How to vet a financial advisor

“Tell any new advisor that you will only invest in securities that he or she personally has money in. Then be prepared to look them in the eye and ask for proof,” said Fred Wollman, CFP®, MPAS®, AIF®, founder of Wollman Wealth Designs. “You want to see the statements with their investments. Ask them to show you their financial plan. You want to see their succession plan, buy-sell agreement.”

Investors need to thoroughly vet prospective advisors, and that starts with asking the right questions. “Advisors Magazine” recently spoke to several wealth managers about how new clients should approach potential advisors and which questions they should be prepared to ask.

“The consumer may view this as similar to a resume and consider themselves as the potential employer,” said Tiffany Bergland Ballard, CFP®, AIF, president of Bergland Wealth Management, Inc. “What questions would you have before hiring this individual? A great list of questions would bring about an advisor’s responses that reveal the person’s character as actions speak louder than words.”

Financial literacy remains low across the United States. In fact, only five states – Utah, Alabama, Missouri, Tennessee, and Virginia – require a financial literacy class in high school. Outside of those five states, only 8.6 percent of high school students nationwide take financial literacy, according to a study by the non-profit Next Gen Personal Finance. And adults do not fare much better considering that the U.S. placed 14th world-wide in FINRA’s last financial literacy survey, conducted every three years. Weak financial literacy only makes life easier for those unscrupulous advisors, and more difficult for legit professional practitioners.

“The public does not have a base to determine the quality of the person in front of them seeking to gain their trust,” said Nancy J. LaPointe, MBA, CFP®, ChFC®, CLU®, RICP®, a financial planner, wealth manager, investment adviser representative for Navigate Financial. LaPointe added that the Certified Financial Planner (CFP®) designation does require holders to act as a fiduciary – meaning clients’ best interests come before commissions or other bottom-line considerations – but these sorts of industry ins and outs remain unclear to the average consumer.

“The CFP® designation, the ongoing continuing education, and monitoring of the ethical standards of a CFP® is not as well-known or reinforced by regulatory organizations like the Securities and Exchange Commission or FINRA,” she said. “I tell folks anyone can call themselves a financial planner, but not just anyone can call themselves a doctor or a lawyer.”

The SEC is mulling new regulations that might restrict who could present themselves as what sort of advisor but has not released any final details as of this writing. So, if anyone can call themselves a fiduciary or a financial planner, then simply asking is unlikely to get a prospective investor anywhere. Instead, potential clients should hone in on specific issues such as how an advisor gets paid.

“Ask what their relationship is with a broker-dealer and are there incentives to use or engage in services or products,” LaPointe said. “Ask if they manage investments directly and if so, who is the custodian of the funds.”

Financial qualifications are a good place to start for investors who want to research which advisors to look out for. A qualification is no guarantee of a reliable advisor, but the time and energy required to earn a CFP® or a ChFC® designation is significant and can mark somebody as a serious professional. Many investors get wrapped up in the branding surrounding a popular television or online personality without considering who that person is or what qualifies them to manage money. Stepping back and looking at an advisors background can help investors sidestep being suckered.

“I am biased toward professional financial qualifications. There are a lot of ‘asset-gathers’ roaming around, that are not fiduciaries, and the investing public is unaware of the distinction,” said CPA John H. Bishop, president of Wellington Capital Advisors. “Many investors are attracted to the personalities attached to a big-brand name sales folks, not realizing those individuals are beholden to the sales salary and incentives of the employer.”

LaPointe echoed Bishop and noted that the organizations that grant professional qualifications make demands on holders’ behavior.

“Ask what their qualifications are and then verify they are in good standing with national organizations such as the CFP Board, College of Financial Planning, and the American College,” she said.

Another way to find the right advisor is for an investor to dig through their personal connections.

“Skip the Google search and marketing dinner seminars when seeking a financial planner. Get an introduction from your CPA, attorney, or someone you know well that has a long-term relationship with an advisor,” Wollman said. “You have a much better chance that advisor will act as a ‘real fiduciary.’ This advisor not only wants your business but is anxious to maintain the relationship with the person making the introduction.”

Finding a real fiduciary can be difficult. Most advisors, in fact, have slightly definitions of what a fiduciary is. Investors know that they want a fiduciary advisor, but few can clearly define what that means.

“They can buy a ‘cat in a bag’ from a big name organization with a salesperson attached, or they can engage the services of a fiduciary to map the path forward,” Bishop said, adding that his firm acts as a fiduciary for clients. “We stick to the big picture, and don’t permit the client to get distracted by fear, greed, shiny bells, and whistles. We focus the client on fact-based investment decision-making.”

But maybe the easiest way to prove whether an advisor is a fiduciary is to simply ask them to lay their cards on the table and explain their personal portfolio. An advisor who gets antsy when asked to do that likely is not somebody an investor wants to entrust their money to, Bishop said.

“Any ethical advisor will be eating their own cooking. They need to be doing exactly what they are asking you to do,” he said. “Are they ‘walking the walk’ or merely talking to you about doing things they are not doing for themselves? That is called a hypocrite.”


Hiring a financial advisor?
5 questions to ask – and why you should ask them!

“Advisors Magazine” routinely asks financial advisors and wealth managers what questions a prospective investor should ask before committing to a relationship with a financial professional. Here are the top five we’ve heard over the past few years.

1. Who pays you? How do you make your money? Are any commissions or third-party payments involved whatsoever?

Investor tip: The purpose of this question is to determine whether you’re the one who is fully in control of the client-advisor relationship, or if there are competing financial interests in play. Make sure you know where your advisor’s revenue comes from, all of it.

2. Who is custodian over the funds?

Investor tip: Remember, your advisor should not be directly in control of your money. A third party custodian always should be involved.

3. What are your professional qualifications?

Investor tip: Again, qualifications alone can’t guarantee honesty, but they do require serious commitment to attain. Qualifications also can make advisors answerable to certain professional organizations, and clients should cross-check with those groups to make sure their advisor has had no serious issues regarding their conduct.

4. Are you a fiduciary and how do you define “fiduciary”?

Investor tip: Any waffling on this question is a red flag. An advisor should be able to clearly tell you whether they are a fiduciary and should define it in simple language.

5. What is your investment philosophy? How does it work in practice?

Investor tip: Make sure that your advisor’s philosophy toward investing (for example: high-risk, high-reward; heavy reliance on mutual funds, etc.) matches yours. The advisor you are talking to today might be honest, professional, and capable, but subscribes to an investment style at odds with yours, meaning it’s a poor fit all around.


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