Another important issue is how your advisor takes your home equity into account."Some advisors will tell you to borrow against your home equity to raise cash, and that can be self-serving because that means you are refinancing and not selling anything from your portfolio [from which advisors generate fees] and they get a fee for a refinancing," says Smith of DT Investment Partners. In the boom-and-bust era of home prices, people worry about the fluctuating value of their homes. The idea of withdrawing equity while they have it can be appealing. But there can be long-term negatives, such as adding more years of debt payments. A home is one of the most important assets for many individuals, and borrowing away equity could be a long-term negative.
Ask your financial advisor specifics on how the financial plan he or she creates for you fits your situation. Some financial plans are derived from broad demographic assumptions advisors make when you do an initial review. It's standard practice for financial firms to give you a form going over your financial situation. As part of that initial review, they will gauge your risk tolerance. But it does not tell your advisor everything. That initial snapshot of your life can be helpful, but things change. What's more, the risk assessment is as much for the investment firm's protection against future lawsuits as it is for the client's benefit.
People's financial lives are complicated: Meeting costs for retirement is the main focus of most savings plans. But there are many financial issues that can change over time, such as kids' college costs, health issues, job losses, divorces or an inheritance.
"The advisor needs to keep engaging with the client, identifying scenarios and outcomes, and providing guidance when things arise," says John Nersesian, managing director of wealth management services at Nuveen Investments, who trains financial advisors at a number of firms.
Clients may not want not to share all of the details about their lives with a financial advisor, and may not even want not to fully disclose their basic financial holdings. Advisors have to respect clients' preferences, says Nersesian, although "you get the best advice if you are forthcoming about your finances."
In other words, a trusting relationship is best, but advisors have to earn that trust. Not just with big financial returns, but by engaging with clients and speaking in terms they understand.
You can ask for a second opinion in financial matters. You can always get advice from more than one financial advisor, just as you can with a doctor's opinion, and many people like to use more than one financial advisor. "No advisor should be worried about being put in a competitive situation," Smith says.
An advisor's willingness to admit they can't handle every financial issue that comes up could be a good sign, Kinniry says.
Remember that you, as the client, have a responsibility to understand and ask about fees. Know exactly what you are paying for, experts say. "You want to pay lowest rate possible," Kinniry says. Fees are one of the only things that are certain in investing, but they are also among the most misunderstood. Expect clear, understandable answers in simple, direct language. And do your best to understand exactly what you are paying for.
Don't take it as a negative if an advisor says,"I don't know" when you ask for specifics, or "I don't do that." No single advisor knows everything, and sometimes you might need an accountant or a tax or trust lawyer. "The very best advisors and brightest investors are humble enough to know what they don't know," Nersesian says. It might cost more to get specialized advice, but it's often worth it.
"It's in a financial advisor's best interest to give you clear advice that you want and that's not misleading or in some self-serving way," Smith says. He adds that it's a red flag if they offer you something for free outside of wealth management, such as complex private transactions that lock up money for long periods of time, complicated trusts, tax avoidance plans or insurance products. Be especially wary, he says, if an advisor offers services or products outside their area of expertise, even if they are free. "Head for the hills when they do that," Smith says. "There is no free lunch."