How can I determine if a Financial Advisor is a trustworthy fiduciary?

Choosing an Advisor
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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.

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