CFA Society Minnesota encourages its members to contribute to Freezing Assets. This is piece written by one of them to help individuals identify a trustworthy investment advisor.
On October 23, 2016, 60 Minutes aired a story titled “Thrown for a Loss” that detailed how dozens of NFL players lost over $40 million in an investment brought to them by their financial advisor. These individuals invested in a risky entertainment and gambling complex built in Alabama. Mistakes were made that caused the losses. One of the biggest was also the first—the individual these NFL players hired to advise them. Catastrophe may have been avoided had more time been taken to vet their financial advisor.
The financial advisor you choose to work with is among life’s important decisions. I believe the vast majority of us are trustworthy; however, bad apples do exist. Unfortunately, the process of selecting an advisor is intimidating. Therefore, people make their decision based upon uninformed criteria such as:
- He/she goes to my church.
- I see their ads on TV or hear them on the radio.
- I’m related to him/her.
- He/she drives a nice car (or has another other status symbol), so he/she must be good at what they do.
The fact is none of the above offer insight into the person’s integrity, competence, or qualifications. A good financial advisor will tell you the questions you should be asking. If not, here’s a list to get you started.
- What is your wealth management process?
- What is your investment management process (the two are different)?
- How are you paid?/What are your fees?
- Do you earn incentives from the products you recommend to me?
- Do you have any business relationships with any outside financial firms?
The above questions can provide meaningful insight. The first two questions allow you to compare between multiple financial advisors. Their process should be disciplined, repeatable, and remove human emotion. The final three show transparency, or lack thereof. Watch how these questions are answered. The advisor should be comfortable describing fees. Every professional (doctor, lawyer, accountant) receives compensation for their services. Many investment products contain fees that aren’t prominent to the investor. If a financial advisor tells you there’s no cost, it’s a red flag.
The direct method of asking questions is effective. However, there are also indirect red flags to watch out for. Be aware for the person that sells past performance rather than a process. Also, many advisors offer seminars to the general public and/or to their clients. Unfortunately, the intent of these seminars is to sell you a product rather than provide education. That’s financial sales, not financial planning.
With the above in mind, it can still be a daunting task choosing among the 285,000 financial advisors in the United States (according to Reuters). To narrow that list, consider working with a CERTIFIED FINANCIAL PLANNER™ professional or Chartered Financial Analyst. Members of these professional organizations sign an annual ethics pledge. It states they will act with integrity, independency and objectivity, and put your interests first. Individuals who attained either designation completed a rigorous education and examination process they don’t want to jeopardize.
Finally, utilize tools to help you in this process. One such is BrokerCheck. It’s from FINRA (Financial Industry Regulatory Authority) and helps you research the professional backgrounds of brokers and brokerage firms, as well as investment advisor firms and advisors. Your attention should be placed on the disclosures section. Disclosures can be any customer complaints or arbitrations, regulatory actions, employment terminations, bankruptcy filings and any civil or criminal proceedings the individual was a part of.
Look how often the individual has switched firms. My personal opinion is that this is also a red flag. Reasons for departure are not given, so I would suggest asking. This industry heavily recruits, often paying the advisor to switch firms. Those who do that often are probably looking out for themselves rather than you.
The process of hiring a financial advisor should be completed with the same diligence as buying a home, car, or television. With the tools to perform the proper research and ask the right questions, you can find someone who puts you first.
Craig Popp, CFA is a Financial Advisor with Raymond James Financial Services, Inc. Member FINRA/SIPC located at 115 Litchfield Ave SE, Willmar, MN. Craig Popp can be contacted at firstname.lastname@example.org. Any opinions are those of Craig Popp and not necessarily those of RJFS or Raymond James. Expressions of opinion areas of this date and are subject to change without notice. Investing involves risk and investors may incur a profit or a loss. There is no strategy that ensures a profit or guarantees against a loss. Past performance is not a guarantee of future results.