Choosing A Financial Advisor

Do's and Don'ts for Selecting a Financial Advisor

In today's financial environment, many people will be looking for a new advisor. There is no simple set of questions to ask or guides to follow. Here we offer 10 suggestions -- the product of years of experience representing investors who are unhappy with their advisors (or worse).

In our line of work, we meet few "happy" investors. Nevertheless, we are confident they are out there. Here are some suggestions about how to become one.

1. An advisor should have an appropriate education and well-rounded experience. While a "finance" or business degree is not required, where a person went to school and what s/he studied is relevant. So is work experience. Beware of advisors who have not experienced at least two market cycles. It’s OK to ask for references.

2. An advisor should be more conservative than you are. Beware of any advisor who belittles your concerns about risk, or who encourages you to buy investments you don't fully understand.

3. An advisor should give you several "plans" or ideas IN WRITING from which to choose, and time to think about them. Beware the advisor who tries to push a single product, or who does not give you time to consider alternatives. And beware an advisor who won't put in writing what s/he tells you on the phone, or who says you have to decide now lest you miss an opportunity.

4. An advisor should tell you how s/he will be compensated, and what fees are associated with each transaction. Always remember - an investment account is like a bar of soap; every time you touch it, it gets smaller.

5. An advisor should either be part of an organization that has sufficient financial wherewithal to make good a mistake or worse. Advisors from small firms should carry "errors and omissions" insurance. Don't be afraid to ask. If the advisor appears offended by the question, or says "no", s/he is not conservative enough.

6. In general, a referral from another INDEPENDENT professional (e.g. a lawyer, or an accountant) is a good place to start. The most reliable referrals usually come with statements like "I've sent other clients to this person, and they've been happy", or "I've known this person professionally for 20 years". Beware of referrals by professionals of their friends and relatives; the referrals are not objective.

7. Conduct due diligence. Run a Google search; check the FINRA web site (FINRA.ORG) under "Broker-check". Ask for and check references. Ask for examples of what the advisor has done in the past for clients similarly-situated, and ask how that worked out. Be curious. If anything makes you uncomfortable, go elsewhere.

8. If you are not capable of or inclined to review periodic account statements, employ another professional to keep an eye on your advisor, even if you must pay for that service. Its like getting a second opinion before surgery - you need to do this.

9. Past performance is not an indicator of the future - but it can be an indicator of risk. Avoid managers and advisors who claim they consistently "out-perform" the market or their peers. It means they are taking more risk.

10. Don't "reach for yields". The markets don't always cooperate with your needs; be ready to spend less when returns/rates are low. And pay attention to tax consequences, but don't let the tax-man dictate how you invest; it’s a factor, but not the sole determinant.