Where do you go for financial advice?
Photo: A Livmann. Source: Morgufile
Financial advice is tricky. There’s lots of TV shows and news shows touting the next hot stock, lots of specialized jargon, lots of web sites. Google the phrase “questions for a financial adviser” and you’ll get millions of hits. Some of the suggested questions are pretty off-the-wall: “Do you believe in ghosts?” Or, “Have you ever been arrested?” You know that it’s an important area—you’ve worked hard for your money, and you don’t want to get bilked by the next Bernie Madoff. What do you do?
The first step is to go to someone you genuinely trust. It could be a relative or a close friend, but it should be someone that you have an ongoing relationship with. That person doesn’t have to be an expert, but find out who they use, or what they do. Most likely, they have someone they’ve been working with. Get their recommendation.
Second, set up a couple of meetings with different advisors. Ask them what their background is, what their approach to finance is, then ask a trick question: ask what they would recommend for you—before you give them many details about your life. If they have a quick or detailed answer, don’t go any further. Financial advice needs to be tailored to an individual’s personal situation. Anyone who would make recommendations before learning much about your circumstances isn’t qualified to be your advisor, no matter what credentials they have or where they went to school.
Ask yourself: “Do I want to meet with this person on a regular basis?” Financial advice isn’t like going to the dentist. You need to have a two-way conversation, usually on a pretty regular schedule. When things go wrong in the market—like during the financial crisis, or the dot-com crash—you’ll want to talk more often. Your advisor should be someone you like talking to, who is qualified.
Finally, is the advice they’re offering easy to understand? Finance is complex, with a lot of confusing elements—taxes, insurance, options, liquidity, and so on. If someone has a deep grasp of what they’re talking about, they should be able to explain it with ease. The explanation won’t involve “black boxes” or proprietary algorithms. And you should be able to follow what they’re saying. If they can’t make themselves clear, maybe they don’t understand it themselves.
J.R.R. Tolkien once called advice “a dangerous gift.” You especially want to be sure that when it’s advice about your money it’s not going to blow up in your face.
Douglas R. Tengdin, CFA
Chief Investment Officer