Can You Really Trust Your Financial Adviser?
October 04, 2012When it comes to financial advisors, we often hear the term “trusted adviser” so often that we can take the “trusted” part for granted and forget just how important that trust is. This is someone we may entrust with some of our deepest and most intimate goals, our financial secrets, and our life savings. Yet, we often rely on very little to decide who’s worthy of that trust. We may choose an adviser based on who greets us at the nearest brokerage office, a cold call, a casual recommendation from an acquaintance, or even who happens to be sitting next to us at our child’s soccer game. Equally difficult can be the decision of when to fire an adviser we’re working with, especially if it’s been for a long time.
Sometimes it’s pretty clear. A few days ago, I received a distressed phone call from a friend of mine who had heard that her financial adviser’s license had been suspended for stealing money from his clients’ accounts. Yet, she had just spoken to him and he made no mention of this, carrying on business as usual. I quickly checked FINRA’s BrokerCheck web site and discovered that he had a history of violations and was currently under both regulatory and criminal investigation. Needless to say, she wanted to move her money as soon as possible so I gave her a list of brokerage firms to consider transferring her accounts to. (Since they are all discount firms, she would also pay considerably less in commissions than with her current broker.)
But what about when it’s not so clear? How can you tell whether your current or prospective adviser is one to be trusted, just a slick salesman, or even a crook? Here are some things to look for:
1) Have you done a background check? Employers do it before hiring someone and so should you. You can get a broker’s or adviser’s history of licensing exams, brokerage employment, and “disclosure events” such as “criminal matters; regulatory actions; civil judicial proceedings; customer complaints, arbitrations, or civil litigations; employment terminations; and financial matters in which the broker has been involved” at no cost on FINRA’s BrokerCheck web site. Make sure they can adequately explain anything fishy you find.
2) What are their qualifications? One shortcut can be to look for respected designations such as the CFP®, ChFC, CPA/PFS, and CFA that require a minimum level of education, education, and ethical requirements. At the very least, going through the effort of acquiring these designations shows a certain level of seriousness about the profession.
3) How are they compensated? While there are honest advisers who sell investment and insurance products, it can be harder for them to always do the right thing for their clients when their income could be adversely affected. Charging an asset management fee provides fewer conflicts of interest, but I think the cleanest form of compensation is to charge an annual retainer or hourly fee. You can find the advisers who charge the former at the Alliance of Cambridge Advisors and the latter at the Garrett Planning Network.
4) Do they look at the big picture or just your investments? While advisers like to tout their investment expertise, research shows that it’s unlikely they’ll be able to time the market or pick winning investments consistently enough to justify whatever fee they charge. Promising high returns with low risk should raise red flags. Instead, good advisers earn their keep by helping you set your financial goals, put together a plan to achieve them, take the steps to execute your plan (even and especially when the going gets tough), and adjust the plan when necessary. That plan should address things like budgeting, debt, taxes, insurance, and estate planning in addition to your investment portfolio.
5) Are they a “yes man” (or woman)? If your adviser just follows your instructions then they’re essentially acting as a glorified and overpaid order-taker. Your adviser should be willing to play devil’s advocate and try to dissuade you from making an emotional decision that you’ll later regret. That’s a key part of their job responsibility and helps differentiate a true professional from a mere salesperson.
Have you had an interesting experience with a financial adviser? What other characteristics would you look for? Share your thoughts in the comment section below…