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More on Choosing an Adviser

Reading yet another article about choosing a financial adviser, I was struck by how the writer completely missed the point of the exercise. The writer did correctly note that some advisers are focused on selling product to their clients and that the prospective client should ask what exactly about the portfolio the adviser would change. Also noted, in the writer’s view, advisers should not charge more than one percent on assets.

What did this writer miss? Quite a bit, actually. The biggest miss was the common misconception that a financial adviser’s only real job is to tell clients what to buy and sell for their portfolio. The real job is to provide life advice about finances, risks and approaches to handling life events. This naturally includes the portfolio construction and investment advice but also requires the adviser to understand the client, the client’s needs AND goals. Virtually no clients solely want the most return possible once they understand that it is what you plan to do with the assets that really is important.

Another miss, and a common one, was ignoring the impact on a client’s portfolio of several factors affecting all of us. Among these items are trading costs and trading frequency. These activities all too often generate income for the adviser at no real benefit to the client. Other misses were the impact on the client’s portfolio of inflation and taxes. When one figures in an adviser’s fee, the annual costs tied to mutual funds or other managed investments, the impact of inflation (however low) and the never ending grind of taxes, a large return can amount to next to nothing for the client in real terms.

By all means a prospective client should be concerned about the fees charged by an adviser as well as the relative costs of the investments that the adviser normally suggests for clients. However, it would be foolish to ignore the planning needs of the client and other sources of friction diminishing the portfolio beyond the adviser’s fee. 

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