Many people out there need the services of a financial advisor. Choosing the right advisor is a process that should not be taken lightly. Choosing an advisor because he or she is your best friend or because you already have a banking relationship with them are most likely not the best reasons. The performance and fee structure of the advisor, the accessibility and responsiveness of the advisor, and the honesty and integrity of the advisor are probably the most important things to consider for most people. However, honest and integrity are the most difficult qualities to assess in a person.
In order to gauge the integrity and quality of an advisor, here are ten questions I feel a good advisor should be able to answer with little to no hesitation. I feel some answers should come easily like the answers to questions 1-4, but other answers naturally require a little bit more reflection like 5-10. Obviously, if the potential advisor has trouble answering these questions or is incomplete in answering, I would take this as a warning signal. I hope this list is helpful.
- Who do you look up to in the investment business and why?
- Who is your greatest mentor and what are their 3 most powerful competencies?
- What investment mistakes have you made? Listen carefully to determine if they recall errors of commission and/or omission.
- What is the biggest mistake you have ever made in business and what is the most valuable lesson you have learned from this mistake?
- What makes you feel guilty?
- Have you ever suffered or experienced a loss for doing what you thought was the right thing?
- Under what extenuating circumstances would you lie?
- What about you will I know after three months that would keep me from hiring you today if I knew it?
- If you are willing to provide references of former clients, what will they say is your greatest strength and greatest weakness?
- If you inherited $300,000, what would you do with it?
If anyone has suggestions for additional questions, I would be happy to see them posted in the comments.
These are fantastic, thoughtful questions.
We run a family of hedge funds and one of them is a fund of funds. Too often fund of fund managers get hung up on past performance and quantitative criteria for measuring risk, and they’ll ignore qualitative factors like a trader’s character. These questions certainly apply to fund managers and traders in addition to financial advisors and should be asked by prospective investors in conjunction with a thorough quantitative review.
I will file these away for the next time we interview a potential manager.
As the publisher of a newsletter myself, I feel as though its important for my readers to understand who I am and the framework from which my commentary and analysis flows. Part of me wants to answer these questions for my readers, but I worry it might cheapen the experience.
Doug, how would you feel about personally answering these questions you posed in a subsequent post? How would you feel if you read on a competing financial advisor’s blog his answers to these questions? Would you even believe them or would you worry about a smarmy, sales-centric meta-message?
-JEFF