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Comparison Shopping for a Financial Advisor

by Rick Kahler


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Many people who are financially successful are comparison shoppers. They pore over ratings in consumer magazines, read website reviews, and compare scores of products before buying even everyday products like coffee or toilet bowl cleaner.

Yet too many consumers don't use that same care in choosing an investment advisor to manage their life savings.

A March 2014 survey, funded by Dimensional Fund Advisors and conducted by Advisor Impact, asked 1,229 investors how they decided to work with their current advisors.

Over half of the respondents, 61%, chose the only advisor they interviewed. A mere 22% interviewed more than one advisor. The remaining 17% of investors selected "Other," which may have included throwing darts at a dartboard.

The survey went on to ask which of 11 possible reasons contributed to their decision to choose their current financial advisor.

Topping the list, selected by 55% of the respondents, was the fact the advisor had experience in working with people like them. This affirms the recommendation of most marketing consultants that advisors carve out or become the perceived specialist in a certain niche. Unfortunately, a lack of specialized knowledge in an area doesn't disqualify the advisor from using the marketing spin to their advantage. Notice, for example, how many advisors list a specialty as financial advising for women or couples. For the record, I've never seen one advertise a specialty as advising for only men.

The next four factors, chosen by just over 46% of respondents, all tied for second. They were investment philosophy and returns, a broad selection of investment options, a sense of shared values, and a recognized brand name.

Certainly, investors should pay attention to the advisor's investment philosophy and returns. There is a big difference between advisors who are deeply committed to a passive, buy-and-hold strategy and those who've developed intricate models of timing various markets. However, both investment philosophy and returns can be easily overstated or manipulated.

Just as important is whether the advisor represents a broad selection of investment options. In many cases, however, what is offered is a selection of investments but from just one mutual fund, insurance or annuity company, or retirement plan advisor.

Expert Interview: How to Find the Right Financial Advisor for Your Retirement Years

Discovering whether the investor and advisor share similar values requires asking lots of questions, using exquisite listening skills, and getting a sense of the advisor's "being," something that can take a lifetime to master.

A recognized brand name is so important that most of the large Wall Street firms spend bucket loads of money on establishing their brands as competent, caring, and trustworthy. That expense seems to pay off with consumers. Often going unnoticed are the millions of dollars these firms are fined by the SEC and FINRA for behavior opposite to their advertised values.

I was surprised by some of the factors that consumers saw as relatively unimportant. How the advisor is compensated ranked seventh. Just 30% of respondents cared whether their advisors were compensated by commissions, by a combination of fees and commissions (fee-based), or only by fees (fee-only). This is interesting given the great attention given to this topic by financial professionals, myself included, who feel the compensation model has a direct influence on the advisor's ability to give conflict-free financial advice to a consumer.

In tenth place, at only 12%, was the advisor's education. To most consumers, it doesn't matter if the advisor has a master's degree in financial planning or an undergraduate degree in history.

Consumers would do well to apply their comparison-shopping skills to choosing financial advisors. This means learning to look past the marketing and assess what is more important: the advisors' training and integrity.


Rick Kahler

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.

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