How to Select the Best Financial Advisor

Selecting the best advisor is more difficult than you may think for three reasons:

• Every advisor claims to be a trustworthy financial expert
• Advisors do not have track records that document their past performance
• Advisors do not have mandatory disclosure requirements

It is up to you to gather the data you need to make an informed decision. The following Watchdog tools help you obtain information from advisors and produce reports that you can use to select the best advisor.

• Request for Information (General information)
• Advisor Scorecard (Comparison report)
• Fact Finders (Specific information: performance, risk, expense)

Selection Process

You need a process that puts you in control of critical information so you select the best advisor. The key elements of a process that you control are as follows:

• A way to gather the same information from multiple advisors
• Advisor responses must be written so you have a written record
• An easy way to compare the advisors’ responses
• A structured interview process that puts you in control of the agenda
• A way to validate advisor information, for example their compliance records
• A list of key criteria that are most important to you

Objectivity

Your selection decision must be based on complete objectivity for criteria that impact the competence and ethics of financial advisors.

High quality advisors prefer an objective process for two reasons:

• The process emphasizes information that matters: Education, experience, certifications, etc.
• They have nothing to hide

Low quality advisors prefer a subjective process for three reasons:

• The process creates maximum impact for their personalities and sales skills
• They have a lot to hide
• There is no written record of what they say to you

Beauty Contest

Selecting the best advisor is not a beauty contest. In other words, it does not matter how:

• Professional they may look
• Nice they might be
• Big their office might be
• Many lunches they buy
• Many claims they make in their sales pitches
• Big their company is (brand name or not)

You have to stay focused on the criteria that really matter.

Competence

How do you measure the competence of advisors who do not provide legitimate track records that document their past results? You focus on their sources of competence:

• Years of applicable experience
• Degrees from accredited colleges and universities
• Certifications from quality organizations: CFA®, CIMA®, CFP®, CPA/PFS®
• Memberships in quality associations: CFA Institute, IMCA, NAPFA, FPA, AICPA

Ethics

How do you measure the ethics of financial advisors? We recommend you evaluate the following characteristics.

• Clean Compliance for at least the past ten years
• Clean criminal records since they were adults
  • Yes, convicted criminals can obtain securities licenses as long as the crime was not securities related
• Advisors acknowledge they acting in a fiduciary capacity when they provide financial advice and services for fees
  • Fiduciary advisors are held to the highest ethical standards in the financial services industry.
  • All other advisors are held to much lower standards
• Advisor hold certifications and belong to associations that have ethical codes of conduct 

Business Practices

Advisors have to two types of business practices: practices that benefit you and practices that benefit them more than they do you.

The single biggest business practice that differentiates advisors is their methods of compensation. The best professionals are compensated with fees for their knowledge, advice, and services. Other professionals are compensated with commissions when they sell you investment and insurance products.

Other business practices include: 

• The amount of total expense you incur for the advisor’s advice, recommendations, and services
• The types and frequency of reports that describe your performance
• The accessibility of the advisor
• The frequency of meetings that may be face-to-face, telephone, or online
• The organization that will have physical possession of your assets
  • It should never be the advisor
  • It should be a brand name firm

Services

There are major differences between advisors who provide financial advice and services and advisors who recommend investment and insurance products. The former is a “real” advisor. The latter is a “sales representative” masquerading as an advisor.

At a minimum you want a documented response for the question "what ongoing services do I receive for the fees that are deducted from my assets?"

References

You should consider references a sales tactic. No advisor will knowingly provide a bad reference and many of the references have been coached to make positive comments about the advisors.

In addition, references are not a substitute for a legitimate performance track record or a check of the advisors’ compliance record at FINRA.org / Brokercheck.