Financial Adviser: How to find one in the "Wild West" world of Wall Street

One of the most important life choices you can make is selecting a financial adviser.  A good adviser can make the difference between a comfortable retirement and becoming one of the elderly poor.  Lately, the news has been full of stories about unsavory financial advisers losing their client’s life savings. Access and control of other people’s money can prove to be too tempting for greedy people.  So how can select a good adviser to protect and grow your nest egg? 

•       Qualifications

Unfortunately, the financial management field is somewhat of a “wild west”.  Anyone can call themselves a financial adviser or planner.  While an adviser really has no defined parameters, there is a basic expectation that a planner will help you prepare a budget, and design a retirement and estate plan.  They may boast a variety of credentials, or none at all.   As a minimum, ensure they have the CFP designation (Certified Financial Planner) or some finance related designation.  People with this qualification are licenced and regulated, require specific training, partake in continuing education and are expected to adhere to a code of ethics.  You can also verify their and their company’s qualifications and review complaints or legal action against them by checking the national registrar’s database.  Ensure you have a fiduciary agreement with your adviser.  This requires them to act in your best interests at all times.  Some planners adhere to the sustainability standard, which is non-fiduciary and requires providers to only ensure that an investment is suitable for you but not necessarily ideal or in your best interests.  Membership with the National Association of Personal Financial Advisors (NAPFA) sets higher standards than CFP.  Members must pledge to only act in their client’s interests and can only charge fee for service.

Financial planners may offer advice on structuring your personal finances in a manner to minimize your income taxes, but they may not necessarily be accountants  Similarly accountants will often provide advice on organizing your expense to minimize your tax payments, but might not be considered a financial planner or be registered as a CFP.

Stock brokers buy and sell shares on your behalf.  They may offers guidance on which stocks to buy, sell or hold and in this manner may be considered a financial adviser, but not necessarily a planner and may not hold a CFP certification.

Banks often provide financial planning services, but typically will encourage you to purchase the bank’s own mutual funds which will pay the banker a better commission and may not necessarily be in your best interest.  Banks do offer the convenience of providing a one stop shop for all financial services which is convenient for some people.

Insurance companies are venturing into financial planning services.  I would approach this with caution since they will want to promote their expensive whole life policies as an “investment”, which is not in anyone’s best interest but provides the most profit to the insurance company.

2. Payment

Financial advisers are typically paid either by commision, fee for service or a flat annual fee.

Try to always avoid commissioned salesmen. Different investment funds pay varying amounts in commissions, so these advisers will typically recommend you invest in funds that pay more lucrative commissions rather than focusing on what is best for you. Paying fees may be hard to swallow, but if your planner’s advice is based upon his best research and opinions, it is worth paying since you likely do not have the time or expertise to do this leg-work yourself.  If you intend to make frequent trades, then a flat annual fee may save you money, but if you plan to buy and hold, then fee for service may be more appropriate.

3. Due Diligence

As with any major purchase, your own background research could pay large dividends.  Check out the company’s history.  How long have they been in business?  What has been their historical rate of return?  What is your personal advisor’s educational background?  How experienced are they?  Check references from other clients or get recommendations from trusted friends who are pleased with their current adviser.  Many people think they will be safer utilizing the services of large investment firms or banks provides a higher level of security, but  sometimes even the big “reputable” firms betray their client’s trust. Bernie Maddoff and Goldman Sachs where some of the biggest investment firms around, yet greed led them to betray their clients.  Recently TD bank was fined for forcing its advisers to recommend their own high commision mutual funds regardless client suitability.  Some boutique firms require high minimum deposits so are not suited for beginning investors.  There is no guarantee these elite groups provide higher returns than their competitors.  All firms that boast of high past returns will note in the fine print that past returns are no guarantee of future success.

Once you have found your adviser, ensure they understand your goals.  Are you saving for retirement many decades away or do you have shorter term goals like saving for college or the down payment on a home?  The time frame of your goals will determine the amount of risk you can take in choosing your investments.  Your adviser should cater your risk profile to your goals rather than adhering to his own biases.

When choosing a financial adviser, take your time and do your research.  Most people will do more research buying a new television than they spend investigating the person they are trusting with their life savings

Written by:
Alex Lopez
Posted on:
July 25, 2017