The One Thing You Must Do Before Choosing a Financial Advisor
How do you pick a financial advisor?
There are countless factors to consider in making this decision: services provided, the fees, how much you like the person, and how much sense he or she makes when discussing your finances.
But a lot of it might just come down to emotion, and to this question: Can I trust this person?
After all, he or she will be managing your investments, or at least advising you on how to manage them, and for most people that pot of money represents much more than a series of numbers and charts.
So what if I told you that you could get deep insight into the kind of advice your advisor will offer, just by asking one simple question?
Could I look at your personal portfolio?A massive study of advisors and their clients in Canada found something very strange and interesting: the characteristics of an advisor's portfolio are "far and away the strongest predictor" of the characteristics of a client's portfolio.
In other words, advisors craft client portfolios in their own image.
While there is obviously some variation based on the client's age or risk preference, those features only explain 13% of the variation in risk-taking among client portfolios.On the other hand, the advisor's characteristics explain over 30% of the variation.
Whether it's by accident or because the advisor believes in a particular market view, the implication is that your advisor's portfolio is the single best indication of what your portfolio will look like.
Aren't portfolios supposed to be customized?They are, of course.
And advisors almost certainly believe they are customizing portfolios for their clients. It's just that they are starting from a particular place -- their own investment outlook -- and adjusting accordingly. The level of customization away from that original worldview is simply not as significant as an individual advisor might think.
So what do I do?Instead of operating under the misapprehension that your advisor is customizing a portfolio from scratch just for you, be aware of the fact that your portfolio is probably going to look a lot like your advisor's.
Instead of waiting to find out what that will be, ask to look at your advisor's investment account today. Is it very risky? Then your portfolio, assuming you select this advisor,will probably be relatively risky, too. Does it mostly favor local stocks or mutual funds? Yours probably will, too.
The exercise will probably be most effective when speaking to a few different potential advisors, as you'll get a feel for the risk differences and allocation strategies out there.
If one of those portfolios makes you think, "Wow, this guy really knows what he's doing," while another makes your stomach clamp up with nervousness, maybe that tells you something.
They say the eyes are the windows to the soul, but in the case of financial advisors, the soul is apparently spilled all over the account statement.
The article The One Thing You Must Do Before Choosing a Financial Advisor originally appeared on Fool.com.
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