Category Archives: How to Select Advisors

Investors Can’t Delegate This Decision

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You can delegate investment work, for example researching mutual funds, to financial advisors. You can also delegate the monitoring of investments and performance reporting to advisors. You can even let advisors make investment decisions for you. For example, they make asset allocation decisions and select money managers that will make day-to-day investment decisions.

However, there is one process and decision that you cannot delegate to advisors. You are solely responsible for the selection process you use to screen, evaluate, and select financial advisors. And, you have sole responsibility for the advisor selection decision. Once you have selected a financial advisor, then you can delegate the investment work. Continue reading →

How do Investors Tell the Difference Between Good and Bad Advisors?

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The immediate answer is you can’t, just like you can’t predict the future performance of the stock market. You invest in the market because you hope it goes up in value. However, you know the market is volatile and unpredictable so you diversify your investments to reduce your risk of large losses. The point is you don’t know short-term direction, but you hope the longer-term direction is up. Continue reading →

Do Financial Advisors Have Two Faces?

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In a recent article published in AARP’s magazine, Allan Roth provides excellent insight into the world of financial professionals and the conflicts of interest that test their ethics. Advisors fight daily battles that challenge them to do what is best for investors versus what is best for themselves and their firms.

Allan is a practicing financial professional in Colorado. You can visit his website at: DareToBeDull.com.

Financial Fiduciaries are Lower Risk

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Financial planners, financial advisors, investment advisors, and money managers are financial fiduciaries. That’s because they are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs) who work for RIAs. What does this mean to you, the investor?

Fiduciaries are held to the highest ethical standards in the financial services industry. They are required to put their clients’ financial interests ahead of their own. In other words, your financial interests come first.

Non-fiduciaries are held to a lower ethical standard called suitability. In a nutshell, a suitable investment means that an investment is appropriate for an investor’s willingness and ability to take on some level of risk. Here’s a good article that explains suitability in more detail.

If you’re looking for a new financial advisor or your first financial advisor, make sure you select an RIA or IAR and require them to acknowledge their fiduciary responsibilities in writing. Remember: it’s your money so the financial professional you hire should have the highest level of accountability back to you, the client!

How Good are Financial Advisor References?

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This question came in from an investor who lost more than $1 million because he believed the references of a shady financial advisor. Too bad he did not check with Watchdog before investing his assets.

FINANCIAL ADVISOR REFERENCES ARE WORTHLESS!

Why?

No advisor will give you a bad reference.

References are selected because they are willing to make positive comments about advisors.

References are coached to make the right comments. One reference said an advisor “was the best kept secret on Wall Street”. The advisor had a long history of selling low quality products that paid high commissions.

The reference could be anyone with a different last name – not even a client.

References may tell you the advisor averages a 20% rate of return. Testimonials are not track records. What are the odds this reference is telling the truth? Zero.

Do not select advisors based on the comments of references.

Don’t Financial Advisors Have to Tell the Truth?

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We get this question all of the time from investors who use the services of financial advisors.

Yes, advisors are supposed to tell the truth. However, less ethical advisors use three deceptive sales tactics to sell investment and insurance products.

Omission – What they don’t tell you. You have to ask the right questions.

Misrepresentation – What they tell you that is not true. You are supposed to know the difference.

Exaggeration – Used to describe their investment results and services.

Where are the regulators (FINRA, SEC, States) you ask? They have no control over what advisors say to you. It is your word against the advisors.

Investors have to learn to require documentation for the information they will rely on when they select financial advisors. All verbal information is a sales pitch. Verbal sales claims are worthless.

If the advisor won’t document the information you request – exclude the advisor from your search.

Have you ever asked an advisor to document his credentials, ethics, or business practices?

Why Financial Advisors Want You to Like Them

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I was conducting a seminar for retirees a while back and asked the attendees to show by raising their hands if they had a personal relationship with their financial advisors. I was shocked when approximately 80% raised their hands.

Then I ask how many conducted any type of background check to confirm the quality of their advisors before they followed their advice or bought their investment recommendations. I was shocked for the opposite reason – approximately 15% raised their hands.

