by Jack Waymire
There is no doubt selecting the right financial advisor is one of the most important decisions you will ever make. That’s because your financial advisor will influence or control the investment decisions that impact when you retire, how you live during retirement and your financial security late in life when you need it the most.
This means your financial advisor vetting process must be able to identify real experts you can trust and avoid weak advisors who use deceptive sales tactics to gain control or your assets.
What Are Deceptive Sales Tactics?
Some of the more frequently used tactics include:
- Misrepresenting key information about their competence and ethics
- Omitting key information so you have to ask for it
- Using sales pitches to create unrealistic performance expectations
- Selling proprietary products without proper disclosure
- Using fake credentials (certifications, designations)
Lack of Written Disclosure
It is important to note that financial advisors are supposed to tell you the truth. Industry regulations say they are not supposed to misrepresent or omit any pertinent information. However, there is no requirement for written disclosure.
Consequently, there is a lot of risk if all of the information is verbal and it is communicated to you in the form of sales pitches. It is your word against the advisor’s if there is a future dispute and you will lose because there is no written record of what was said to you.
Therefore, it is your responsibility to ask for written documentation when you vet financial advisors. It pays to trust what you see and not what you hear.
Access to Public Data
The good news is the Internet gives you access to large amounts of public data when you are vetting financial advisors. The bad news is that you have to know where to go, what to look for and how that information impacts you.
Your best sources include:
- A third-party vetting service like www.PaladinRegistry.com
- www.FINRA.org for compliance data
- www.SEC.gov for additional registration and compliance data
- Google to search for relevant information using keywords
Top 4 Categories of Questions
There are four important categories of information that will help you vet advisors and select the best ones for interviews:
- Business Practices
You have to ask the right questions and know good answers from bad ones that will negatively impact your financial situation.
All financial advisors claim to be planning and investment experts. They know that is what you want to hear when you vet financial advisors.
So, the first category of questions is about their sources of expertise. If they are real financial experts, they should be able to document the following in writing:
- Education (Names of Schools, Degrees)
- Years of Financial Service Experience
- Certifications and Designations
You can use a free service that does not require registration to check the quality of financial advisors’ certifications and designations: PaladinRegistry.com/Research/Credentials-Financial-Certifications.
You are paying financial advisors for their specialized knowledge, advice and services. Make sure they are real experts before you select them.
The next most important category of information that should be included in your vetting process is the trustworthiness of financial advisors.
It stands to reason trust is a very difficult characteristic to measure. Like expertise, every advisor will claim to be trustworthy, but that does not mean the advisor provides financial advice that puts your interests first. In fact, the more the advisor claims to be trustworthy, the less trustworthy the advisor might really be.
Step one in your financial advisor vetting process is to ask them if they are financial fiduciaries. If the answer is yes, ask them to acknowledge their fiduciary status in writing. If the answer is no, keep looking for a financial advisor who is held to the industry’s highest ethical standard (financial fiduciary). Non-fiduciaries can be ethical, but they are not required to put your financial interests first.
Step two is to check the financial advisors’ compliance records at www.FINRA.org/BrokerCheck. There you can view the advisors’ licensing, previous employers and compliance record. The most important information is disclosures that result from client complaints, company terminations and actions by regulators.
Step three is Google search the advisor’s name, and if the advisor owns the firm, also Google search the firm name. Enter the advisor’s name, location and certain keywords, such as lawsuit, bankruptcy, foreclosure, complaint, etc.
Vetting the financial advisors’ business practices is the next step. Your initial focus should be how the advisor is compensated. How (fee or commission)? How much? Who pays the advisor (you or a third party)?
You also want to know the total amount of expense that will be deducted from your accounts. Every dollar of expense is one less dollar you have to reinvest for your future use.
You should also determine what ongoing reports and other forms of communication will be provided to you. Will you have online access to your investment information? What types of reports will you receive and the frequency? How often will you meet with the advisor and where?
Determining the services that are provided by the advisors is an important next step.
A typical need is financial planning and investment advice. The plan is your financial roadmap for the future. How you invest your assets (risk tolerance, return expectations, investment horizon) will impact the advice that is provided to you by the advisor.
You may also have a need for various types of insurance: Life, health, long-term care, disability or annuity. Some advisors are licensed to sell insurance products to their clients. Other advisors do not have these licenses, but they can usually refer you to someone who does.
You may also have needs for tax (planning, preparing documents) and legal (will, probate, trusts) advice and services. Most advisors are affiliated with professionals who provide these types of services and they cross-refer clients to each other.
Two Books Worth Reading
Want to learn more about financial advisors? I recommend reading my two books. The first book was published in 2003 by John Wiley & Sons. The title is: “Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor.” The second book was published in 2018. It was titled: “5 Steps for Selecting the Best Financial Advisor: How the Internet has Changed the Game for Investors and Financial Advisors.”
Jack Waymire worked in the financial services industry for 28 years before he left to found the Paladin Registry (www.PaladinRegistry.com) in 2004. This investor education website was based on the Principles in Jack’s first book: “Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor.”
The Registry also has a free service that matches investors to advisors who meet Paladin’s minimum requirements for competence and trustworthiness.
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