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How Do I Choose the Right Financial Advisor? Three Considerations.

Published in the Desert Magazine
June 2016

By The Cypress Group

Which Account to Tap First?

How Do I Choose the Right Financial Advisor? Three  Considerations.

Working with the right financial advisor can increase the odds of meeting your financial goals and provide tremendous peace of mind, but the wrong advisor may do more harm than good. We offer three considerations that may help to make the right choice.

The Value of an Advisor

Many individuals choose to work with a financial advisor. Here are a few reasons why:

  • They desire objective investment advice tailored to their needs.
  • They realize the benefits of non-investment financial planning advice.
  • They have too much to lose by making a major mistake.
  • They want someone to serve as an ongoing resource for them and their family.
  • They want to provide continuity of advice in the event of incapacity or death

 Whatever the reason you may have in choosing an advisor, choosing the right person is critical. You may eliminate the wrong advisor by asking the right questions in three areas: Conflicts, competency, and custody.

1. Avoid Conflicts of Interest

Conflict of interest: A conflict between the private interests and the official responsibilities of a person in a position of trust.

- Merriam-Webster Dictionary

Question: Are you required to put my interests first as a fiduciary?

Most “advisors” at banks and brokerage firms are really just salespeople governed under what is termed “the suitability standard”. They are brokers. A broker’s primary obligation is to the firm he or she works for, not the client, and therefore the broker does not have to place his or her client’s interest first. An investment need only be suitable at the moment it is sold.

A registered investment advisor (RIA), as defined under the Investment Advisors Act of 1940, has a fiduciary duty to his or her client and is legally obligated to put the client’s interest first at all times.

You should work with someone who is legally required to put your interests first.

2. Seek Competent Advice

Never ascribe to malice that which adequately can be explained by incompetence.

- Napoleon Bonaparte

 The financial advisory field is very different than other professions like law or medicine. If you want to be a lawyer, you go to law school. If you are doctor, you go to medical school, etc. Most financial advisors have no college education specifically in financial planning and investment management because (until recently) there wasn’t a college level program offered. They learn it on the job. So, how do you identify an advisor with competence and relevance?

Question: What are your credentials?

There are over 140 credentials in the financial services industry. Most are worthless. If you are looking for help with financial planning, make sure someone on the team of advisors you work with is a Certified Financial Planner (CFP). If you are seeking tax advice, get it from a CPA. If estate planning is required, get it from an estate-planning attorney. These designations all require a college degree, advanced studies, a formal exam, and continuing education.

Question: Do you work with people like me?

If you are of high net worth, choose an advisor who works primarily with high-net-worth households. You don’t want your advisor learning at the expense of your financial well being. When issues come up you want an advisor who has experience working with those same situations on a regular basis.

Question: What is your process for financial planning and investments?

Many strategies “sold” to investors don’t work in practice. If an advisor is proposing a strategy that claims to participate in the upside of the stock market and alleges to get out of the way before a downturn you should probably question the validity of such a strategy. Anything that sounds too good to be true probably is. Proper investment and financial strategies should be backed by time tested research, common sense, and should align with your needs.

3. Understand Who Has Custody

Brokerages and advisers should have independent custodians and the government should have forced me to have an independent custodian. Client funds should be held by independent custodians. If they had, I would have been caught long ago. If I had had an inspection by the SEC, they would have looked at the custodian accounts and seen the funds on my books did not match the funds in the accounts, and I would have been caught.

Bernie Madoff

Question: Who is taking custody of my assets?

What Bernie Madoff did was despicable on every level. He stole not only from the very wealthy, but from charities and foundations as well as ordinary investors. The media feverishly covered the story and some blamed the investors themselves for not investigating the advisor.

The real issue, however, is custody. The ideal way to work with an advisor is to have separation of assets. An advisor can help you open an account at a national brokerage firm like Charles Schwab, Fidelity, TD Ameritrade, etc.

Be wary of certain types of investments that may lead themselves to you giving up custody of your money. These include some types of hedge funds, private equity funds, and real estate funds. If you are not in a position to perform tremendous due diligence on these funds, ask yourself if you really need this type of investment.

Choose Carefully

Choose your financial advisor carefully. Understand the importance of custody and competence, but most importantly, make sure your advisor has no conflict and follows an investment and financial planning philosophy that makes sense for you.