Personal Finance

What Makes a Good Advisor?

By February 18, 2014 No Comments

The global financial crisis, poor education standards and recent scandals have put the spot light on much of the financial services industry and led to public questions about the role and value of financial advisors.

Robert Shiller, Nobel laureate and Professor of Finance at Yale University, remarks on a similar situation in the United States:

This situation is somewhat analogous to physicians’ advice in the 19th century, when most people did not have a personal physician. People learned about medicine through advertisements for Dr. So-and-So’s miracle remedy. The U.S. Food and Drug Administration had not been established yet, and they had no way to get advice from someone who didn’t stand to make a profit selling them a drug. I think the situation has improved a lot in medicine. Now, we need to make similar progress in financial advice.

It’s a common perception that the reason you seek out a financial advisor is because they have a clearer view of where the market and the economy is headed and they know where you should invest your money to get the best returns. As the truly dismal record of forecasters, stock-brokers and product sales driven advice will attest to, this is patently false.

While that may be a common misunderstanding of the reason to seek advice, the need for it is genuine. Shiller goes on:

People need good, solid financial advice. The complexities of a financial system require that investors be educated, but that alone is not enough. Serious deficiencies exist in modern financial society, and the average person needs financial guidance from a real person—not a website. That good information can be found on the internet is a big step forward, but the problem is that most people won’t seek the information they need and won’t read the information given to them. They need someone to actually talk to them. People benefit immensely by having a trusted advisor with a fiduciary duty to represent them.

The financial landscape for investors is complex. But more important than what to invest in is how to invest well. And more important than investing well is a deep understanding of why we are investing in the first place. At the end of the day, money is just a bit of paper with an arbitrary number printed on it. It’s what it enables you to do that matters. A good advisor works with you to understand what it is you value most in this life. They can show you what is and isn’t possible so you can make deliberate choices to live and work in ways that have meaning for you.

The best advisors understand that the value they bring is not dependent on the state of the markets. If anything, it’s when markets are tanking and panic is starting to take hold that their value is most evident.

The scope of the advisor’s role is much broader than commonly appreciated. In fact, they play multiple and nuanced roles with their clients.  I particularly like journalist Jim Parker’s taxonomy:

  1. The expert: more important than what to invest in is knowing how to invest well. Investors need advisors who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.
  2. The independent voice: the global financial turmoil of recent years has demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.
  3. The listener: the emotions triggered by financial upheaval are real. A good advisor will listen to a client’s fears, tease out the issues driving those feelings and be a steady guide in all market conditions.
  4. The teacher: getting clients beyond the fight-or-flight phase is often just a matter of learning from financial history, the power of diversification, the importance of asset allocation and virtue of discipline.
  5. The architect: once these lessons are understood, the advisor becomes an architect, helping clients build a long-term wealth management strategy that caters to their own unique risk appetites and lifetime goals.
  6. The coach: even when the strategy is in place, doubts and fears will inevitably rise in the client’s mind. The advisor at this point becomes a coach, reinforcing first principles and keeping the client on track. Good advisors share responsibility for you achieving your goals and hold you accountable.
  7. The guardian: beyond these early experiences is a long-term role for the advisor as a kind of lighthouse keeper or guardian, scanning the horizon for issues that may affect the client and keeping them informed. As someone who sits on the same side of the table with you, they are always acting as your advocate to find the most cost-effective value adding strategies and solutions for your situation.

These seven “hats” that a good advisor wears, when properly applied, become testimony to the fact that the value of a good financial advisor extends well beyond the writing of a simple financial plan.

While people often seek out advice on a specific matter because of the advisor’s expertise and knowledge, once those credentials have been established, the main value of the advisor in the client’s eyes may be their role as an independent voice. They allow the client to make important financial decisions with confidence.

A trusted advisor can be a listener and a sounding board – someone the client can share their greatest fears with. From this point, the listener can become the teacher, the architect, the coach and ultimately the guardian. These are all valuable roles in their own right and none of them are dependent on the state of the economy or the markets.

Good financial advice is ultimately defined by the patient building of a long-term relationship founded on the values of trust, understanding and expertise. It is fundamentally aligned with your values. It is comprehensive, yet it simplifies your life. It helps you achieve what’s most important to you.