What if Warren Buffett called you today and offered to be your personal financial advisor? I bet very few people would turn him down. Buffett is the sweetheart of the financial world—someone who embodies a rare blend of intelligence and success mixed with humility and personability.
He’s a grandfather, a Midwesterner, and has owned the same modest family home for six decades…but he’s also worth over $100 billion, making him the sixth richest person in the world.
If Warren Buffett offers you advice, you might be inclined to take it. He has a proven track record and is not known for underhanded ploys or wild risk-taking. Some may consider him a little “old school,” but his methods have worked, and he wouldn’t intentionally lead another investor astray.
Many of Buffett’s qualities would make him a competent, trustworthy financial advisor—if he were to choose this profession. If we examine Buffet’s attributes, we find that they’re not terribly groundbreaking or unusual. Many financial advisors also embody these qualities, and it’s possible for consumers to recognize them. For this blog post, I’d like to discuss five important qualities to seek in a financial advisor and how to identify them.
First, however, let’s establish a few baseline characteristics.
The Essentials
My goal is to steer investors toward honest, disciplined, and fair financial advisors. With that in mind, I suggest consumers
If you are looking for a financial advisor, where would you go? You may search the internet for the “top financial advisors near me” or “best financial planners in 2024.” When the search results pop up, you might breeze past specific firms in favor of a more “neutral” source—an article from a major news outlet, a column by a financial writer, a database of financial planners or a report from a financial publication. As you scroll through these articles, the same names or, at least, the same companies might keep popping up. You may think, “That’s a good sign; clearly, these are the top performers in the industry.” But are they the top performers or merely the top spenders? Are these the most competent and trustworthy financial advisory firms and advisors or simply the ones with the largest marketing budgets?
The Media Can Be Bought
At this point, few people will probably be surprised to learn that much of the news media—including financial media outlets—can be bought. Though the average consumer might, in theory, be aware of this, they may not realize the extent of the deception or know who to trust. It can be challenging to discern between factual articles and sponsored content. And it can be hard to see how a media company compiled lists of “top financial planners” or “best investment companies.”
In Barrons’ recent “Top 100 Financial Advisors,”[1] most advisors hailed from wirehouse brokerage firms. “Wirehouse brokerage” — a term coined before the advent of wireless communication — refers to large-scale, full-service brokerages employed by one of the big players (i.e. Morgan Stanley, Wells Fargo, Bank of America’s Merril Lynch, and UBS).[2]
Many people ask us the difference between fee-only and fee-based compensation models for financial advisors. They also want to know how project fees, asset-based fees, and hourly fees work. For the average investor, the compensation models of financial advisors can feel downright confusing.
Few other industries have so much variation when it comes to paying a professional. When you hire an auto mechanic, you pay for parts and hours of labor. When you hire a piano teacher, you pay per lesson or for a set amount of time. All these methods are straightforward and easy to understand.
Unfortunately, the financial advisory world is a different ballgame. Payment models vary from firm to firm and, sometimes, from client to client (depending on client needs, services rendered, net worth, etc.).
Since payment models for financial advisors are sometimes complicated, misinformation abounds. Consumers might fall for “special offers” or “guaranteed returns.” Or they might believe they are entitled to free financial planning because large brokerage terms do this for “free.” However, there’s no such thing as a free lunch—those big firms are making their dollars somehow. Many of these large brokerage firms use 10-20 questions to be analyzed by a robo-advisor, which is NOT financial planning. Genuine financial planning is comprehensive, multi-layered, and involved. For most people, quality financial planning is worth the price tag.
But how can clients determine if a pricing model is fair? And how will they know if a particular pricing model is right for them? To clarify the confusion, let’s talk about different ways a financial advisor could be compensated AND which methods make sense for certain types of investors.
Two Compensation Models to Avoid
There are several legitimate, ethical compensation models for financial advisors. However, before discussing those, I want to touch briefly upon two models to avoid: commission-based and fee-based.
Should you Combine Finances and Collaborate on Financial Decisions?
Conversations about debt, budgeting, or investment strategies typically aren't great first-date material. It isn't romantic to ask a potential partner about their 401(k) contributions or to grill them about their debt tolerance. Save these talks for later when the relationship is well established and you're becoming increasingly part of each other's lives.
But what if those conversations never happen?
What if you end up marrying this person, sharing a household, having children, and filing jointly on tax returns every year…but you've never taken the time to sit down and discuss your finances in any depth?
This communication gap happens far more frequently than you might realize. People can live together for years without discussing their investment philosophies or debt tolerance. They can live alongside someone for decades and never truly know their thoughts on money management or financial goals.
Having honest, open conversations about finances and collaborating on financial decisions is critical. Even if you're not married, talking about money is essential. Sharing your views on your finances is vital for building trust and understanding between two people and paving the way for a strong and healthy relationship. Money is the foundation of many major decisions you'll make together, such as sending your kids to college, buying that lake house, planning vacations, and strategizing for retirement, so having a shared understanding will help you prepare for those eventualities and make decisions that best suit you both.
Let's discuss why and how to share financial information, make unified financial decisions, and combine finances with your significant other. Failing to do so could be incredibly costly.
Getting a commitment in writing demonstrates the gravity of an agreement or situation. When you get married, you sign a marriage license. When you buy a house, you sign a purchase agreement. When you download a new version of a Mac operating system, you agree to the written terms and conditions. Written agreements are commonplace, so it would be straightforward to ask your financial advisor, or potential financial advisor, to sign a written statement of fiduciary responsibilities―also known as a fiduciary oath.
A fiduciary oath is a statement signed by a fiduciary that outlines the fiduciary’s duties and responsibilities in writing. Groups such as The Committee for the Fiduciary Standard, founded in 2009 after several infamous financial crises, have emphasized the importance of signing an oath to clarify the relationship between the fiduciary advisor and the client. This document can help clients determine ifa financial advisor is acting as a fiduciary.
Why Seek a Fiduciary?
A professional fiduciary is held to a higher standard of customer care than a broker, insurance salesperson, or bank representative. Fiduciaries are legally obligated to put their client’s best interests first and adhere to a fiduciary standard of care. Brokers or other product salespeople are only held to a “suitability” standard. The suitability standard does not prevent profit-seeking activities, and invisible costs can pile up. Retirement plan expert Scott Simon eloquently explains in his article, "Why I’m a Fiduciary."[1]
Brokers, bankers, and other professionals who deal with product sales can call themselves whatever they wish, confusing the public. They may use titles like wealth manager, financial advisor, money manager, or something similar. Titles generally are not regulated.
