How to Have a Good Conversation with a Financial Advisor
DISCLAIMER: As in most of our articles, we focus primarily on contexts and examples from the U.S. market. Many of the concepts also apply to other markets, but please consult with us to better understand the differences and similarities.
At Ockham Finance, our goal is to give you the knowledge and tools you need to make your own financial decisions and manage your investments directly, without intermediaries. In fact, the experts at Ockham Finance can help you deepen your knowledge on the vast majority of financial topics covered in this article, so you're better prepared to have productive conversations with your financial advisor… or to do it yourself, for a fraction of the cost and with more confidence.
However, we also recognize that you might not always have as much time as you'd like to actively manage your portfolio, or that some financial concepts can take too long to learn in depth. In those cases, it's not a bad idea to hire a financial advisor to guide you on your journey to building wealth.
Who should you hire?
As with everything in life, there are very good professionals who add value and deserve what they earn, and others... not so much. Drawing from our personal experience, these are the characteristics we look for in a financial advisor:
Knowledgeable and experienced: Someone with 10 or more years of experience, a large client portfolio, and significant assets under management of at least $100 million. This gives us confidence that they have done this for many clients who have entrusted them with their wealth.
Friendly and personal, someone who shows they have your best interests at heart: Someone you feel comfortable with, who shows interest in your story, your background, and your family situation. I once had a financial advisor for 4 years! who always called me Francisco (my first name) even though I asked him from the very beginning to call me by my middle name, Javier. I believe this shows a certain lack of interest.
Has a fiduciary duty: This point is the "legal" side of the previous one. In the United States, financial advisors who are designated as CFP (Certified Financial Planner) and RIA (Registered Investment Advisor) are required by law to have a fiduciary duty to their clients. This means they are obligated to always act in their clients' best interests. For example, fiduciary duty prevents them from recommending a financial product just because it might earn them a higher commission if it doesn't bring greater benefits or returns to their client. It's always better to choose someone who is legally bound to protect your interests over someone who is not.
Clear explanations: Of course, we couldn't leave this one out! This is one aspect of financial advisors that can sometimes be intimidating: They use complicated terms and confusing explanations, and in the end, we don't understand anything they've explained. We simply say "yes" to avoid looking bad, but we're left with that nagging feeling of doubt. If you don't understand what a financial advisor is saying, tell them and ask them to explain it again. If you still don't get it, the problem isn't yours—it's theirs. A good financial advisor is ultimately a good educator. In fact, if an financial advisor uses grandiloquent and bombastic expressions (like the two words I just used), they might be hiding some shortcomings or subterfuge behind that complexity: "If my clients see that I speak in 'super advanced' terms, maybe they won't realize that I don't really know the underlying causes of market behavior; or maybe I can sell them this product that isn't very good, but for which I get a huge commission if I steer money into it." If you don't understand them, don't feel bad about telling them you're going to explore other options.
At a solid company with an investment platform you like: It's no use hiring the best driver if they're going to drive you in a beat-up car. Similarly, we recommend hiring a financial advisor who works for a reputable company with a flawless track record, and who has investment tools that you like—that are easy and intuitive to use, adapt to your lifestyle (e.g., "I want to invest only from my phone," or "only by speaking with someone"), and offer the variety of investments/financial instruments you need (Stocks, Crypto, Options, Bonds, etc.).
It's wise to make a change: If after a few months of working with an advisor and a platform, you feel it's not the right fit, don't feel tied to them! Do your homework to identify where you want to move your wealth and who your new financial advisor will be. If you're in the United States, the new team will coordinate all transfers of funds and assets, and in most cases, you won't have to pay a commission for the transfer. You also won't have to pay taxes because transfers are generally done "in-kind," meaning they don't liquidate your market positions (they don't sell your stocks) but rather transfer the stocks and other positions without selling them. The bulk of your wealth will be transferred in about 3 or 4 days, and then any residual amounts that come into your old accounts (like dividend payments) will automatically go to your new accounts. One last tip: Try not to make this kind of change during a period of market volatility, just in case! In any case, if you have doubts, you can schedule a consultation with us if you're planning this type of transaction.
What should you talk about?
Once you've decided which platform and financial advisor to work with, you'll want to have productive meetings with them, usually 2 to 4 times a year. For these meetings, we recommend covering the following points:
Investment Strategy: It's essential that they understand your profile so their recommendations are based on YOUR preferences, not theirs.
Risk tolerance: Do you have a conservative profile, meaning you don't like to risk your money even if the potential for gain is high, preferring to keep it safe even if it earns very little? Or, on the contrary, do you have a high appetite for risk, willing to risk big to win big? It's important to know yourself and calibrate your profile. For this, at Ockham Finance we offer the R.A.Z.O.R. tool, a free questionnaire through which we can help you determine your risk profile and its implications for the types of investments that would suit you.
