5 things clients should know before hiring a financial advisor

Some people approach engaging a financial advisor with the same mindset as hiring an auto mechanic.

Yet, while some consultation with mechanics is required, maintaining and repairing cars is a highly objective undertaking that doesn't require a lot of discussion.

By contrast, though wealth management, investment management, retirement planning and estate planning involve objective precision, they're subjective services that should be geared to the individual client's situation and goals.

So to work for clients effectively, advisors need extensive input from them initially, regular client meetings throughout the relationship and timely notice when clients' lives change.

When approaching an engagement with an advisor, here are five things to keep in mind:

• Decide at the outset what services you need the advisor for. Then seek agreement specifically on what the advisor will handle for you—investment management, retirement planning, tax planning or estate planning (including a review of existing insurance policies), or all of these.

If other consultants are already handling some of these areas and you're happy with their services, you may prefer to stay with them while your advisor focuses on other things—essentially, unbundling services.

But to the extent that your advisor is a full-service advisor or wealth manager caring for your overall financial wellness, they may offer to confer with your other advisors—with your estate attorney or insurance broker, for example. This arrangement is designed to support a holistic process, while freeing up the advisor to focus on their assigned areas—often, investment management and retirement planning.

• Prepare to tell everything. Full disclosure is critical, so don't be shy. Prepare to tell your advisor all pertinent details of your financial life and about the life your finances reflect. Your advisor needs to know what concerns you most—what keeps you up at night. These issues may include concerns about assuring enough wealth accumulation for a comfortable retirement, meeting cash flow needs now and down the road, supporting your family, minimizing taxes and building a legacy for your family. Also, it's critical for the advisor to understand your tolerance for investment risk.

Without knowing everything, the advisor can't maintain your wealth any more than physicians can maintain their patients' health. Physicians and other health professionals well know the folly of patients withholding key information about symptoms, medical history and negative habits like smoking and excessive drinking.

The same is true when engaging an advisor. He/she needs to know about pretty much every dime you own, earn, spend and owe. Incomplete disclosure brings sub-optimal results, invoking the classic computer slogan: garbage in, garbage out.

So it's important to bare all, keeping in mind that advisors are confidential consultants. These disclosures can get quite personal and might involve substantial cash outflows for parts of your life that are quite sensitive.

While an advisor shouldn't be a moralist, he/she should encourage self-discipline to curb extravagant spending, as it limits asset growth, retirement resources and the size of legacies. If you withhold key information, your advisor may eventually see signs of this in your financial records, as when a patient who doesn't disclose smoking is betrayed by chest X-rays. The advisory equivalent of a tell-tale X-ray is large cash withdrawals from assets—a counterproductive habit that advisors try to help clients curb.

• Be prepared to communicate your expectations for communication—for conferences to review your portfolio, discuss problems and learn mutual expectations. How often would you like to meet? Many advisors consider quarterly meetings the preferred interval, as monthly is often overkill, and semiannual meetings can be too infrequent. These meetings can be remote (using video-conferencing), completely telephonic or, if convenient for the client, in person; a good advisor shouldn't be averse to meeting face-to-face.

Just as clients have different goals and risk tolerances, they also have different needs for advisor contact. Some need more reassurance and support than others, especially amid difficult periods such as market pullbacks. For some clients, relatively frequent phone calls are an essential part of the relationship.

• Be disciplined. Both parties must do their part to get the desired results. It's the advisor's job to set plans and make recommendations to help clients pursue their goals. If goals are to be met, clients must do their part by following the advice they're paying for. This may involve curbing unnecessary spending to free up cash for investment and/or legacy goals. Or it might mean forgoing frequent new-car purchases, or taking overseas vacations less often. In some cases, clients may need to instill more spending discipline in their spouses.

This overall discipline also includes keeping advisors apprised of financially impactful events: deaths in the family, marriages, divorces, births of grandchildren, etc. Conversely, advisors are accountable for keeping clients informed of progress toward goals, adverse markets and economic trends.

• Don't conflate your advisor's skills with your recent investment returns. Of course, the former has an impact on the latter. But all too often, clients judge their advisors unfairly when financial markets turn downward because they don't understand that wealth building means structuring a portfolio for the long haul—not only to take advantage of up markets, but also to preserve assets during down periods.

If all this sounds like engaging an advisor involves considerable effort, that's because it does. The advisor does most of the work, but these professionals can't help you achieve your goals without your participation. Initially, this may require a good deal of thought to prepare for meetings. And throughout the engagement, clients must have the discipline to follow through on the advisor's recommendations.

The payoff can be seen in the satisfaction of financially successful individuals. Those who work with advisors tend to do what the relationship requires.

Keeping the above five points in mind may make this work easier.

Jared Lee is an Advisor in the Indianapolis office of Allworth Financial LP, a national investment advisory firm registered with the SEC.