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The Art of Choosing the Right Financial Advisor

“Most security buyers obtain advice without paying for it specifically. It stands to reason, therefore, that in the majority of cases they are not entitled to and should not expect better than average results. They should be wary of all persons, whether customers’ brokers or security salesmen, who promise spectacular income or profits.” – Benjamin Graham

These words from one of the most successful investors who ever lived and one who remains the most influential investment thinker of all time, is a telling statement on the way an investor must go about identifying the right financial advisor.

Especially in the wake of numerous scams and acts of greed (I recently shared one such real-life story) that have hurt investors in the past, it is of great importance that you be very careful while choosing a financial advisor for yourself.

While there are no clear cut standards of doing so, I will suggest some points to be kept in mind, and some questions to be asked, which will help you in making a good, well thought-out decision.

Let’s get started right here.

How to choose the right financial advisor
Many investors take comfort from the experience and second opinion that a good financial advisor can provide.

The right advice can give just the psychological boost you need to keep investing sensibly at a time when other investors are losing their heads.

While looking for the right financial advisor for yourself, you should have the following two goals:

  1. To determine whether he cares about helping you or just goes through the motions;
  2. To establish whether he understands the fundamental principles of investing and is sufficiently educated, trained and experienced to help you.

Here are some questions you must ask to a financial advisor to understand whether he scores well on the above two requirements:

  • Why are you in this business?
  • Do you believe in the short term, and do you use market timing? (A “yes” response to either of the last two questions is a “no” signal to you.)
  • Do you focus solely on asset management, or do you also advise on taxes, retirement planning, debt management, and insurance?
  • How do your education and experience qualify you to give advice in those areas?
  • How do you choose investments? What investing approach do you believe is most successful?
  • What’s your interest in recommending this investment to me?
  • Have you bought this investment in your personal account? If not, why are you recommending it to me?
  • Can you offer some proof of your investing success for your clients?
  • What do you do when an investment performs poorly for an entire year? (Any advisor who answers “Sell” is not worth hiring.)
  • Do you, when recommending investments, accept any compensation from any third party? If yes, under which circumstances?
  • Do you consider yourself financially successful? Why? How do you define financial success?
  • How high an average annual return do you think is feasible on my investments? (Anything more than 10-15% is unrealistic.)
  • Will you provide me with your resume, and at least three references?

It’s your money at stake
See, it doesn’t matter if you are a beginner or have been investing for many years. It’s never too early or too late to start asking questions before you zero in on your financial advisor.

It’s almost impossible to ask a dumb question about how you are investing your money.

Don’t feel intimidated. Remember, it’s your money at stake.

Don’t fall into the trap of unbelievable promises of super-sized returns. Instead, look for an advisor who cares about your money like he would care about his.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Dear Vishal,

    If such genuine questions are asked to the so called Advisor, I can certainly assure that we may not find an Financial Advisor for advise, which is by the way good our financial health.

    When you don’t ask such tough questions to a FA, be assured of the permanent loss in investment.

    Always remember, It’s your money at stake. For your financial well being “look for an advisor who cares about your money like he would care about his”.

    • I wish investors are careful when parting with their money, believing that the financial advisor would take care of their financial future! But given the numerous cases of greed and bad unethical behaviour I see happening around me on a regular basis, it’s high time people start asking the relevant, tough questions.

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