FA Center: Here’s when your financial planner’s advice needs a second opinion
Financial advisers often compare themselves to doctors. Like physicians, they provide specialized expertise to deal with complex issues. There’s one big difference: When patients face a serious health diagnosis, they often seek a second opinion.
But when clients hear their adviser’s recommendations for their financial future, they rarely consider getting a second opinion from another adviser. Should they?
Pursuing a second opinion when you’re grappling with the possibility of a life-altering illness is routine. Rather than take it personally, medical specialists tend to understand patients’ desire to gather another expert’s input and even encourage them to do so.
Advisers, by contrast, aren’t accustomed to having clients say, “Thanks for your advice. Now I’ll see what one of your competitors thinks.”
H. Kent Baker, university professor of finance at American University, views second opinions as appropriate for clients under certain circumstances.
“Advising is an imperfect profession,” he said. “It’s a combination of art and science. So if I’d have no hesitation going to another doctor to get a second opinion for my physical health, I can see how it might make sense for my financial health.”
He cites three interrelated factors for clients to consider when weighing whether to consult with another adviser in order to make well-informed financial decisions:
1. Trust level: If the adviser consistently acts in a trustworthy manner, there may be less uncertainty about accepting a high-stakes recommendation.
2. Length of relationship: If you’ve successfully worked with an adviser for many years, the longstanding relationship can in itself help you feel more confident sticking to the plan.
3. Track record: It’s reassuring when your adviser has delivered prudent, spot-on recommendations time after time. More tellingly, it’s comforting when an adviser shows fallibility, admits it and shares a lesson learned.
Baker adds that advisers, like the rest of us, harbor biases. If a client suspects that their financial planner’s biases interfere with clear advice, a second opinion can prove valuable.
Another red flag is if an adviser applies general rules of thumb when crafting your financial plan without customizing it to fit your unique situation, Baker says. You want someone who thinks through your specific needs, risk tolerance and other priorities rather than adopts a cookie-cutter approach.
One of the most common reasons for clients to seek a second opinion (or quit their current adviser) involves discontent with portfolio performance. They may assume if only they chose an adviser with a hotter hand for picking stocks, they’ll generate heftier returns.
Ironically, that’s probably the worst reason to meet with another adviser. It’s easy for someone to boast about his or her prowess and proprietary investment methodology (“I don’t fall into the trap of all those advisers who look at the wrong things when constructing a portfolio”), but no one can guarantee market-beating returns.
A more compelling reason to think about a second opinion is when you’re experiencing a major life change such as divorce, career upheaval or retirement.
“When people come to me for a second opinion, it’s often driven by some broader life event,” said Derek Tharp, a certified financial planner in Portland, Me. “They’re thinking, ‘Things are changing so maybe I need some new advice.’”
The logistics of getting a second opinion are simple. Many advisers offer free introductory meetings in which they will review an investor’s current strategy and share their perspective.
“You might find that your [original] adviser was fine,” Tharp said. “But you have to be careful. You may get a sales pitch. The risk of a second opinion is that adviser might suggest unnecessary tinkering.”
More: Anybody can say, ‘I’m a financial planner.’ Here’s how to dig deeper to tell what that really means.
Also read: What to watch for — and watch out for — before giving your money to a financial adviser