Finding A Financial Advisor Even Your Mom Could Trust
You’ve come to the conclusion that you need the help of a financial advisor. Multiple friends have given you “their guys” name. You’re confused and overwhelmed. You don’t want to make the wrong choice and you’re worried that you may inadvertently hire the next Bernie Madoff.
Sound familiar? That’s not surprising at all. For most people speaking about their finances is highly personal. Many people find it more comfortable to talk about their sex life than their financial life! The financial services world evolved from an industry where selling was – and in many cases still is – the primary function. Folks in the industry are trained on how to land you as a client. You are starting off with the proverbial “two strikes against you” and you need something to tip the scales in your favor. Using the approach outlined below, you will be able to tip the scale in your favor. It will allow you to screen potential financial advisors quickly and efficiently. It will also greatly increase the probability that you will select an advisor that is a good fit for you. You need to answer four questions in the selection process, they are:
How does the advisor get paid?
Some might think this a strange place to begin. I disagree. While we would all like to think of ourselves as totally altruistic, the reality is that we are normally driven by a set of goals or metrics. Your financial advisor will be compensated. His/her livelihood depends on this. As a result HOW they are compensated will be a huge driver of WHAT they sell you. And yes, make no mistake about it, your financial advisor will be selling you – selling you that he/she can deliver you the most value via the products and services that he/she provides.
You want to choose an advisor that is paid only by you. Your advisor should not receive fees, commissions, or “trails” from any external entity. You are hiring them and you should be paying them directly. Any indirect compensation method has the potential to introduce a conflict of interest. Advisors that are paid by you alone are known as “fee only” advisors. Ask them:
“Are you a fee only advisor?”
If they will not profess/confess to being a fee only advisor, proceed with caution as there are potential conflicts of interest.
What is the advisor’s legal obligation to you?
When you finally do agree to work with an advisor, there will be some paperwork that you will be required to sign. Before signing these contracts – and yes the paperwork often IS a contract – you would be well served to understand the advisor’s obligation to you.
The answer you want to hear is that they are legally required to act in your best interest at ALL times. In fact, you can actually ask them:
“Are you legally required to act in my best interest at ALL times and are you willing to sign an agreement to that effect?”
Proceed with caution if they are unwilling to sign such an agreement.
Does the advisor know what they are doing?
There are two key dimensions to this particular question. The first is to ensure that the potential advisor has the formal training necessary to provide you with advice. While there is no “guarantee” with any set of credentials, advisors having the “Certified Financial Planner” or CFP designation are normally the safest bet. To obtain the CFP advisors need to complete significant course work, pass a rigorous examination, and obtain three years of full time work experience in the financial services. Ask them:
Have you fulfilled the requirements to become a Certified Financial Planner?
The second dimension focuses on their practical experience. While there are a number of ways to assess experience, my litmus test focuses on the “physician heal thyself” test. Any advisor you select should be able to demonstrate that he/she has been able to implement a solid financial plan for themselves. Ask them:
Do you have a personal financial plan in place that you can share with me?
If they have not personally, effectively implemented the approaches they are proposing for you, proceed with caution.
Do you trust the advisor?
We now move from the quantitative to the qualitative. Ultimately a financial advisor is only worth hiring if you are willing to adopt and implement follow his/her advice. Your adoption and implementation of that advice will be strongly biased by the trust you have in that advisor. While there is no perfect question to ask in this instance, I think there is one pretty good surrogate:
Would I trust them with my mother’s money?
When you put the trust question in the form of the impact it would have on someone that you care for deeply it often allows you to expose your innermost feelings.
Even if all of the qualitative factors from the first three questions seem positive, the answer to this fourth question is often the most critical. The mind is an amazing thing and has a way of “knowing” what is right and what is wrong. If you do not feel comfortable with the advisor, proceed with caution.
So there you have it. Fours simple questions that you need to answer as you select a financial advisor. If you get the right answers to these questions you will end up with an advisor that is paid only by you, is legally obligated to work only in your best interests, has a wealth of experience, and is someone who you would trust to take care of your mom. In my mind that’s a pretty solid approach to take when hiring someone to assist you – or your mom’s – with your financial wellbeing!