Time horizon: When do you expect to be able to "cash out" your investments? The further into the future, the more aggressive (risky) you can be in the short term.
Investment pillars and diversification: In which financial instruments do you want to invest your money (stocks, bonds, indexes, funds, etc.) and in what proportions?
Tax strategy: What tactics will you use to be as tax-efficient as possible?
Rebalancing frequency and performance tracking: How often do you want to rebalance the portfolio to align with your diversification profile, and how frequently do you want to review your investment performance?
Your Financial Goals: It's crucial for your financial advisor to understand these in order to help you achieve them.
Retirement: At what age? What kind of lifestyle do you want in retirement? Where do you want to retire?
Home purchase or other real estate investments: What do you want to buy, for how much, and where?
Education savings: What are your goals for your own education, or that of your children or grandchildren?
Travel, large purchases (car, boat, etc.), or other life milestones: How much do you want to spend and when?
Charitable donations and legacy planning (inheritance).
Current Financial Situation: A good relationship with a financial advisor is based on being open and transparent about your wealth.
Income, expenses, and cash flow
Assets and liabilities, including real estate, debts, and loans
Savings and investment accounts
Insurance coverage: life, health, property, disability
Retirement Planning: This is a key stage of life where you will no longer have work-related income (salary, in general) and will depend entirely on what you have planned for this phase of your life. If you don't plan, you don't retire!
Ideal retirement age and estimated required income
Pensions, social security, and other benefits
Retirement accounts: 401(k), IRA, Roth IRA, annuities (recurring payments from certain financial products like some life insurance policies)
Withdrawal strategy: From which accounts to withdraw money for retirement, in what order, and in what amounts, taking into account the tax impact.
Estate Planning:
Status of your will, trust, and powers of attorney: All these legal documents and structures are important when planning what happens to our wealth after we pass away. The more organized it is, the easier we make the transfer of assets for our successors.
Beneficiary designations, especially for retirement funds and insurance policies.
Inheritance or generational wealth strategies: How can we ensure we minimize the tax impact? How can we ensure our heirs and future generations preserve the wealth we built for them?
Tax Planning: Your financial advisor can guide you so that, always in compliance with the law and tax regulations, you can minimize what you have to pay in taxes.
Strategies to minimize your tax burden now and in the future
Management of gains and losses
Planning when to realize income (e.g., from deferred income), take deductions (e.g., charitable donations), and make conversions (e.g., from a traditional IRA to a Roth IRA).
Coordination between your financial advisor and your tax preparer, if applicable.
Insurance and Risk Management: This involves managing unforeseen events that could have a significant impact on your finances, such as an accident, illness, lawsuit, or disability.
Coverage gaps: Disability, long-term care, and "umbrella" policies that offer higher liability coverage than your individual policies.
Health insurance in retirement, which is when you will most likely no longer have employer-provided insurance.
Life insurance and beneficiaries.
Major Life Milestones or Changes
Marriage or separation: In addition to a lawyer, it's a good idea to talk to your financial advisor to understand the financial implications and considerations.
Having children, adopting children, or caring for elderly relatives: A financial advisor can help you think about and plan for what these responsibilities mean from a financial standpoint.
Career changes or acquiring a business: Here too, an advisor can help you think through the financial implications and can advise you on strategies to follow.
Relocation: If you're thinking of moving to a new city, state, or country, a financial advisor can help you consider the financial implications.
Fees and Fiduciary Responsibilities:
How the financial advisor is compensated: Is it a fixed fee (fee-only), a commission, a percentage of the assets they manage? It's very important to have transparency here, and you should also know that EVERYTHING is negotiable. It's good to have references from other financial advisors and firms to better understand your room for negotiation.
Conflicts of interest or affiliations: It's a good idea to ask if the financial advisor receives any third-party compensation for financial products they recommend.
Fiduciary responsibility: As we mentioned earlier in this article, it's important to ask if the advisor has a fiduciary duty to you.
Financial Plan: As a result of all the above, the financial advisor can prepare a financial plan for you, giving you a good idea of what will happen with your wealth in the months and years to come.
What actions should be taken in the next 3, 6, 12 months.
How progress toward your financial goals will be monitored, and how often.
What tools or platforms will be used to track your financial plan.
If you have any questions or want to delve deeper into what we've covered in this article, don't hesitate to schedule a consultation with us. As we mentioned earlier, our experts at Ockham Finance can cover the vast majority of the topics in this article at a fraction of the cost of a financial advisor—and your first consultation with us is always free!
Javier Neves
Co-Founder, Ockham Finance
