How to Research and Choose a Financial Advisor

Your biggest financial risk is not investing in the stock market. It is bad advice when you invest in the stock. Low quality financial advisors who do not have the knowledge and/or ethics to provide competent, ethical advice are the source of bad investment advice.

Bad advisors are not bad people. In fact they may be likeable, friendly people – for example, advisors who are members of your church or country club. You may remember Bernie Madoff acquired many of his clients through his synagogue and country club.

Advisors can be nice and friendly, but this makes them extremely dangerous. It is what you don’t know about advisors that make them so dangerous.

Warning Signs
There are very few warning signs that tell you to avoid particular advisors. If you are like most investors, you trust people you like. That is why personalities are so dangerous – you may like and trust the wrong financial advisor.

Competent Advice
You need competent financial advice from an expert. There are three sources for advisor competence: Education, experience, and valid certifications. You have to be cautious when you evaluate advisor credentials. You assume credentials produce expertise. What if the credentials are not real?

  • Make sure degrees are from accredited colleges and universities. Low quality advisors buy degrees and use them to deceive investors.
  • Years of experience is a tough one. An advisor may have spent years selling mutual funds. That does not make the advisor a financial expert.
  • Certifications can be extremely important. They are the best source of specialized knowledge. Keep in mind there are top quality certifications (CFA®, CIMA®, CFP®, CPA®) and there fraudulent certifications.

Ethical Advice
You want a financial expert you can trust. However, like competence, trustworthiness is also difficult to measure.

  • Select an advisor who is required to put your financial interests first. The requirement applies to financial advisors who are financial fiduciaries (Registered Investment Advisors, Investment Advisor Representatives).
  • The advisor should have a clean compliance record with the three primary regulatory agencies: SEC, FINRA, and States.

Business Practices
The advisor’s practices can also help you determine quality. There are three that you should focus on.

  1. Is the advisor willing to disclose compensation and all of the expenses that will be deducted from your account?
  2. The best advisors are compensated with fees and not commissions. Do not select advisors whose only source of compensation is a commission.
  3. Is the advisor willing to practice full written disclosure for all pertinent information that will impact your selection decision? High quality advisors practice transparency because they have nothing to hide. Low quality advisors withhold information because they have a lot to hide.

Fake Track Records
In an ideal world advisors would have legitimate track records that documented the past results of their advice. Unfortunately, very few advisors have authentic track records.

Be aware, unethical advisors will use fake track records to convince you to buy what they are selling. The two most frequent scams are to:

  1. Claim they selected high performing mutual funds “before” the performance occurred when they selected the funds “after” the performance occurred.
  2. Use references that are willing to confirm advisors claims for exceptional performance. You don’t even know if the references are real clients.

Public Data
There are limited sources of public data that will help you determine the quality of financial advisors.

Why Research Advisors?
Research helps you select the advisor with the best credentials, ethics, and business practices. If you do not research advisors, you risk selecting the advisor with the best personality or sales skills. Personalities and sales skills have nothing to with competence, ethics, or business practices that benefit you.

Jack Waymire is a member of the DailyWorth Connect program. Read more about the program here.