Investors fail to recognize advisors want to be liked. In fact, Wall Street hires people for their personalities. Advisors know people trust people they like. Being a little cynical, when investors like advisors, advisors can use trust to sell investors the products that make them the most money.

Another way a personal relationship works for the advisor is investors will tolerate bad performance a lot longer from someone they like than they will from someone they don’t like.

A third way is investors may be reluctant to terminate the services of an advisor they consider to be a friend. They do not want to disrupt the relationship or lose a golf partner.

You have heard the adage, if you want a friend, get a dog. The investment of your assets should be based on an objective, business-like relationship. You will have more money later if you have a business relationship with your advisor.

“Real” Financial Advisor or Sales Representative?

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Several investors have asked me for easy ways to determine if the professionals advising them on their investments are “real” financial advisors or sales representatives masquerading as advisors.

These investors have a valid concern. Sales representatives frequently market themselves as advisors because they know investors do not want salesmen investing their assets. If they told the truth about their actual role (selling investment products) they could lose the sale.

Following are three easy ways to recognize the type of person advising you on your investments.

First, “real” advisors are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs). If your advisor is not an RIA or IAR you are following the advice of a sales rep.

Second, “real” advisors are willing to acknowledge they are financial fiduciaries. This is the highest ethical standard in the financial service industry. If your advisor is not willing to provide this acknowledgement in writing you are following the advice of a sales rep.

Third, “real” advisors are compensated with fees for their knowledge, time, and services. If your advisor’s only method of compensation is commission, you are following the advice of a sales rep.

How to Choose the Right Adviser?

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When it comes to their money investors must thoroughly investigate the adviser’s credentials; whether the adviser is held to a fiduciary standard (not just a suitability standard); and whether there are any material conflicts of interest that would exist with the investor/adviser relationship.

There are many investment credentials out there and sorting through them can be overwhelming. The letters after an adviser’s name are an important gauge of how much training he has actually received. Some certifications require very little study or work experience and can be attained rather easily while other designations require far more rigorous study and examinations to earn. It is important that investors get to know the letters behind the name of the person they are about to hire because the holders of more prestigious designations have demonstrated a commitment to become better at their craft and have shown a strong desire to maintain a higher level of integrity.

Just as important to understand is that not all investment professionals are held to a fiduciary standard. Be very wary of a broker who calls himself an investment adviser as a broker is generally not held to a fiduciary obligation (only a suitability standard which is extremely subjective). A fiduciary standard is a legal duty that requires advisers to put a client’s interests ahead of their own at all times and to fully disclose their conflicts of interest.

A conflict of interest exists when an adviser’s interest competes with his duty to his clients. Such a conflict is material when it has the potential to dramatically affect the result. The fact that a broker receives commissions if a client implements a particular recommendation is a material conflict of interest that should be weighed considerably before an investor does business with any broker.

Brokers versus Advisers

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Many investors are confused about the term investment advice and the different types of professionals who can provide it. Most investors do not understand the differences between investment adviser representatives or brokers calling themselves financial advisers; and the standard of care they think they are receiving from each.

Fee only investment advisers are legally obligated to act in the best interests of their client (i.e. act as a fiduciary). In contrast, brokers who call themselves financial advisers facilitate securities purchases and sales for their clients, usually for a commission, and are primarily governed by FINRA, which (and this is key) requires that investment recommendations they make to their clients be suitable for that particular client. In broker/client relationship, filled with all sorts of conflicts of interests, suitability is an extremely blurry standard at best.

A report by The RAND Institute for Civil Justice in 2008 found that 63% of investors believe registered representatives are required to act in the best interests of their client (they aren’t), and 70% believe that registered representatives must disclose any conflicts of interest (generally, they don’t)… [TD Ameritrade White Paper].

Due to the influence of special interest, Congress has not taken the initiative to clear up the confusion. Unfortunately for investors, confusing the two can have entirely unintended consequences. A clear line needs to be drawn between them so investors can make more informed decisions. There needs to be a clear distinction between who is a fiduciary and who is a salesperson. Anything less is irresponsible and unacceptable.