A good advisor can be worth their weight in gold. They can be invaluable to a family or an individual.  The wrong advisor can be detrimental.

If you’re looking for someone to help you with the complexities of your financial life, I’ve laid out a few important things to keep in mind. These will help you narrow the field, if you will, and allow you to make an informed choice on who you will hire.

 

Fiduciary

Financial advisors come from 2 basic realms:

• Registered Investment Advisors (RIAs) and
• Registered Representatives, also known as brokers.

RIAs are legally bound to serve as fiduciaries. A fiduciary is a fancy term for someone who’s legally bound to put their clients’ interests first. They are a steward of someone else’s resources. Being a fiduciary is actually the highest standard of care you can have– think of attorneys, trustees of estates, and doctors as professional examples.

Brokers, on the other hand, are allowed to recommend products or services that are “suitable.” They may be suitable but they probably also pay the broker the highest fees and commissions.

Let me simply say this: Who would want to work with someone who is NOT legally bound to serve your best interest? That sounds like a way to get burned. Unfortunately, there are a lot of advisors who are not fiduciaries.

How do you find out? Ask them to give you a statement in writing. If they are not a fiduciary, then you’ll know they are not legally bound to do what’s best for you.

 

Incentives Are Everything

Be aware of conflicts of interest. There is no way to eliminate all conflicts of interest, but there is a way to reduce them and confirm if the person you’re sitting across the table with truly is after your best interest. An honest advisor will admit these conflicts and explain how they handle them when they do come up.

Simply ask: “How do you get paid?” You need to know exactly– in percentage terms and approximate dollar figure.

For example, most RIAs charge a percentage of a client’s account balance (usually around 1% per year). They are, therefore, incentivized to keep assets in those accounts for as long as possible. They stand to make more money by discouraging paying down mortgages or giving large sums to charity.

On the other hand, most brokers work off of commission. They charge you for each stock or fund you purchase and sell. Hence, they are incentivized to perform a lot of transactions, which decrease your overall returns due to the fees you pay. Not good. And they always seem to come up with a new stock to buy. When you think about it, they must think you are really stupid. If they knew what stock to buy, why wouldn’t they buy it themselves and go sit at the beach? Why would they tell you?

Some advisors charge an hourly rate, but then they are incentivized to take as long as possible on the task. See what I mean? It’s hard to escape conflicts of interest.

 

Independence

Finding someone who is independent is of the highest importance. Do they sell insurance along with their services? Do they only offer proprietary funds (funds that can only be accessed by clients of the firm)?

Leaning back on the fiduciary term, you want someone who is going to do what’s best for YOU. Independent firms can choose any type of fund and recommend you to the best insurance agents because they do not have any ties and receive no compensation for recommending those funds or people.

On the flip side, many advisors can only offer the funds of their firm. Well, what happens if their funds suck? Too bad, you’re stuck with it, and the firm makes tons of money off those fund fees. That doesn’t really sound like what’s best for you.

 

Humility

Some of the smartest people in the world work in finance. Everyone is very, very smart. Intelligence isn’t the problem. You need that and someone who has the heart of a teacher and is able to think with common sense. Don’t be impressed by someone merely because they are smart. The financial industry is full of smart people who lack common sense. Keep this phrase in mind: insecurity is another word for ego.

The ability and meekness to say “I don’t know” is a sign of good character.

Watch out for guarantees. Studies show investors are more trusting of advisors who make extreme, overconfident predictions. These investors were judging the advisor off of confidence rather than process. Confidence is not the same thing as being correct. The best an advisor can promise you is a high probability of meeting your goals. If an advisor promises 10%+ annual returns, thank him for his time and then never set foot in his office again.

 

Designations

Most professionals (accountants, attorneys, doctors) have to pursue years of additional schooling, pass rigorous exams and spend years in training in order to practice. How about a financial advisor? They just have to graduate high school.

Seriously, that’s all you need to call yourself a financial advisor. Therefore, you need to make sure the advisor has reputable designations to back up their experience – CFP® or CFA® (CERTIFIED FINANCIAL PLANNER™/Chartered Financial Analyst®). Both of these require college-level education, additional courses, a certain length of time in the industry, and the ability to pass very rigorous exams, along with ongoing education.

What the designation says more than anything is that “I’m committed to this craft.” You shouldn’t trust someone just because they are a CFA chartholder, but you should respect the work they had to put in to achieve it. In your mind, it’s a check in the box that should help you distinguish someone who is qualified to give you advice and passionate about his work versus someone who is just a good salesman. 

 

Coaching

The inspiration for this section came from a book by Ben Carlson called “A Wealth Of Common Sense.” Investment advisors usually pitch themselves as investment managers when really their job is to be managers of investors. Investing can become very emotional. The highs and lows of the market along with global events can be a lot to handle.

The media does a poor job of helping people be better managers of their wealth. It’s either doomsday or envy. A good advisor should be able to tell you the things you should pay attention to and the things you shouldn’t.

Here are some notable cues you should be able to pick out to determine if they are a good coach or not:

• They spend most of their time listening instead of talking
• They are able to explain things when you ask 
• They don’t  say, “Trust me, I’m the expert!”

Above all, an advisor works for you. You need to be the one making the decisions, and they should be teaching you how to make good ones in the future. If you get to the place where this isn’t happening, you need a new advisor. By following these guidelines, you’ll have a great chance of choosing someone who will be a benefit to your personal team.