Despite the old cliché, money can, in fact, buy some amount of happiness—for most Americans, there isn’t a problem in their lives that couldn’t be solved with a little (or a lot) more money. But once you have a bit of scratch, a new problem arises: managing it. Whether you’re saving for retirement or trying to become passive-income rich, money needs to be managed to avoid huge losses and enormous tax bills and to ensure you’re heading toward your goals.
Most of us can’t really manage our own money—around half of the U.S. population could be described as financially illiterate. That means most of us rely on financial professionals to manage our retirement accounts, investments, and taxes. This is fine—you don’t necessarily need to know how to fix a car when you can just hire a mechanic. But with a car, you know your mechanic is doing a good job when the vehicle continues to run well. If you don’t understand money in the first place, how can you know if your financial advisor is actually doing a good job?
Returns
On the surface, having someone managing your money comes down to one simple thing: Is there more money at the end of the day? On the one hand, yes, sure, that is a big part of it: You need your money to grow, so you hire someone to grow it.
But simply seeing a lot of black on your statements doesn’t necessarily mean your financial advisor is doing a good job. You have to compare their results to something as a benchmark; you can ask your advisor what public index fund most closely matches the goals of your investments, or use the S&P 500 as a broad, general benchmark. Over the long term, your financial advisor should be achieving results that are more or less in the same ballpark as those benchmarks. Markets are volatile, so one “bad” year isn’t necessarily a sign of a bad advisor, but consistently missing that mark by a wide margin—even if there is some gain year on year—indicates that, at the very least, a conversation is warranted.
If you have no idea how to benchmark performance, you can ask your advisor to provide this information to you. If they refuse, that’s a huge red flag in and of itself.
Low churn
Something else to consider is how often your advisor makes big changes to your portfolio. If they frequently make a lot of transactions, resulting in a lot of “churn” in your accounts—especially in response to market downturns—that’s a sign that they don’t have a long-term vision for your money. A financial plan for a retirement that’s still decades away, for example, should have a horizon far enough out that panic moves in response to market fluctuations shouldn’t be necessary.
Holistic plan
A financial advisor needs to have a pretty clear idea of your total financial picture in order to manage your wealth effectively. They shouldn’t only be concerned with your investments—they should know your home financial situation to some degree, know your financial goals aside from retirement, and at least be reviewing your taxes every year. The tax review is crucial, as it gives your advisor insight into your finances that can help guide their decisions when managing your money, and helps them craft a strategy to minimize your tax hit. If your financial advisor isn’t interested in anything but your investments, they might not be doing the best job for you.
Not selling you
One thing that can’t be stressed enough: Your financial person should be a certified financial planner (CFP), sometimes referred to as a fiduciary. A CFP has had training and attained official status as a financial planner—but most importantly, they have a legal duty to act in your best financial interests, not their own. That means they won’t be constantly selling you on new investments or products, because they’re not getting fees or commissions from other sources.
If your advisor is always calling you up and trying to convince you to invest in stuff and buy financial products, especially with promises of big returns, it’s time to reconsider whether you’ve got the right person managing your money.
Fair fees
Nothing in this life is free, so the fact that your financial advisor is going to charge you for their services is no surprise. But you should know what they’re charging you—and how they’re charging you. Look for the words “fee-only” or “fee-based”—the former means you pay your advisor directly, and they are likely a fiduciary, while fee-based means your advisor gets paid by others, which could compromise the advice they give you.
Fees vary, but most financial advisors will charge you a percentage of the “assets under management” (AUM), which is typically about 1% up to a certain amount and less for larger amounts. But some advisors will charge a flat, annual fee instead (ranging between $2,000 and $7,500), or bill you hourly. If you’re being charged more than 1% or $7,500 per year, it’s time to ask some hard questions to make them justify the cost.
High communication
A financial advisor should, you know, advise you. If you never hear from your advisor and have difficulty getting them to respond to questions or requests, the chances that they are thinking about your financial goals with any urgency or coherency are low. You should be speaking with your advisor at least once a year, at minimum, and they should be sending you quarterly reports. They should also be responsive if you reach out with a question, and be happy to explain things to you or discuss any ideas you have about how to handle your money better. If they’re dismissive, impatient, or simply don’t return calls, that’s likely a good reflection of the quality of the work they’re doing for you.
Willing to research
Finally, your financial advisor doesn’t need to know everything—but they should be willing to find out what they don’t know. If you’re curious about something—cryptocurrency, or a hot new startup you heard about at a cocktail party—your financial advisor should a) know something about it and be willing to explain it to you; b) admit they know nothing about it and be willing to research it for you; or c) be willing to put you in touch with a resource that can give you the information you’re looking for. If they’re not interested in doing anything but what they’ve been doing, they may not be doing the best job for you.
