlooking fiduciary duty: Some advisors operate under a fiduciary standard, while others adhere to a suitability standard. Choosing a non-fiduciary advisor may expose you to potential conflicts of interest.

5. Ignoring red flags: If an advisor avoids answering your questions directly, promises unrealistic returns, or pressures you into decisions, it's a sign to proceed with caution.

6. Not asking for references: Hearing from current or past clients can provide valuable insights into the advisor's performance and client satisfaction. I make a point of this. I will never rent out one of my properties to a tenant without checking their references. That was another previous failure of mine. Put the extra 10% of effort in and check references.

7. Making a quick decision: Rushing the hiring process may result in choosing an advisor who doesn't align with your long-term financial goals.

8. Not discussing the scope of services: Ensure you understand the range of services the advisor provides and whether they can address your specific needs comprehensively.

9. Neglecting to assess communication styles: Miscommunication can lead to misunderstandings and hinder progress toward your financial objectives.

10. Overlooking a written agreement: Always get a written agreement detailing the services, fees, and other terms of the advisor-client relationship. It's crucial to have a clear record of the agreed-upon terms.

11. Failing to check for potential conflicts of interest: Ask the advisor about potential conflicts of interest they may have when providing advice or recommending investments. Some advisors are part of a large institution and their incentives are tied to the institution and not to the client. While others only derive an income based on the performance of your portfolio. As Charlie Munger said, “Show me the incentive and I will show you the outcome.”

By being aware of these potential mistakes, you can conduct a more effective interview and make an informed decision when selecting a financial advisor. Take your time, ask probing questions, and trust your judgment in finding the right advisor to support your financial goals.

Questions to Ask When Interviewing a Potential Hire

1. What are your qualifications and credentials? Look for certifications like Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), or similar designations that demonstrate their expertise. While not a necessity it does offer peace of mind that the individual has gone through some sort of recognized training.

2. How many years of experience do you have as a financial advisor? Experience can provide valuable insights and a track record of successful client relationships. Remember some people may have 20 years of experience, while others have 1 year of experience, repeated 20 times.

3. What is your investment philosophy and approach? Make sure their investment philosophy aligns with your risk tolerance and financial goals. Mine is slow growth, the antithetical approach to YOLO investing.

4. How do you charge for your services? Understand their fee structure, whether it's a percentage of assets under management, hourly rates, or flat fees. Some are flat fee based while others are a % of AUM (assets under management).

5. Are you a fiduciary? A fiduciary is legally obligated to act in your best interest, providing transparency and avoiding conflicts of interest.

6. Can you provide references from current or past clients? Request references to gauge their client satisfaction and performance. They often aren’t displayed as Google reviews, so you may have to do some digging.

7. How will you customize your advice to my specific financial situation and goals? Ensure the advisor tailors their advice to your unique needs and circumstances.

8. What is your communication frequency and style? Determine how often you'll meet, and receive updates, and how they prefer to communicate (in-person, phone, email).

9. How do you stay informed about changes in the financial industry? A proactive and up-to-date advisor is essential in the constantly evolving financial landscape.

10. How do you handle potential conflicts of interest? Ensure the advisor has a clear plan for handling conflicts and prioritizing your interests.

BONUS QUESTION: Ask your advisor to see their portfolio and ensure that they also own all or a few of the investments they are recommending to you. Would you eat at a restaurant if the chef never tried or ate their own cooking?

I am very fortunate to have found the advisor I currently employ. However, I do not entrust my entire financial portfolio to him. I maintain a portion of those investments to do as I see fit. I find this control important, not only because it allows me some flexibility but it also allows me to continue to make mistakes.