If you've never had a financial advisor, or if it's been years since you last hired one, maybe there are a few things you don't know about the industry.
- Unless your financial advisor works exclusively for a registered investment advisory firm, he is not required to act in your best interests at all times. This means that, depending on the licences that the person has, they can give you "fiduciary" advice, but don't act in a fiduciary capacity when implementing such recommendations. In effect, they're legally authorized to put their own interests first, like selling you an insurance product that will give them"credits" for a lavish vacation but may pay you a lower interest rate or have higher expenses than others.
- A number of financial advisors are in the business of selling products (mutual funds, annuities, "managed portfolios", etc.), not advice. They have to disclose this it in their paperwork, but many investors miss this disclosure or don't necessarily understand what it means.
- Financial advisors often refer to themselves as "producers": Their job is to "produce" sales for their firms. To "hunt" for clients, as the article in the link clearly states. "Top Producers" are routinely given all-paid vacations and other benefits (for examples, simply Google "Financial Advisor Compensation Plan") Remember: The number of sales is not necessarily related to the quality of the advice given to clients, or how clients benefit from such advice, it may just be an indication of good salesmanship.
- It's easy to become a "top financial advisor". In some cases, you only pay a few hundred bucks and marketing firms will send you your flashy award along with the compliance verbatim to go with it (in 2009, a dog was named "Top Financial Advisor"). This practice is still very prevalent; so much that even the Securities and Exchange Commision (the regulatory body that oversees financial advisors) put out an Investor Alert to inform people of this
- To become a financial advisor (in many cases), you only need to have "high level contacts" and the ability to sell to them. Don't believe me? Look for the recruitment ads in sites like monster.com. Or this article.
- Want to know with more certainty if your advisor is a fiduciary to you at all times? Ask him to sign a Fiduciary Oath. You'll probably feel better if he agrees to sign it, and it should raise a big red flag if he doesn't.
- Very few advisors will admit that we're as clueless as you about what's going to happen tomorrow in the stock market. I'll write next week about why this is relevant.
- Many financial advisors will say or imply that their "research" department is able to "protect" you from the market or find "investment opportunities" for you. That is total BS (see #7 above).
- As a financial advisor, it's not hard to get a bunch of designations after your name. Make sure you understand what those designations/credentials mean for you (here's a website that tries to unscramble them). Designations like CFP® or CPA/PFS have more stringent requirements to be obtained and have strict continuing education requirements.
- If the only thing your advisor does for you is setting a portfolio and charge you may be overpaying. A real financial advisor does much, much more than that. Make sure you understand the services your advisor offers for what she charges and, more importantly, how your advisor is paid.
If this list made you feel uneasy about your current advisor, give him/her a call. Ask the questions you think are necessary to make you feel better. If you're not satisfied by the answers, you can look for a fee-only advisor at NAPFA.org or, you may send me a message to see if we're a good fit for each other.