Equity, Diversity and Inclusion

Here are 5 factors to consider while selecting a financial advisor

The decision to consider using the services of a financial advisor is often driven by personal circumstances.

The decision to consider using the services of a financial advisor is often driven by personal circumstances. Image: Unsplash/Scott Graham

Stephanie Guild
CFA and Head of Investment Strategy, Robinhood Markets
Ken Johnson
CFA and Senior Investment Strategist, Robinhood Markets
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  • Technology is changing the perception of the financial advisor.
  • There are several factors to consider when looking to use a financial advisor.
  • Conducting your own research to determine which type of financial advisor best meets your needs will help you in the long term.

A common perception of financial advisors is that they are only for the wealthy. Yet, the growth of technology and natural competition is expanding access to advisory services for a broad range of financial situations.

The benefits of a financial advisor are well documented. From an economic perspective, several studies have shown an advisor can improve results over time. One such study from Montmarquette and Viennot-Briot found that individuals using a financial advisor for more than 15 years have on average 2.7 times the assets of 'comparable' non-advised individuals."

Perhaps even more important, from a psychological perspective, knowing someone is watching over assets in light of market conditions can help keep a person on track for their goals. In fact, results of the Franklin Templeton-Gallup Economics of Recovery study found investors who work with financial advisors are twice as likely to be very confident they have the best possible investment strategy than those who don’t work with financial advisors.

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The decision to consider using the services of an advisor is often driven by personal circumstances. There are, however, a number of common catalysts that may lead one to look for an advisor: savings beyond a rainy day fund and a general desire to employ a service that keeps investments on track; a lack of time or desire to make every investment decision; an accumulation of wealth that may require some deeper planning, such as estate or tax planning or even an expansion of family responsibilities.

Consider these factors before selecting a financial advisor

Once you feel ready to begin working with a financial advisor, there are several facets to consider.

1. Align with an advisor for your lifestyle

While traditionally an advisor has been a person or team of people, technology has expanded the choice of advisory services, as well as how advice happens. Understanding how financial advice fits into your life is key to choosing the right platform for you. If having a close relationship that is largely conducted through phone calls and meetings is preferred, then a traditional advisor may work best. Yet, if establishing and maintaining a relationship all through a mobile phone is more aligned with your lifestyle, then a traditional robo-advisor may be right for you. There are also now many offerings that land in between these two, combining technology with human advice that may suit many preferences.

Finding an advisor that can bridge the gap in your personal life will likely mean you’ll be more apt to stick with your choice — and thus your investments.

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2. Set the right expectations

Understanding the following factors will make for a smoother investing experience:

(1) Who will have control over what investment decisions

(2) How have different investments performed historically

(3) Your personal risk tolerance and timeline

This will set the right understanding of what to expect and what range of returns is possible, relative to your needs. To ensure you, and an advisor, have a complete picture of your needs, spend time outlining your goals. For instance, you may want to start a family in the next few years or buy a home. Conveying goals will not only inform your needs but may also spark an advisor to offer other educational services relevant to you.

3. Discover the full fee structure

It’s important to understand there is always a fee — explicit or implicit. Questions to help your understanding include:

• Is there a management fee with add-on fees for other services? Or, are charges an all-encompassing 'wrap fee'?

• How will fees be calculated and paid — as a percentage of the size of your portfolio or as a flat fee? And, how frequently will they be charged — monthly, quarterly or annually?

• How will the advisor be incentivised? For example, mutual funds may offer advisors compensation for investing their clients in the fund.

Lastly, make sure you understand the all-in fee, which could include the advisory fee and fees from underlying investments, such as funds and review portfolio performance after or 'net of' all fees. In general, advisors should be forthright and transparent about their fee structures.

4. Understand the investment approach

Investment advice comes from a variety of approaches — using quantitative data, such as algorithms, or qualitative data, with human discretion. There is a risk in relying on just one of these types of insights. Algorithms may have limitations in synthesising current events or applying an outlook. Similarly, human discretion can be impacted by biases and emotions, which may not be as objective as an algorithm analysing trends. Advisors who incorporate both quantitative and qualitative insights may be best equipped to manage through cycles. Furthermore, advisors should be able to provide context as to why changes are made to your portfolio.

5. Get a sense of the what

Understanding the types of investments your advisor will make, whether it’s stocks, bonds, mutual funds or exchange-traded funds (ETFs), is imperative given the implications when considering one’s investing goals. For example, there are notable differences between investing in ETFs versus mutual funds. Mutual funds have been around longer than ETFs, so there are more of them and more tend to be actively, versus passively, managed against an index. However, the growth in choice within the ETF landscape is increasing rapidly. And, ETFs can be more tax efficient than mutual funds and allow you to invest intraday versus only at the end of the day.

The bottom line

Working with a financial advisor should bring increased knowledge to one's financial situation. In fact, according to a survey from Age Wave and Edward Jones, among investors who work with a financial advisor, 84% said that doing so gave them a greater sense of comfort about their finances during the COVID-19 pandemic - a very uncertain time.

Like with many things in life, conducting your own research to determine which advisor relationship best meets your needs will help better set you up for the long term — at this and any stage in your financial journey.

This communication is general in nature and provided for educational and informational purposes only.

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