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How To Find The Right Financial Advisor — Who’s Not A Crook

Most Americans don’t have a financial advisor. According to a 2016 Harris Poll, 62% are without one. And that’s a shame. Because, let’s face it, most folks don’t know how to plot their financial futures, and that’s dangerous for them.

The good news: Getting an advisor who is right for you, and also trustworthy, is not a Sisyphean task.

To listen to the conventional wisdom, advisors are a nest of vipers. In the wake of the 2008-09 financial crisis, a lot of people came to distrust advisors, who they blame for losing them money then. That was also when money-manager hucksters like Bernie Madoff and others like him were caught.

In a 2016 poll by the American Association of Individual Investors, 65% of respondents said that they don’t trust advisors, with just 2% saying they trust them “a lot,” and 15% “a little.”

Such misplaced suspicion – the vast bulk of financial advisors are honest – is an obvious impediment to getting decent financial advice. And you’re not going to get it from your brother-in-law, as nice a guy as he may be.

Making matters worse, Washington could be a help ensuring that the public is well-advised, but the federal government has fumbled on that score.

The Obama administration dawdled, until it was almost out of office, to propose that advisors must be fiduciaries for retirement plans – meaning they have your interests at heart, not their own. Some advisors already are fiduciaries. Most, however, are brokers, who don’t have a fiduciary mandate, so they can peddle their firms’ over-priced mutual funds, say, and too bad for you.

The Obama Department of Labor’s retirement-plan fiduciary rule was submitted in 2016, not enough time to take effect before a new team came to Washington. The Trump administration has suspended the rule’s implementation, and after Wall Street trade groups challenged the measure, the U.S. Court of Appeals for the Fifth Circuit overturned it. So the fiduciary rule is either dead or headed to the Supreme Court.

Meanwhile, the Securities and Exchange Commission, now under Republican control, has come up with its own rule that would require advisors to divulge possible conflicts of interest. Sounds good, though the definitions of what constitutes a conflict are a little mushy.

Better that that nothing, perhaps. Yet under the SEC plan, the onus remains on you to vet a potential advisor. What should you look for?

First, let’s consider what’s the least important qualification: stock-picking ability. Gauging advisors on their market track record isn’t worthwhile. Sure, there is a system to determine their stock selection prowess, called the Global Investment Performance Standards, or GIPS. With this, an advisory firm reports the returns of several model portfolios, using methods laid down by the Chartered Financial Analyst Institute. Some firms get third-party verification of how they performed, such as through accounting services.

Here’s the problem: Most advisors don’t use GIPS because it is time consuming and expensive. Besides, advisor clients have different needs, and a GIPS-approved cookie-cutter portfolio is of no use to them.

The better issues to look at when choosing an advisor are:

Can I get along with him? The chemistry issue is key, and best resolved by a face-to-face meeting. If the advisor is condescending or otherwise doesn’t answer your questions, don’t sign up.

How does she answer key questions about what to expect? Like how often can you meet? What types of clients do you work with – wealthy, middle-class, older, younger? What are the advisor’s credentials and experience? If the person is a certified financial planner, for instance, that means she has been through a long course and passed several tough exams. CFPs, who must be fiduciaries, can be checked at the CFP Board of Standards website.

How does he get paid? Recognize that there are two types of advisors: 1) fee-only types, who are fiduciaries and don’t sell you securities (using flat fees, hourly fees or 1% of your invested assets yearly), and 2) brokers, who often are not fiduciaries and get commissions for stuff they vend.

Is he or she a crook? You can check with the CFP board to see which of their members have been disciplined. Fee-only advisors, who work for companies called registered investments advisors, are under SEC regulation. You can look up their disciplinary history and other background data on Form ADV at the SEC’s disclosure website. The same goes for brokers, also known as registered reps, whose histories are on file with their regulator, the Financial Industry Regulatory Authority (FINRA), at a site called BrokerCheck.

In our next post, we’ll discuss what types of advisors are best for what kinds of clients.

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