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You are seeking a competent, ethical professional who can help you achieve your financial goals. It sounds easy enough, so what is the problem? If you don't know how to determine the quality of financial advisors you have a big problem - in fact, this problem is so big it is a major source of financial risk.
"Your biggest risk isn't investing in the stock market. It is bad advice when you invest in the stock market"
All advisors claim to be competent, ethical professionals - what else would they say about themselves? Your challenge is to make sure the advisor you select is a real expert who puts your financial interests first. This is easier said than done.
Read the Tips. In a few minutes, you will be better prepared to protect your financial future from advisors who use deceptive sales practices to sell you bad investment advice and products.
Never write a check in the amount of your assets to a financial advisor or a company that is owned or controlled by an advisor. This is a tactic that is common to all Ponzi schemes. The same rule applies to companies that are recommended by advisors when you don't know the quality of the company. Be particularly cautious with companies that have acronyms for names. For example, FTS may not stand for Fiduciary Trust Services. It may actually be Frank's Trucking Service. Companies that hold assets for investors are called custodians. Make sure your custodian is a brand name company that is responsible for billions or trillions of dollars: Charles Schwab, Fidelity, Pershing, TD Ameritrade.
You still need to be cautious when advisors are recommended by friends, family, associates, and other professionals. The number one sales tactic of Ponzi schemes is referral-based marketing. How can you be sure the person making the recommendation isn't a victim of bad advice? Or, the person may not know how to determine the quality of financial professionals? How do you know a referring professional doesn't have a conflict of interest? Regardless of the source of referral, you must always conduct your own in-depth due diligence.
A major red flag occurs when advisors promise you high returns for low risk. This product sounds too good to be true because it doesn't exist. If you want higher returns, you have to take more risk. If you want lower risk you have to accept lower returns. That's the way it is and there are no exceptions. Advisors use this deceptive sales pitch because they know it appeals to less sophisticated investors' who want high performance and low risk from the same portfolio. Even experienced investors fall for this deceptive sales tactic - for example, the 11,000 people who lost billions of dollars investing in the Madoff Ponzi scheme.
All advisors have a core conflict of interest. That is, they can make more money doing what's best for them versus what's best for you. Only the personal ethics of advisors protect you from this conflict of interest. When you evaluate advisors make sure they provide a disclosure statement that covers all of their potential conflicts of interest.
Do not accept verbal claims of expertise from advisors. All advisors claim to be expert, whether it's true or not. Require advisors to document their experience, education, certifications and association memberships that have continuing education requirements.
All advisors also claim to be trustworthy professionals who put your financial interests first. Like claims about expertise, these representations are used to develop trust and to help them sell investment products. Make sure you ask for the advisors' CRD or IARD numbers and check their records and documents at FINRA.org and with your state's Securities Commissioner.
Trust what you see and not what you hear. Require advisors to document their credentials, ethics, business practices, and services. Written information is much more reliable than verbal information. That's because verbal information is easy to manipulate and deny later. You always want a record of what was said to you. If you have a problem it is no longer your word against the advisor.
The most reliable financial professionals are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs). RIA and IAR registrations permit them to provide advice for fees and they are held to the highest ethical standards in the financial services industry. If you want another layer of protection make sure they acknowledge they are fiduciaries when they provide financial advice and services. Fiduciary advisors are required to put your financial interests ahead of their own.
The appropriate way to pay for financial advice is with a fee - the same way you compensate other professionals (CPAs, attorneys) you depend on for specialized knowledge. Advisors may charge fixed fees, hourly fees, or asset-based fees. Fees also mean you are paying the advisor so they have fewer potential conflicts of interest.
Watch out for the "free lunch" sales pitch. Advisors who are paid by third parties (commissions or revenue sharing) may tell you their recommendations and services are free. There are no free services. Free means the advisors are paid by third parties who mark-up the fees they charge you to recover the compensation they paid the advisors to sell their products.
Be sure to check the professionals' visibility on the Internet. Visit their websites and review the quality of the content. Compare the content of the websites with what you are being told by advisors who are selling you investment products. Plus, enter the advisors' names and their companies' names into Google and read content on the first ten pages. You can also check their profiles on third party websites as long as the source of information is independent and objective.
You are looking for a competent, ethical professional who can help you accomplish your long-term financial goals. You are not looking for a friend. In fact, advisors use their personalities and sales skills to get you to like them for three reasons. First, people tend to trust people they like. Second, once trust is established, it's easier to sell you products. And third, investors are more tolerant of bad results when they like their advisors. You will make a better decision if you maximize your objectivity and minimize subjectivity when you select advisors. |
