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Want to improve your odds of selecting a competent, ethical financial advisor? Follow these seven important principles and you will reduce your financial risk of making a bad selection decision.
Trust what you see, not what you hear.
Advisors don’t have track records and they don’t have mandatory disclosure requirements. In the absence of meaningful documentation, they have the latitude to use personalities, sales skills, and deceptive marketing practices to gain control of your assets.
Your primary defense is to require all important information that will impact your selection decisions to be in writing so you have a permanent record of advisors information. Following this one rule will have a dramatic impact on the quality of information you receive from advisors.
Documentation is also a screening process. High quality advisors will have no problem providing the information because they are proud of their accomplishments. Low quality advisors will not want to provide written information because it documents their weaknesses.
When companies hire professionals to advise them on the investment of hundreds of millions of pension dollars, they require documentation for all of the most information that will impact their selection decisions. They call the document a Request for Proposal (RFP). Individual investors should be equally diligent.
Competence is a function of acquired knowledge.
Advisors don’t document the results they produce for their current clients so you have no idea if they actually delivered the competitive returns they say they did. You have to trust them when they tell you they have knowledge that will produce the returns you are seeking. Unfortunately, all advisors make this statement to gain control of investor assets.
As an alternative to track records, ask the advisors to document their years of financial services experience, industry certifications, college degrees, and association memberships that have continuing education requirements. These are their primary sources of financial knowledge that produce competence and permit them to call themselves investment or planning professionals. You want a real professional, not a sales representative masquerading as an professional.
Ethics are a function of advisors putting your financial interests first.
All advisors say they put your interests first. They know you have no way of validating this claim. Unfortunately, this claim masks a core conflict of interest that impacts all advisors - they can make more money doing what's best for them versus what's best for you. Your only protection from this core conflict is the personal integrity of the financial professional.
If you question this last statement, think about the large number of major Wall Street companies that have paid billions of dollars of fines for cheating investors. In addition, these fines don't begin to cover the trillions of dollars of losses Wall Street scams have cost investors - for example, the dotcom meltdown in 2000 and the mortgage meltdown in 2007/2008.
Always ask advisors for their CRD or IARD numbers and check their compliance records with FINRA (www.finra.org) or your state’s Securities Commissioner. Registered Investment Advisors (RIAs) also have ADVs that are filed with the SEC www.sec.gon) or your state's Securities Commissioner.
Personalities, sales skills, and brand names have nothing to do with advisor competence or ethics.
Lower quality advisors want you to buy what they are selling based on their personalities, sales skills, relationship skills, and brand names. None of these tactics have anything to do with their competence or ethics. However, the tactics work because most investors base advisor selection and buying decisions on subjective valuations.
Financial services companies know this, financial advisors know this, but most investors do not know this. Consequently, millions of Americans have unknowingly selected bad advisors.
Lower quality advisors prefer sales pitches and glossy brochures when they market financial products. They prefer verbal information because it is easy to misrepresent (what they say), omit (what they don't say), and deny later when it's your word against theirs.
Higher quality advisors prefer documentation because they have nothing to hide. One way to protect your financial interests is to pick advisors who are willing to provide written documentation for objective criteria that describe their credentials, ethics, business practices, and services. Only then do you have the information you need to make an objective selection decision that is not influenced by the sales skills and personalities of lower quality advisors.
Advice comes from advisors and not companies.
You should not be overly impressed by the names of companies that employ or license financial advisors. That’s because the amount of money companies spend on advertising to create the brand name has nothing to do with quality of advice that is dispensed by their advisors.
Many of the best financial advisors in the U.S. are independent professionals. They left brand name companies so they could focus on doing what was best for their clients.
Your relationship is with the advisor you depend on to help you achieve your financial goals. Your relationship is not with the company that provides the advisor with office space and sales literature.
Performance reports are a critical financial service.
Only select advisors who provide quarterly performance reports so you know what you own, the performance of your assets, and your exposure to risk. This critical service keeps you up-to-date on your results, acts as an early warning system, and provides the information you need to ask the right questions.
Performance reports are produced by third parties and not the money managers who are responsible for making investment decisions. Money manager reports are the equivalent of the fox guarding the chicken coop.
This requirement also protects you from sales representatives who aren't really financial advisors. Reps cannot provide quarterly performance reports.
Make sure a brand name custodian has possession of your assets.
Never write a check to transfer your assets and make it payable to an advisor or a company that is controlled by an advisor. A Madoff company acted as custodian when it stole $50 billion from 11,000 investors. Ponzi schemes act as custodians so they can manipulate the reports they send investors.
Take the time to research the custodian that has been recommended to you on the Internet. If the custodian is a broker/dealer you can learn more about the company by going to www.finra.org. If the custodian is trust company, go to your state's Department of Corporations.
If your advisor is an employee of a company that acts as custodian, make sure the company has a long service record and is responsible for hundreds of billions or trillions of dollars.
Independent advisors use the services of third party custodians, for example: Schwab, Fidelity, Pershing, and TD Ameritrade. Again, you want to make sure the custodian is a major firm that is responsible for a substantial amount of assets over a long time period. |
