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How to Evaluate a Financial Planner’s Performance?

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Last Updated on October 21, 2023 by Divya

Hiring a financial advisor is a decision that deserves careful consideration, yet many clients may not fully grasp the importance of this choice. Even when initially well-selected, advisors can become complacent over time, leading to potential stagnation in the quality of service. Consequently, clients must understand the significance of periodic assessments of their financial advisor’s performance. This blog delves into the essential aspects of evaluating your financial planner to ensure that your financial goals and expectations are consistently met. By doing so, you empower yourself to make informed decisions and maintain the effectiveness of your financial planning relationship, promoting your long-term financial well-being.

Introduction to Financial Planner

A certified investment advisor, often known as a financial planner, offers clients expert advice on various financial management topics. This advice covers investing techniques, taxation, insurance, retirement planning, and wealth management. Other names for financial planners include certified financial planners and personal financial planners. They can work for financial firms or individually, providing knowledgeable financial advice.

Financial planners work closely with their customers to determine goals and objectives, gauge risk tolerance, and create a detailed strategy that will help them go from where they are financially now (point A) to where they want to be financially in the future (point B). Nevertheless, a financial planner’s duties go beyond just putting out a financial plan. They have to keep an eye on the plan, evaluate it frequently, and make adjustments as needed to keep it in line with the client’s changing goals and needs about finances.

A financial planner is crucial in helping individuals and families make informed and strategic financial decisions. Here’s a more detailed look at their responsibilities and how they work with clients:

1. Evaluate Average Revenue Per Client (ARPC)

The Average Revenue Per Client (ARPC), also called Average Revenue Per User (ARPU), is a valuable metric for assessing the financial performance of a financial advisor’s practice. This indicator provides insights into how profit margins are evolving, which is crucial for gauging the health and sustainability of the business.

A low ARPC figure may signal that the financial advisor predominantly serves a narrow client base with limited financial resources. In such cases, there are several strategic approaches to enhance ARPC:

  • Diversify Services: The advisor can expand their offerings by introducing a wider range of financial products and services to cater to the diverse needs of their clientele. By doing so, they can increase the revenue generated from each client.
  • Target High Net Worth Clients: The advisor might consider shifting their focus towards clients with a higher net worth to boost profit margins. These clients typically have more substantial financial portfolios, which can lead to increased revenue without significantly escalating marketing and retention expenses.
  • Retain and Upsell: Retaining existing clients and upselling additional services can be effective. By deepening relationships with current clients and offering them more comprehensive financial solutions, the advisor can naturally enhance ARPC.

2. Why Is It Important to Have Assets Under Management (AUM)?

Because of its strong relationship to a company’s overall revenue, the Assets Under Management (AUM) measure has historically been highly valued in the financial industry. AUM patterns over time are an essential tool for evaluating a business’s growth trajectory. Prospective clients also closely examine AUM data, in addition to business owners. A high AUM indicates the existence of knowledgeable and reliable financial advice.

AUM also influences the goals for the next month or year. It offers a foundation for estimating revenues when creating an annual budget. Simply put, AUM is a critical metric that has broad consequences for the financial company and its customers.

3. Cost of your Financial Planner

Regarding the cost of your financial planner’s services, it’s essential to balance seeking the lowest prices and avoiding exorbitant fees. Here’s an in-depth look at the considerations involved:

  • Bargain Shopping vs. Premium Costs: While looking for the cheapest financial planner may be tempting, it’s not always advisable. Financial planning is a specialized service, and extremely low fees might indicate inexperience or a lack of qualifications. Quality and expertise come at a price. On the other hand, paying significantly more than the market average without gaining correspondingly superior services can be financially unwise.
  • Benchmarking Costs: Your financial advisor can guide you on reasonable fees based on the services they offer and their level of expertise. However, it’s also prudent to conduct some research. A quick internet search or contacting different financial planning companies can give you an idea of the range of fees in the market.
  • Value for Money: Rather than fixating solely on the lowest or highest cost, consider the value you receive for the fees you pay. A cost-effective financial planner who provides comprehensive and tailored services might be a better choice than one with exorbitant fees but limited benefits.
  • Full Cost Assessment: When evaluating fees, looking beyond the financial advisor’s charges is crucial. Consider the fees associated with the investments and financial products the advisor recommends. High-cost investments can erode your returns over time. Therefore, a seemingly lower financial planning fee might become less attractive if it increases overall costs in the long run.

4. Importance of Accountability

It’s crucial that your financial advisor assumes responsibility for the investment choices they recommend or guide you towards. For instance, your financial planner might present an appealing opportunity, like a retail fund, such as a property investment offering a 15% annual return over five years, which aligns with your risk tolerance. However, it’s pertinent to ask whether your financial advisor has personally invested their funds into these recommended investments.

Accountability in financial advising is fundamental. When your financial advisor suggests particular investment opportunities, they should provide advice and demonstrate their commitment and belief in the choices they propose. This aligns the advisor’s interests with your own, assuring they genuinely believe in the recommendations’ potential for success. This accountability creates a sense of trust and confidence in the advisor-client relationship.

In essence, it’s not just about words; it’s about actions. If your advisor advocates a particular investment, it’s reasonable to inquire whether they have a personal stake. This underscores the importance of them sharing in the risk and potential rewards, reinforcing the credibility of their recommendations.

5. Evaluating Past Performance

The adage that past performance doesn’t guarantee future results is a wise financial reminder. Yet, when entrusting your financial well-being to a professional, it’s entirely reasonable to seek a financial planner with a demonstrated ability to generate favourable outcomes.

Suppose your financial advisor has an extensive history in the field. In that case, it’s prudent to request an assessment of their performance over a substantial period, which could be the last 5, 10, or even 20 years. By doing so, you gain insight into the actual results they’ve delivered to their clients, which can be a valuable gauge of their competence and effectiveness.

This performance evaluation is not about making future predictions based on past performance. Instead, it’s about assessing the planner’s track record, ability to navigate various market conditions, and proficiency in helping clients achieve their financial goals. While it doesn’t provide guarantees, a strong history of positive results can instil confidence in your choice of a financial advisor, reinforcing your trust in their expertise and ability to guide your financial journey.

Conclusion

There are various important considerations to consider while evaluating the performance of your financial advisor. You must undergo regular evaluations, preferably annually, to ensure that you are still getting good communication, that your relationship with your adviser is favourable, and that you are getting help with your long-term financial planning.

As you reflect on the qualities you seek in a trustworthy financial advisor, we encourage you to consider meeting with one of our fiduciary planners at Edelman Financial Engines. Our commitment to your financial well-being, expertise, and dedication can be an invaluable asset in your quest for a reliable and competent financial advisor.

About Kanakkupillai

Kanakkupillai is a leading financial services provider offering various solutions to individuals and businesses. With a commitment to excellence and a client-centric approach, Kanakkupillai assists clients in various financial matters. Our services include company registration, tax planning and filing, legal compliance, and business consulting. Whether you’re a startup looking to establish your business, an individual seeking tax guidance, or an established company needing legal support, Kanakkupillai offers tailored solutions to your needs. Our team of experienced professionals ensures that clients receive expert advice and seamless support to navigate the complexities of financial and legal processes. With a strong track record of client satisfaction, Kanakkupillai is a trusted partner for all your financial and business needs.

Divya

Telecom engineer turned content creator with a knack for crafting compelling narratives. Experienced in client management and community engagement, and ventured into freelance content creation, contributing tailored and impactful content across diverse industries. Currently, collaborating with companies like Kanakkupillai, dedicated to delivering inspiring technical content rooted in a solid foundation.