Investors dealing with financial advisers can feel like they’re navigating a field full of landmines: Portfolios stuffed with unsuitable investments; brokers conducting unauthorized trades; advisers who misrepresent what an investment product can and can’t do, or who don’t disclose or explain the fees or tax consequences, or who have excessively cozy relationships with the firm or individual who designed that product. Then there are the banal problems – a mutual inability to communicate effectively and clearly – and the most extreme ones, such as the Ponzi scheme constructed by Bernie Madoff. Sometimes regulators must feel as if they are drowning in a sea of investor complaints, and investors understandably might wonder if it’s impossible to find a broker or adviser in whom they can safely place their trust.
It isn’t. The problem, of course, is that identifying that individual is never a simple matter. And even once you have found the right financial adviser, you can’t just kick back and take it easy; as in any relationship, you have a responsibility to sustain it and to keep on having the tough conversations.
Making the task particularly tricky is the harsh but unavoidable reality that those who tend to need the most help ensuring that their savings are well invested and safe – those who have the smallest portfolios – have the fewest options when it comes to finding a financial adviser. For these individuals, the tips below are even more important, as making some compromises is likely to be unavoidable. So, being aware of what compromises and tradeoffs you are making may spell the difference between success and disaster.
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For several years now, I’ve interviewed a dozen or more of the financial advisers whom Barron’s has selected as among the best of breed. (I haven’t played a role in choosing those individuals, or even in identifying which ones are worthy of being singled out in the profiles.) These people may work for giant firms – UBS, Wells Fargo, JPMorgan Chase or Morgan Stanley – or for independents; they may form part of loose associations under the umbrella of a household name; they may work with a handful of multi-millionaires or billionaires, or with hundreds of merely affluent dentists and small businessmen. Some love exchange-traded funds (ETFs); others shun them. Some build their own funds to offer to clients; others prefer to pick stocks, while some turn over the nitty gritty to outside managers and choose instead to focus on developing financial plans. But in talking to these individuals, a few common threads have emerged, from which it’s possible to draw some lessons about how to find a financial adviser you can really trust with your portfolio – indeed, with your financial life.
1. What’s their track record?
This doesn’t mean what they generate in the way of returns for their clients – as the Madoff affair reminded us, we all need to factor in risks and try to understand what an adviser is doing to generate those returns, and whether the portfolio is suitable for them. Indeed, if an adviser tries to proclaim his or her success in generating double-digit gains for investors, you should take that as a cue to run. In real life, a 12 percent increase for one investor and a 6 percent gain for another can be equally satisfactory results, given the circumstances of the clients.
The track record I’m thinking of is a different one. Does the adviser (and his or her firm) have a clean record with FINRA and other regulatory bodies? Do they have a good history when it comes to hanging on to clients? How long have they been with their current firm – and do they have a record of switching firms every two or three years for unexplained reasons? A clean regulatory track record and other signs of stability – including clients’ children who have decided to do business with their parents’ adviser – can be indications that this is someone with whom you can entrust your own portfolio. It also helps if you get a sense of who their clients are. Someone who works with pro athletes and entrepreneurs might not be a good choice for a corporate executive – and vice versa.
2. What’s their style?
No, wearing short shirts or sandals with socks isn’t a disqualifier (even if it makes you wince). This isn’t about personal style. Nor am I talking about investment style – I’ll get to that later. What you want to understand clearly before turning over your portfolio is how that adviser or broker works with his or her clients, and whether you are comfortable with that. How well do they respond to questions? Do they become irritable when asked to explain why they prefer one investment strategy or product to another?
This person isn’t auditioning for the role of your best friend, but you do need to be reasonably confident that you will feel comfortable asking them whatever is on your mind (even if you worry it’s a silly or basic question) and that when you don’t understand the answer, you can ask them to explain it. How will they react when you ask them to explain whether they earned a fee by putting you in a particular product, or whether their choice of a mutual fund with a front-end load was shaped by any kind of conflict?
You need to make sure that your adviser can listen as well as he can talk, too – and that he not only listens, but also remembers and understands. After all, if your main fear is of being widowed and left in poverty, you don’t want to work with an adviser who pooh-poohs that as improbable, but someone who can explain to you why the strategy she’s suggesting will help address that concern.
