When searching for a new financial advisor, the traditional method is simply to ask a friend who they use and take their recommendation. You could also do a Google search and systematically work your way down the list with subsequent screenings, phone calls and interviews. Further, you could even peruse journals such as Boston Magazine that rate the “Top Local Financial Advisors” or Barrons that lists the nation’s “Top Stockbrokers” – and hope that one of those “Superstars” will give you a minute of their time. Finally, you can respond to the invitation that falls out of your morning paper inviting you to attend an “educational” seminar at the local Holiday Inn.
Whatever road you choose, the process can be daunting and stressful. After all, choosing the right financial advisor is as equally important as choosing your doctor or attorney – this person will have an enormous impact on your financial future and security. There are good ones out there as well as bad ones. Here are some different things to think about that we believe will increase the chances of success in your search.
Avoid The Backslapping, Handshaking Advisor!
The first thing you need to do is find someone trustworthy. This is pretty obvious. Trust is a valuable attribute and is paramount in this business. However, the financial industry doesn’t have the best track record when it comes to trust. A day doesn’t go by without reading a story about some firm or broker doing something wrong and causing harm to unsuspecting clients (think Bernie Madoff). To avoid this danger, people tend to go with someone they know, usually a friend, because they “trust the person.” This makes sense – kind of. The relationship is more about the friendship and less about the skills and qualifications. The client and the advisor likely attended the same high school or college together, maybe play golf together or have families that regularly socialize together. Whatever the connection, this advisor is more concerned with wining and dining you. In other words, they tend to be all sizzle and no steak!
Checking the trust box does not guarantee success, unfortunately. While the “backslapper” may have good intentions, know that there are plenty of noble-minded losers in this business who simply don’t know what they are doing. The truth is that many of the “backslappers” are not cut out to manage other people’s money. They lack the overall knowledge and experience that are necessary for success. Just because you played on the same basketball team with someone 40 years ago should not be the core reason for working with a particular advisor. While trust is paramount, qualifications are equally as important.
My Advisor has an MBA, a PhD, a CFA, a CFP and a CPA – but no I.D.E.A.!
Once you find an advisor who is honorable and trustworthy, you also need to look at their qualifications. You want to see a history of success spread across many decades. Be leery of former doctors, engineers or retirees who are posing as “experts” in this space – because it takes a long time to become proficient in the industry. Young advisors, as smart as they probably are, aren’t so great either because they lack the experience that can only be developed through decades in the profession. At the end of the day, you see all types of characters in this business because the barriers to entry are so low. Read a couple of books, take an online class, pass a test or two and there you go – you’re a financial advisor!
Be sure to look at the advisor’s education, experience and certifications. This can be found on the advisor’s Form ADV – a uniform form that is used by investment advisors to register with the Securities and Exchange Commission (SEC) or with the state securities authorities. Experience should be scrutinized thoroughly. A lot of times you see a new broker or advisor posing as an expert when their background does not support it. Further, you want to be sure that your advisor has a history of acting in the best interest of their clients. Using the FINRA Brokercheck, you can discover if the advisor in question has violated any securities laws or has received any complaints.
The preferred credentials are the CFA (Chartered Financial Analyst) and CFP (Certified Financial Planner) designations for investing expertise and planning expertise, respectively. It is important to know that professional designations do not ensure success, however. As President Calvin Coolidge once said “the world is full of educated derelicts!” In other words, how many times have you seen the smartest kid in the class struggling to tie his own shoe? In this profession, value the professional who not only has the experience and designations but also has the sense to manage money the right way. Essentially, you’re looking for the advisor that has the rare combination of experience, professional designations, trustworthiness, and a history of success – this is difficult to find, but it is worth the search.
Thanks for reading Part 1 of our “Choosing a Financial Advisor” series. In the next update, we’ll touch on asking for references, evaluating an advisor’s process and plan, and making sure there is an alignment of investment philosophies. Check back soon!