How can I determine if a Financial Advisor is a trustworthy fiduciary?
I am in my forties and I haven't paid serious attention to my family's financial future until we bought our dream home several months ago. I've discovered that I need proper guidance. I am in search of a trustworthy advisor who can make logical decisions about my finances. Most importantly, someone who will work in my own interest to manage my debt strategically. I understand the limitations of seeking financial advice from friends and family. I have also had negative experience with financial advisors I've worked with in the past. How can I determine if a Financial Advisor is a trustworthy fiduciary?
I’ll try to shorten this up a bit. 3 types of advisors:
- Broker - Derives compensation solely from commissions on products sold. Not a Fiduciary. Adheres to the suitability standard only.
- Fee-Based Advisor - Derives compensation from BOTH commissions and fees for ongoing investment management, advice, planning. Adheres to the suitability standard when selling products and the fiduciary standard when providing advice.
- Fee-Only Registered Investment Advisor - Derives compensation from fees for ongoing investment management, advice, planning. Required by law to act in the client’s best interest 100% of the time as a fiduciary.
How will you know the difference? Simple, if an advisor has an affiliation with a Broker Dealer (check the disclosure on their website) they do not act in a fiduciary capacity 100% of the time. Obvious background checks such as being a CFP®, checking FINRA Broker Check and clearly understanding how they invest are also important.
The financial services industry does a very poor job of differentiating roles. Many "advisors" are not really advisors. The advisory world is full of salespeople and financial planners biased by products and commissioned sales. Investors are challenged to find highly skilled, unbiased investment advice. If an advisor is truly a fiduciary, they will put it in writing. Here are a few questions you should always ask:
1. What are my choices? You can work with advisors with many different backgrounds. Large brokerage firms, banks, independent advisory firms, etc. Working with an independent advisor may be a good choice for you. They are generally affiliated with many different firms to assist with complex needs and aren't dependent on a one size fits all mentality. If the independent firm is an RIA, they must fully disclose all of their compensation and typically are fee-based only. This means they are sitting on the same side of the table with you. Their compensation is directly tied to your success.
2. What are your credentials? The financial services industry has more designations than a bar does beer. Just kidding, but you know what I mean. The advisor's professional designations can tell you a great deal about his/her education and areas of expertise. The CFA designation is considered the gold standard of investment management. CFAs must pass 3 exams, each of which demands a minimu of 250 hours of stucy and includes corporate finance and financial statement analysis. The CFP is a planning designation requiring a completion of financial planning coursework and passing a 10-hour exam covering a variety of topics. If your advisor just sat through a weekend seminar and received a designation, you may want to question their commitment to their profession.
3. How is the advisor compensated? Knowing how your advisor is compensated can tell you a great deal about their objectivity. If they are receiving high commissions on certain products, they may have a bias to push these products onto you instead of offering a lower cost option. Remember, commissioned sales people are not required to serve in your best interest like fiduciaries. They are held to a lower, suitability standard.
4. How do you approach investing? Many advisors will simply allocate your assets and ride the ups and downs of the market. While this buy and hold strategy may work for some people, it's not for everyone. Ask your advisor about their investment strategy and what makes them qualified to manage investment strategies. Just because they put on a suit and read the Wall Street Journal doesn't make them qualified to manage money.
5. Where is your money held? Most independent advisors use a third party custodian to hold and report on client assets. We use Schwab, but there are many other great custodians. If your advisor is using a company you never heard of to hold your money, you should ask questions.
I took a look at the answers you have received and they are all good advice. I would add this: Go to three or four of the wealthiest, most financially-secure people you know and ask them who they use as their advisor. As advisors our business grows, or ought to grow, on word-of-mouth and a good advisor has clients who will recommend them. If your friend is not able to offer an unqualified recommendation, that speaks volumes. Also, by using a word-of-mouth process you will likely get an advisor who has an incentive to do a good job for you -- because if he/she doesn't it will get back to your friend. This gives you an advantage you won't have if you try to find someone using conventional channels.
"Financial Advisor" can be used in several different job descriptions in our industry. It's unfortunate we haven't done a better job of distinguishing the differences. For example, an insurance agent who happens to also do "financial planning" may refer to themselves as a financial advisor. But in reality, they're a salesperson.
The key to finding a true fiduciary advisor is working with one that limits there conflicts of interest to the bare minimum. Meaning they don't SELL products, only their advice, and guidance through financial planning. These types of advisors are referred to as FEE-ONLY advisors. In the case of the insurance agent, he/she may be a great financial planner as well, however, they will always have a potential conflict of interest due to the fact they are able to sell insurance and receive a commission from it. In order to eliminate that conflict, a fiduciary advisor only "sells" their advice and would refer their client to a insurance provider they know and trust, but who offers no kickbacks or commissions as a result.
In addition, certifications such as the CFP (certified financial planner) requires continuing education for advisors who hold the designation. It's become an industry standard for advisors offering financial planning and advice.
A great resource for getting started on your search is to use the website Napfa.org. They provide a directory of fee-only financial advisors.
Best of luck,
I heard you loud and clear. That’s the fear—finding a trustworthy and knowledgeable advisor--for everyone, myself included. Just because I am a CFP®, it doesn’t mean I can do every aspect of financial life by myself. Even though I read the entire estate planning book from cover to cover when I was in my graduate school to get the MBA, I still need to find the estate planning attorney to do mine and my clients’ Will, Power of Attorney, etc. Before I obtained my EA (Enrolled Agent) license, I can’t file any tax return for my clients either.
The point is at some point of your life, you will need some professional guidance to coordinate your financial life with the maximum efficiency. Yes, you can google a question to get the answer(s) nowadays. Occasionally you may even get multiple and contradictory answers, but which one to believe? Having the CFP® on your side, you have a second set of ears and eyes to hear you and give you the direct answer you need, with some further explanations for your full understanding.
There’s no way to find the one that matches your needs without first interviewing some. Many of my colleagues give a free meeting for the first time; that’s where you can get some ideas: 1) How knowledgeable is the planner? 2) Does he/she hear my concerns, or he/she just likes to talk about himself/herself? 3) What credentials does he/she have? 4) Any follow-ups from the post meeting? Ideally you start with family/friends’ recommendations, but don’t limit yourself to the local. With the internet and many facetime apps, you can find the best and brightest CFP® anywhere in the country. Best!