It works both ways, too; you need to understand how often and in what circumstances the adviser will be able to touch base with you. It may well be unrealistic for many advisers overseeing a relatively small and straightforward portfolio to respond within hours to a blizzard of e-mails asking for insight into market movements. Indeed, if they are spending that much time holding your hand, that’s time they can’t spend overseeing your portfolio.
On the other hand, in times of market volatility, you want to be confident that you’ll hear from them, even if it’s in the form of a mass e-mail explaining how they are thinking about and responding to the market turmoil. The bottom line: are you compatible when it comes to style?
3. What are their credentials?
These days, there are a lot more financial advisers out there than there used to be, and the terminology they use to describe themselves is a lot more complicated. Where once we just had brokers, today we have planners, advisers, consultants, and a mish-mash of certifications.
There are two important discussions that you need to have with someone whom you are considering hiring to manage your finances, and the first comes down to the alphabet soup that follows their name. What certifications have they obtained? If they are a CPA, or certified public accountant, this tells you that they’ll probably be good in analyzing your finances and computing the impact of taxes on your investment portfolio. Hire a Chartered Financial Analyst (CFA) and you’ve got someone who is skilled in picking apart corporate finances, and may be well qualified to choose stocks. If they have earned the increasingly popular CFP – certified financial planner – designation, then they have met a certain standard when it comes to understanding modern portfolio theory and helping to guide their clients toward retirement.
4. How do they view their fiduciary duty?
Perhaps even more importantly, you need to understand where they stand when it comes to being a fiduciary. Someone who is a fiduciary is legally required to put your interests before their own – if they don’t, you get to sue them.
In practice, this is still a fuzzy area, with some advisers describing themselves as fiduciaries, but defining fiduciary in a looser manner. For instance, the National Association of Personal Financial Advisors requires members to take an oath stating that they will provide written disclosure of any potential conflicts of interest “which will or reasonably may compromise the impartiality or independence of the advisor.”
Purists argue that there shouldn’t be any conflicts to disclose in the first place. Certainly, what you should try to avoid is working with an adviser or broker who has only to adhere to a lower “suitability” standard. That doesn’t mean that these individuals aren’t doing a good job for their clients; it does mean that if you happen to stumble across one who isn’t, you’ll have less recourse.
These days, just because someone describes himself or herself as a “fee-based” or “fee only” planner doesn’t mean that they have a legal duty to you as a fiduciary. Ask them to explain it – and put it in writing.
5. What’s their view of the investment landscape and your portfolio?
Yes, it’s only now that the questions about the portfolio itself come up. By now, you should have a good idea of who this person is, what makes them tick, and whether this is someone you feel you can work with. So – what would they suggest that you do?
There’s no single red flag here: One professional may adore ETFs as a cheap way to gain exposure to markets, while another may worry about them as volatile vehicles and prefer to invest in corporate stocks directly. Both points of view are valid. What does diversification mean to your adviser? Is it a carefully balanced collection of stocks and mutual funds or a kind of crazy quilt of dozens of holdings that may overlap and yet still leave gaps? What do they think about global investing? How would they handle currency risk?
These are just some of the questions you should research – and then feel free to pepper at your prospective adviser. You’re not an expert, in all probability, but it’s at this point that you need to have an expertly honed bullshit detector. If the person across the desk trots out what sound like well-rehearsed sound bites from a television interview, ask them to elucidate. If they are using jargon, ask for explanations. Look for any hints that your adviser isn’t as smart, thoughtful or well informed as you think they should be – but don’t be distracted by red herrings, such as the fact that they may not share your political or social views.
True, if you’re a die-hard free market advocate, you probably won’t feel comfortable working with an adviser who specializes in running socially responsible portfolios (see No. 2 above). On the other hand, their personal views on the merits or lack thereof on the Affordable Care Act probably won’t prevent them from analyzing what it means for your personal finances, whether in the price you’ll pay for long-term care insurance or the wisdom of owning hospital stocks.
There are no guarantees that you’ll manage to pick the perfect adviser – indeed; I’m increasingly convinced that such a being may be as rare as a unicorn. On the other hand, following the tips above will help you steer clear of the duds, and increase the odds that you’ll find the financial adviser who is right for you.