According to the Bureau of Labor Statistics there are approximately 218,000 “personal financial advisors” in the country. That’s a lot of people who hold themselves out as giving financial advice. Readers often ask me how they can confidently choose a good financial advisor from the pack. There is no shortage of colleagues, friends, and family members recommending the person with whom they work. However, determining if that advisor is a good fit for your needs may require some due diligence. Below is a framework to help evaluate a financial advisor’s level of knowledge, integrity, and compatibility with your family’s needs.
Typical client base: Good financial planning can be quite nuanced. A frum family likely has different financial priorities than a gentile one. Even different Orthodox families have different challenges based on their hashkafa, family size, and lifestyle choices. It’s imperative to find someone who can understand these subtleties. This prerequisite knowledge level will allow them to offer proactive financial advice that you may not have considered.
You can drill down further to find someone who not only understands a frum lifestyle, but also specializes in working with folks who are at your stage of life. If you are nearing retirement, then finding an advisor who spends most of their time focusing on this area is helpful. If you are a corporate executive in the middle of your career, then finding someone who spends much of their time working with that demographic is important.
Take fees and performance metrics with a grain of salt: I grouped fees and performance together because they are typically the only criteria investors ask about. They are also frequently misunderstood and, consequently, can lead to folks hiring the wrong person. Here is some perspective.
While there are different fee arrangements, a percentage of assets under management (AUM) is the most popular so we will use that as a point of discussion. One of the most robust studies on fees was conducted by Kitces.com in 2021. It found that financial advisors charged between 1.0 and 1.5% of AUM at $1 million in assets. The fees drop at the $2 million threshold to a range of 0.9% to 1.3% and decrease further at $5 million to between 0.8% and 1%.
It’s tempting for clients to want their fees to be the lowest possible. However, working with someone just because their fees undercut the competition may be shortsighted. As with any other professionals, it’s prudent to hire someone who can provide the most value with reasonable fees. If you are interviewing an advisor whose fees are within the above ranges, then that’s a great start. Fees that are significantly higher or lower should give you pause. Elevated fees may be justified if the advisor brings additional services, skills, or expertise to the table. Lower than average fees may signal someone new to the field or an advisor facing internal pressure from their company to bring in more business. It may also mean that they only offer a cookie cutter approach for all their clients with no real customization based on a client’s individual needs.
It’s also important to be mindful that advisor fees are just one component of the overall fee picture. There are a myriad of other costs associated with your financial advisory relationship of which you should be aware. This includes investment product fees, which can range widely from a few basis points (one basis point equals 1/100th of 1%, or 0.01%) to several percentage points or higher. Alternative investments, like hedge funds and private equity, have layers of fees such as AUM, performance, and placement fees. Annuities and permanent life insurance can be extremely expensive as well. Furthermore, there are trading and administrative costs that need to be considered. It’s also worth noting that some advisors charge additional fees for financial planning, while others bundle it together with their portfolio management services. The key is to understand all the fees associated with the relationship and what level of service and expertise you can expect to get for those fees you are paying.
Performance is even trickier. Financial advisors typically don’t have audited performance numbers on their client portfolios. Therefore, there are no reports to support the returns they are claiming. Additionally, many prospective clients will ask what returns they can expect to receive in the future. They’ll compare one advisor’s claim against another and pick the highest. This is the wrong approach. An advisor’s honest answer when it comes to future returns should be “I don’t know”, followed by a discussion of risk vs return and the historical performance of various asset classes. Any answer that indicates that an investor should expect to achieve double digit returns, without the above caveats, should be a red flag.
Gaining “access” to investments is not special: Gone are the days where you needed to hire a professional with connections to gain “access” to certain investment opportunities. For the most part, the investment landscape is now democratized and it’s possible for investors to gain exposure to a whole variety of investment opportunities globally. Sure, there may still be more boutique strategies that are exclusive. However, these are typically sold on hype rather than merit and aren’t appropriate for the overwhelming majority of investors. It’s far better to work with someone who has a disciplined process to manage your wealth, rather than offering you special opportunities that others can’t get.
Process: It’s important to find an advisor who can look at your entire financial picture holistically. This means they take the time to understand your goals. They can also discuss how various other aspects of your financial life, including taxes, estate planning, insurance, and investments, interact with each other. After considering the above, they can offer you options for ways to achieve your objectives. If someone is offering you solutions as a starting point, they may be looking out for their own interests and not yours.
Objectivity: Ask the prospective advisor if they have proprietary funds, strategies, or investments they are recommending to clients. Advisors who sell solutions from the firm who pays their salary is a conflict of interest. It’s far better to work with someone who doesn’t have in-house investments to push and is not limited to the solutions their firm can provide. This is true with both investment strategies and insurance products. An advisor who can act independently is more likely to act in their client’s best interest.
Personal investments: Ask every advisor you interview how their personal funds are managed. If it’s not the same way they are advising clients, then run the other way! It amazes me how many advisors I’ve met throughout my career who have their personal money managed completely differently than what they recommend to their clients. The advisor should believe in the advice they are giving and “eat their own cooking.”
Thought leadership: The ability to think creatively is what separates the best advisors from the rest of the industry. Many advisors send out generic, firm created literature or regurgitate what management instructs them to say. This may work for some investors, but not all. If you have a situation that is not run of the mill, then it’s important to find an advisor who can think outside of the box. Find out if the advisors you are interviewing publish or speak regularly. Take the time to read or listen to their content. This will help you understand their approach to wealth management. If you feel like this advisor’s content is directed to you specifically, then you may have found the person you are looking for.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Shenkman Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures.