As I tried to develop a simple model that can be used to select the right financial advisor and get the most from that relationship, I identified three key things that should be considered before jumping in with both feet, each of which I will discuss in detail. They are:
* A right fit
* Rules for them
* Rules for you
Let’s dig right in with an explanation of each of these three ideas.
- A Right Fit -
The “right fit” approach is something we naturally use in almost every relationship we have, but it is not often that we give much thought to why the relationships we enjoy the most are our favorite relationships. If you think of the relationships you have that are the most enjoyable, you will probably realize that you have either consciously or unconsciously committed to that relationship for the long-term. Conversely, relationships that you may have had that didn’t work out probably lacked this commitment.
This is a very important part of almost any relationship, because without this long-term commitment, your level of emotional vested interest will likely be very low, and you will probably not work very hard to maintain the relationship (and neither will the other party if they get the feeling that they’re not important to you).
So, how can making a long-term commitment help you create a right fit?
Actually, it’s the other way around. As you actively search for a financial advisor to work with, it should be important to keep in the back of your mind that you are making a long-term commitment with this person. Making sure that they understand you as a person, and that you believe in their core philosophies is critical to long-term success.
The more time you take to get to know each other, the better chance you will have to figure out whether or not they care about you as a person, they are competent as a financial advisor, and that they will try to help you make the right decisions.
- Rules for them -
One of the most common reasons that relationships fail is because they fail to meet the expectations of the parties involved. One of the best ways to prevent this from happening is to set expectations from the start. Before you go ahead and sign on the dotted line, make sure that your advisor has taken some time to set his expectations for the relationship, and that you feel comfortable with them. If your new advisor has any business at all handling your money, he’ll make sure to cover at least a few topics including:
* his investment philosophy,
* how he’ll communicate with you,
* how often he’ll communicate with you,
* what he’ll charge you for his advice, and
* what he expects from you as a client.
If your new advisor covers these topics before he asks you to sign the dotted line, then you can be reasonably sure that he has an interest in helping you succeed, and not just in his paycheck.
Now on to the most critical part.
- Rules for you -
I have found that most people who have had trouble with a financial advisor have legitimately forgotten that these relationships are two-sided. While you should expect a lot from your financial advisor, you should also make a commitment to yourself and your money.
Remember the saying, “You can lead a horse to water?” The same applies to investors (you). If you’re going to go through the trouble to pay this person for their advice, make sure that you follow it whole-heartedly. If they have a legitimate interest in you as a person, then their recommendations will most likely be in your best interest (and you can assure yourself of this by only letting them charge you on a fee basis instead of for trades).
In the event that you disagree with something that they’ve suggested, ask them to explain why they made that particular recommendation instead of simply choosing to ignore it. Chances are they have a really good reason for having an opposing view on a topic, which means that they should be able to explain their reasoning well enough to reassure that it’s the right choice. Additionally, you’re paying them for their advice, if you don’t follow it, or if you choose to just toss it to the wind, then you’ve essentially paid something for nothing.
At the end of the day, remember that investing is just another way to park your money. You could park it in a checking account, a savings account, a personal business, or under a mattress, but by investing it you can hopefully keep up with inflation over time and, perhaps, even grow your spending power. Just how much it grows depends on your willingness to accept risk (or loss). And, while your financial advisor will hopefully help you grow your money better, remember, he’s really there to help you from committing financial suicide (that’s the advice part), not to make you rich.
If you take the time to choose the right financial advisor and if you make a commitment to lifelong learning and the relationship you have with your advisor, you will be much better off. You, your money, and others in your life will benefit from your newfound confidence in your ability to have a healthy and productive financial life.