Broker Check

Financial Advisor Selection – The No B.S. Guide

| March 12, 2015
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You’ve probably heard of or read about studies where a group of people – hypothetically, drivers – are asked to rate themselves against their fellow drivers.  Inevitably, virtually all respondents rate themselves as being ‘above average’ when compared to other people on the road.  Not only is this absurd to me after having driven the whopping 2 miles to my office this morning, but it’s also mathematically impossible!  I often hear people talking about a recent medical specialist visit or a surgical procedure that they’ve had, and they often say ‘I went to Dr. X, you know, he’s the top _______ specialist in the country/state/etc. He’s the best’.  Physicians are no different than any other people within a profession. I’m quite confident that some are terrible at what they do, the overwhelming majority are quite competent, and only a select few can ACTUALLY be ‘the best’ in their field.  This just makes sense when you think about it, but most people just assume that their physician is at the Top Gun (one of the best movies ever, last time I checked) level of their profession.  These two examples relate back to a phenomenon called ‘illusory superiority’, which is a cognitive (thinking) error where someone believes that they are better or above average in a given arena.  Sometimes it’s true, more often it is not. 

I’ve been providing financial planning and money management services for over 15 years now and I’d estimate that I’ve read approximately 1,452 articles written on the topic of ‘how to choose a financial advisor’.  A few of these articles approach ‘good’, but most are just fluffy rubbish meant to fill a magazine or website page to sell advertising.  These articles are repetitive, over-done, they over-generalize, and never really get to the actual point.  If I could diagram my version of the proper process of selecting a financial advisor, it would be the shape of an upside down cone (small end up) that immediately weeds out the majority of all candidates to increase t chances of a successful search.  Unfortunately, the cone is too often right side up for people, which can lead to hiring the wrong professional.  Making a poor selection for your financial advisor can ultimately lead to disappointment, lost money, and sometimes, lawsuits.    It doesn’t need to be this way and the fix is actually quite simple.

Why is it so difficult to find a competent financial advisor?  Here are a few reasons:

·       There are a ton of people out there who refer to themselves as ‘financial advisors’.  I don’t know how many, and I’m too lazy to figure it out. After all, this is a blog entry, not my PHD thesis.  That said, there are no laws governing the use of the title ‘financial advisor’ and so it seems that every Tom, Dick, and Harry (insurance agents, attorneys, stock brokers, sports agents) has chosen to slap the title on their business card for credibility-building purposes.

·       There are well over 100 professional credentials available to those in my industry.  In my opinion, many of them are worthless and bring little actual value to the table for clients.  Most of these designations are simply for show, or window dressing so to speak, certainly if the advisor isn’t using the skills that the designation provided.  I often see advisor profiles that include 5, 6, or more designations after someone’s name.  Looks good, but what does it mean?  More on this to come.

·       Let’s face it, many of the topics being discussed between financial professionals and their clients are quite complex and at times it’s almost impossible for the ‘public’ to decipher accurate and inaccurate information.

·       There are multiple compensation structures for an advisor including: fee only, fee-based, commissions, etc.  How would ever you know what’s best for you?

The factors above are not an exhaustive list, but suffice it to say that they create an environment where consumers are confused and don’t know how to make a decision.  Not to worry.  Just read any of the numerous online articles out there about the topic of ‘choosing a financial advisor’ and you should be A-O.K right?  Not so much.  These articles make suggestions like:

·       Ask the advisor about their experience and credentials.

·       Ask the advisor if they’re a fiduciary.

·       Ask the advisor how they’re paid.

·       Ask the advisor about their typical client.

·       Ask the advisor about their past investment performance.

·       Ask the advisor about any potential conflicts of interest that they may have.

·       Etc. Etc.

These articles seem to be giving you, the consumer, the insider’s view, the keys to the castle, the silver bullet questions that will root out any and all unworthy advisors and point you to the promised land of working with ‘the best of the best’.  What a public service!  Thank you Yahoo! Finance (amongst others) for looking out for me and my well-being.  Wait a minute.  Is there a problem with these articles?  You bet.  Who are you being told to ask all of these questions?  THE ADVISOR!!!!  Quick pop quiz: do you really think you’re going to ‘out’ an incompetent advisor when talking to them about their business, in their office, while asking questions about topics that you don’t understand in the first place?  A) yes   or   B) no.  You get my point. 

This all sets up an environment where consumers are left confused and looking for answers.  They don’t have any objective way (seemingly) of discerning the true professionals from the pack.  Left with these circumstances, they tend to (in general) do the only thing they can do: assume that the “competence playing field”, so to speak, is even amongst financial advisors and they run to the nearest friend or family member for a referral.  Here is just one permutation of a general client conversation that I’ve had dozens of times over the years:

Me:  Hello new prospective client who’s in my office for the first time.  Please tell me about your current advisory relationship and why you’re here……

Client:  I’ve been with my advisor for years.  He’s a great guy and we get along very well. That said, I’m not happy because of his investment process, my returns, risk level, communication or lack thereof, etc. etc.  I’m not happy so I’m looking for a new advisor.

