How to Select an Investment Advisor/Financial Planner
By Eric Simonds CFP®
There is no shortage of people that want to “take care” of your money for you. Fidelity, Ameriprise, Edward Jones, Primerica and so many more… People start to look and get weary and sometimes settle for whoever their parents use or worse, the office closest to them, when it should be a much more well researched process than that. In my experience, my firm, Saltwater Harbor Financial, LLC is not the right fit for everyone but our high standards and steadfast principles are shared by many advisors across the country. The most important thing when deciding who you want to work with is to know where to look and the right questions to ask.
Here are seven (7) important questions to ask when you are selecting a financial advisor.
- How is the Advisor paid? How the advisor is paid ultimately dictates who they serve. Regardless of vows to serve your “best interests”, promises to “take care” of you or a corporate motto conceived in the marketing office, if an advisors’ compensation comes from selling investments, insurance or products, they work for a company and not you (the client)! Many people would never hire an employee and not know how much they pay that individual. If your advisor truly works for you, then all of their pay comes from your checkbook and you know exactly how much they make from you. Remember that a great deal of marketing money is spent by large companies to cloud the water on the issue of compensation. Only a Fee-Only (Not Fee-Based) advisor works for YOU.
- Does the advisor meet the Fiduciary Standard and are they legally bound to a Fiduciary Obligation? The Fiduciary Standard is the highest level of care and service that a financial professional can provide. A fiduciary is only allowed to make recommendations, give advice and operate their business in YOUR (the client’s) best interest. There is no replacement for the fiduciary obligation. The “go to” resource for such advisors is “The Fee Only Network” (www.feeonlynetwork.com). Many sales people will use the word fiduciary but most are exploiting a loophole that allows for a loose use of that term or are referring to one small aspect of their business. You should not trust your life to a part-time heart-surgeon nor should your financial wellbeing be in the hands of a part time fiduciary. There have been numerous court rulings that have found in terms of insurance there exists a obligation to both the company and the client and that an insurance customer must be given “equal consideration” in terms of their interests, this interpretation by the court does allow for selective use of the term. This is not the obligation of a true Fiduciary. If you are unsure if a professional has a Fiduciary obligation ask that person to sign a fiduciary pledge (click here for a copy of our fiduciary pledge).
- What designation does the advisor have? Although lots of people who want to handle your money have a lot of letters after their name, the origin of a certification is of the utmost importance. Does the certification require experience? A test and if so, what is the pass rate? Unfortunately many certifications require little more than some light paperwork and writing a check while others, such as the Certified Financial Planner™ (CFP®), require 6000 verified hours of planning, a 10-hour test, clean record and Masters level college education. It is prudent to research your advisor and their credentials as there have been countless cases of “want-to-be” advisors claiming (or making up) certifications they never earned.
- Does the advisor belong to industry organizations? Not the same as certifications, advisors may apply and be accepted (or rejected) by industry organizations. Some, like the Financial Planning Association (FPA) have several requirements including a payment of membership dues and adherence to a code of ethics, where-as the National Association of Professional Financial Advisors (NAPFA) have much more stringent standards including (but not limited to) a clean disciplinary record, fiduciary pledge, CFP® certification (with the added requirement to obtain twice the continuing education credits), Fee-only compensation model and the submission of a comprehensive financial plan reviewed by a board of NAPFA advisors. Not all industry organizations are the same and your future is worth learning the difference.
- Does the advisor carry insurance? The question of insurance is an important one and beyond the question of “what kind?” or “how much?” (both important questions) you should delve deep into this topic with any advisor you are considering. Although not required, an advisor with “Errors and Omission” insurance should be a must. What is the result if you ask for a 1,000 shares of a stock and 10,000 shares is bought by accident? Furthermore, what if that stock goes down $8 that day… who is going to pay the $72,000 difference? What if you wanted the 10,000 shares but the order doesn’t go through on a day when the stock went up $11… that sounds like a $110,000 problem for your new advisor. Being well insured is the actions of a responsible professional and I would not allow my own Mother to use an advisor with less than $1,000,000 in coverage. Another type of insurance that an advisor should have is on the actual investment account. This type of insurance covers malicious acts, misallocation of funds and the bad actions of the next Bernie Madoff. The government provides (for a price) a modicum of this type of insurance for most accounts. This type of insurance is offered by the Securities Investor Protection Corporation (SIPC) which is a federally mandated, non-profit, member-funded organization. This type of insurance is analogous to FDIC insurance on Bank Deposits and often covers the first $500,000 of account value. This type of insurance does not cover fluctuations in the market value but will make an investor whole if any number of inappropriate/illegal advisor/custodian activities were to occur. The advisor may (and should) obtain insurance beyond the government minimum. Anyone who does the minimum should be working at the DMV, not managing your money.
- Does the Advisor appear on the Paladin Registry? The Paladin registry (Paladin) is a research organization that sponsors a Registry of 5-Star rated financial advisors and firms (the top 10% of advisors on a national level). Paladin is the only Security and Exchange Commission (SEC) registered firm that vets, rates, and validates the quality of financial advisors and firms. Only a small number of applicants are accepted and the registry monitors many important factors including licensing & registration, ethics & compliance, Fiduciary status, education & certifications, compensation models and discipline. Clients often do not take the time to fully research potential advisors and in the absence of thorough self initiated research, Paladin will provide a potential client with a list of top advisors and a 10-page fact based report on each candidate. See a sample by clicking HERE.An advisor’s unwillingness and/or inability to appear on Paladin is a “red flag” as it translates to an individual or firm’s inability to meet the high standards required and/or a refusal to be subjected to third party evaluation and monitoring. If you ask the advisor about the registry and they are unaware or dismissive, that should be your cue to look for financial services elsewhere.
- Has the advisor ever been the subject of a disciplinary action? The Government (Federal and State) have been stepping up enforcement record keeping and reporting of bad actors. Financial Industry Regulatory Authority (FINRA) maintains a website dedicated to researching advisors discipline records and resources for protecting your investments and a selecting suitable advisor/financial planners. When meeting with and deciding on an advisor remember that http://brokercheck.finra.org/ is the ultimate repository for factual information.
This is a far from a complete list but should provide you with a starting point in your search for a new financial planner.
Eric Simonds is a Portland, Maine Fee-Only Financial Planner located in Brunswick, ME and serving clients across the country. Saltwater Harbor Financial LLC specializes in providing objective financial planning, in accordance with the fiduciary standard, to help clients build, manage, grow, and protect their assets through life transitions. Eric Simonds is a NAPFA-Registered Financial Advisor and a CERTIFIED FINANCIAL PLANNER™ Professional and has been admitted to the Paladin Registry.