This is a guest post by Jack Waymire, a former investment advisor, founder of Investor Watchdog and author of Who’s Watching Your Money?
If you made a New Year’s resolution to choose a financial advisor or replace your current one, proceed with caution. This is one of the most important financial decisions you will ever make. The person you select will influence or control your investment decisions and the quality of those decisions will impact your long-term financial security, in particular during your retirement years.
You can’t delegate your choice of an advisor the way you can hand off investment work. You own this decision, and your vetting process has to be good enough to separate the weak from the strong. Here’s how to look past the smoke and mirrors.
1. Decide what type of advisor you want. These are the four basic types of advisors and the key characteristics for each.
Registered representatives, also called stockbrokers, investment representatives, and bank representatives, are paid commissions to sell investment and insurance products. Their primary sales licenses are Series 6 or Series 7.
Financial planners are a tough category. There are no licensing requirements for planners. Anyone can claim to be a financial planner whether it is true or not. Your vetting process should limit your selection to those who have earned the CFP, CPA/PFS or ChFC certification.
Financial advisors are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs). They are compensated with fees and are financial fiduciaries so they are held to the highest ethical standards in the financial services industry.
Money managers have the same registrations and characteristics as financial advisors. Their distinguishing feature is that they make decisions for investors without their approval in advance.
2. Be objective. Use a process of elimination–vet four advisors, and select one, so you have to exclude three. As you identify weaknesses, cross these advisors off your list. Focus on qualifications—among other things, you might want a professional who has retirement planning expertise. Don’t just choose the advisor with the best personality and sales skills; chances are this is not the person you want advising you on investments.
3. Gather and compare data. Get the same information from multiple professionals so it is easy to compare their responses. Your data gathering should focus on categories of information that impact competence, ethics, practices, and results:
Credentials: Experience, education, certifications, association memberships;
4. Vet advisors on the Internet. On the web you can find public information that is not totally controlled by financial advisors or their firms. Plus, you can maintain your anonymity. Go beyond the advisor’s own website.
*Google GOOG -1.45% the names of advisors and their firms (click through at least 20 of the hits you get).
*Look for third party content that mentions the advisors or their firms (newspapers, magazines, websites).
*Use keywords to uncover problems. Combine the advisor’s name and the firm names with these words: fines, scams, fraud, lawsuits, guilty, suspensions, FINRA, and SEC.
*Check advisor and firm compliance records with FINRA and the SEC.
5. Meet in-person. The key to a successful interview is to establish control from the very beginning. Advisors want to control interviews because it maximizes the impact of their personalities and sales skills. Plus, you only hear what they want you to hear. In contrast, when you control the interview, you obtain additional information and insight that helps you make the right selection.
Before you meet, prepare an agenda and provide it to the advisors. It is easier to compare advisors when they answer the same questions. Require written responses to questions in the agenda.
Limit the interview time–for example, a 40-minute presentation and 20 minutes for questions and answers. Conducting the interview at the advisors’ offices gives you a chance to have a look at their staff and the work environment. If you hold them at your own office or at home, be sure to schedule them far enough apart that advisors do not see each other.
6. Check references. Most advisors use references to validate their quality, performance, ethics, and business practices. They tend to be relatively worthless, though, because no advisor will provide bad ones. In fact, references can be friends of the advisors and may have been coached to make positive comments.
To glean the most insight from these references, make sure you get the same basic information from each reference. Ask about length of the relationship; types of services; amount of assets; service quality; and why the client selected this advisor. Ask for information that may catch the reference off-guard, such as: What is your fully-loaded expense for the professional’s advice and services? Do you receive brokerage statements and performance reports from different firms or the same firm?
Remember that a reference is not a substitute for a track record. You should discount any performance-related comments by references, or information that sounds exaggerated–for example, “This advisor is the best kept secret on Wall Street.”