Me:  How’d you meet this advisor?

Client:  My brother-in-law referred him.

Me:  Oh, that’s nice.  Tell me about your brother-in-law.

Client:  He’s an idiot, I’ve never liked him, he has a terrible personality, and I can’t believe my sister married him in the first place, etc.

Me:  Brutal.  What does he do for work?

Client:  He sells insulation to home builders and knows nothing about finance.

You can laugh, but I’ve been part of this discussion way too many times.  I’ve always cynically referred to my business as a ‘great guy’ (feel free to insert gal if you please) business.  For every competent, knowledgeable, and experienced advisor out there you’ll find and equal number (probably more actually) of incompetent and/or inexperienced ‘great guy’ advisors who are out every night of the week with clients at steak dinners and Yankees games.  They have infectious personalities and that’s how they’ve built their business.  The ‘great guy, Yankees tickets’ business model works quite well when the markets scream upwards, but what happens when the pool gets drained?  You find out who’s wearing a proverbial bathing suit!  Unfortunately, most people find this out only after the pool is drained and they’re looking at non-optimal results on a statement or realizing that they can’t retire when they thought they could or should.

So how should consumers approach this issue?  I mentioned earlier that a diagram of the advisor selection process should look like an upside down funnel that immediately eliminates most all candidates from the get-go.  Maybe I’m off-base, but I’m going to go out on a limb here and create a short, non-exhaustive list of must have qualities that I assume consumers are looking for in a financial advisor.  Can we all agree that consumers are looking for an advisor who is:

·       Experienced

·       Smart

·       Verifiably serious about and committed to their trade

·       Well credentialed and at the top of their field

I’m assuming that the answer is ‘yes’.  Who would argue with any of these qualities?  Please note that ‘great guy’ didn’t make the list, at least not at this point of the search process.    Here’s how the upside down funnel works……… screen for the qualities above first, AND THEN, seek out a ‘great guy’ amongst your list of remaining candidates.  How do you apply the initial screening to capture the qualities listed above?  It’s actually very simple.  Let’s go through the process……..

1)     Screen for credentials:  Which credentials?  In my opinion, there are two that really count.  If you’re looking for a person to create a high quality, comprehensive financial plan, you should hiring someone with the CFP® (CERTIFIED FINANCIAL PLANNER™ practitioner) certification.  These professionals have put in years of professional practice and study to have earned this designation.  They have also met stringent experience and ethical requirements and have passed a rigorous 2 day exam to earn their mark.  Within the world of financial planning this is typically viewed as the crème de la crème of credentials.  Are there financial planners out there who are competent and do not have this credential?  Sure.  But how would you know?  Why mess around? 

If you are looking for portfolio management advice you should apply a screen for the CFA Charter (Chartered Financial Analyst).  Those with this designation have met experience and ethical requirements and have undergone years of study to attain this designation.  This designation represents a deep knowledge of security valuation and portfolio management concepts.  If you’re paying someone to manage your money, wouldn’t you expect them to have this level of expertise?  The CFA Charter is globally recognized as the gold standard in investment management designations.  Again, when hiring someone to manage your money, why mess around or take chances?

This initial credential screen is the only objective and verifiable system that I can think of to ensure knowledge, commitment, experience, and an emphasis on ethical behavior.  If there are any doubts about this initial screen, feel free to Google any number of search terms relating the CFP® and/or the CFA. You’ll see what I’m talking about.  Ask your CPA about these designations and why they’re important to have vs. not have.  Ask your friend who works for a mutual fund company or private equity firm.  Do these designations guarantee you success?  Absolutely not.  Do they start you off in the right direction and give you a higher likelihood of success?  Absolutely.

2)     Interview Candidates: Once this initial screening is done you’ll be left with a short list of professionals to interview.  Now you can be confident that the people that you’re speaking to are smart, committed to their profession, and have demonstrated aptitude in their given fields.  In these interviews you can ask all of the classic suggested questions about fees, investment philosophy, etc.

3)     Go to FINRA.ORG:  Visit and use the ‘BrokerCheck’ function to see if the people you’re interviewing have had any regulatory issues.  Running one of these reports will give you information on client disputes, fraud, or criminal charges.  It’s all in the report, please look before leaping.

4)     Search for the “Greatest Guy”:  Now that you’ve found competent people who are not criminals, who makes you feel the most comfortable?  Who tells the best jokes and stories?  Who also grew up in Jersey or loves to play golf?  Who takes you to the Yankees game?  Everyone has different criteria for what makes them feel comfortable.  Now’s the time to select someone that you actually want to work with.  To some consumers this step is very important, to others, they are only looking for professional competence and could care less.

In my opinion, the process outlined can help ensure that you find the right person for you.  Finding an advisor who is a ‘great guy/gal’ that you get along with is important, but when that is used as your primary criteria, you’re asking for trouble as your judgment can easily become clouded.  I will now perform a well-above-average dismount from my soapbox.

 By: Andrew Gonski


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques and strategies discussed will yield positive outcomes.

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