Whether you live in Simi Valley, Malibu, or Woodland Hills; hiring the right financial advisor for you and your family can be an important and time consuming decision. We all wish there was a simple, sure fire way to know a person’s true character, morals, ethics, and intentions. Unfortunately, there isn’t. We have to rely on facts and gut instinct to guide us in our decisions. Here are 5 key areas you should focus on when researching and interviewing a financial planner.
1. Does the Financial Advisor have a Clean Record?
Perhaps the most obvious question? So, how can you look up this information? Go online to FINRA BrokerCheck®. You can get a detailed background report including all complaints and disciplinary histories on any financial professional.
2. Does the Financial Planner have any Advanced Degrees or Professional Designations?
Simply having advanced degrees and professional designations doesn’t make one planner better than the next. However, it usually signals one’s level of educational commitment and desire to be as competent as possible in one’s field of study. One of the major professional designations is the Certified Financial Planner™ professional. To become a CFP® professional, you must meet the 4 Es:
For more information, visit http://www.cfp.net. Ultimately, you want an advisor who is passionate, collaborative, and is continually learning and growing both as a person and a financial professional.
3. What about Experience?
Having experience gives financial advisors feedback and perspective on their financial planning and investment processes. The investment services world is constantly changing and lessons are always being learned as investment companies’ planners manage their clients’ financial investments. While I cannot recommend an exact number of year’s experience, I can tell you the CFP® certification requires 3 years of financial planning experience.
4. Is the Financial Advisor acting as a Broker or Advisor?
This is a VERY important distinction with some nuances. Is your money being managed by an investment company whose advisor is acting as a “fiduciary” or like a broker who acts upon the standard of “suitability”? Let’s discuss this important difference and what it could mean for you?
An advisor acting as a “fiduciary” simply means they are legally obligated to act in your best interest. Even the Certified Financial Planner™ Standards of Professional Conduct, “…require that all CFP® professionals who provide financial planning services will be held to the duty of a fiduciary…”.1 So, what does this mean in practice?
Let’s assume you meet with a financial advisor to review your financial investments. The investment company has narrowed their recommendations to two similarly suitable investment products. One will pay the advisor 8% in commissions and the other pays 1% in commissions. Which one do you think the advisor would prefer to sell you?
Under the “fiduciary” standard, the advisor would be legally obligated to choose investment products that are in your best interests, not what is best for the planner (making 8% instead of 1%). Aside from what their moral compass should be telling them, the planner would be legally obligated to recommend financial investments that are the appropriate for you regardless of commission bias. Now for brokers, here is where it gets interesting.
Brokers are not “fiduciaries”. Their standard is “suitability”. This means their investment recommendations have to be “appropriate”, but doesn’t necessarily have to be in your best interest or conflict-free. As in the above example, the investment company’s broker could propose the investment product paying 8%, even if it wasn’t in your best interest. Why?
Because the broker is only required to make a judgment as to what is suitable for the investor, based on his or her particular circumstances. For example, an aggressive stock portfolio might not be “suitable” for an older investor. Moreover, a bond portfolio might not be suitable for a young, aggressive investor. Note that the above definition doesn’t require that the broker act in your best interest – only that it is “suitable”. Below is how the SEC defines suitability:
When your broker recommends that you buy or sell a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your income and net worth, investment objectives, risk tolerance, and other security holdings 2.
In choosing the right investment company, you have a say in the type of working relationship you cultivate with your financial advisor. Having knowledge of the above potential conflicts of interest might save you some heartache down the road. As it was said in Indiana Jones and the Last Crusade, “you must choose, but choose wisely”.
5. Does the Financial Planner make an Investment in Independent Research?
Aside from propriety investment product sales and recommendation biases, does the financial planner utilize independent thinking? Is their asset allocation and financial planning strategy recommendations based purely on independent analysis or rendered slightly to accommodate a certain proprietary investment process? For example, a financial advisor working for an insurance company might implement more insurance based products into their overall financial planning philosophy. As the saying goes in economics, “incentives matter”. Be mindful of any potential conflicts of interest as even the slightest ones can add up over time potentially costing you money.
In conclusion, these are areas worth investigating when looking into hiring a financial advisor. Knowing the planner’s true compensation structure, background, and source of their financial planning advice and investment recommendations can be of great value. Should you have any questions, please feel free to reach me at (805) 558-8497 or by e-mail at: email@example.com.
Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.