Determining who is a competent, ethical financial advisor and who is selling bad advice, bad investment products, and scams is a major challenge. It is up to you to ask the right questions and to know good answers from bad ones.
"The investors we're dealing with know what they want to acquire. If they raise questions about a deal, then the salesman owes them an honest answer." Lloyd Blankfein, CEO, Goldman Sachs: Testimony before a Senate Investigation Panel: 4/27/10
If you fail to raise the "right questions" do not expect advisors (salesmen) to volunteer information that may have a negative impact on their sales success. No sale means no revenue and no commission. If there is anything to hide, the salesman hopes you do not ask the "right" questions. Then they do not owe you an "honest" answer. And, being realistic, there is no guarantee you will get an honest answer anyway.
It is difficult to determine advisors' quality when they have no requirements to disclose or document information for their competence, ethics, and business practices. It is much easier to learn to avoid lower quality advisors. Read how!
Avoid advisors who hold Series 6 licenses. They are limited to selling investment products for commissions. You should also avoid advisors who hold Series 7 licenses unless they are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs). RIA and IAR registrations permit advisors to provide financial advice for fees.
Do not select advisors who cannot or will not provide written documentation that they are acting in a fiduciary capacity when they provide financial advice and services. Fiduciaries are held to the highest ethical standards in the financial services industry.
Avoid advisors who are not willing to practice full "written" disclosure for their credentials (education, experience, certifications), ethics (compliance record, licensing, registrations), and business practices (compensation, reporting, accessibility). When advisors hide information you have to ask the right questions and hope they tell the truth.
Avoid advisors whose sole method of compensation is commission. These advisors are paid to sell you products. They are not paid to help you achieve long-term financial goals.
Some sales representatives claim to be financial planners because it helps them sell investment and insurance products. Require all advisors to prove they have planning experience. The best proof is a current CFP® or CPA/PFS® designation. If they claim they have 10 years of planning experience, but no certifications, ask for another type of proof. For example, a membership in the Financial Planning Association for that length of time.
Financial advisors do not have track records because their services vary by client. However, some less scrupulous advisors create track records by selecting high performing mutual funds and claiming they selected the funds before the performance occurred. They know you have no way of determining the truth. Avoid advisors who use this deceptive sales tactic.
Do not select advisors based on comments from references. No advisor will give you a bad reference. References can be friends, associates, and professionals who have business relationships with the advisors. Plus, a high percentage of references have been coached to make positive comments about advisors' results. Comments from references are not reliable and they do not constitute a track record.
