Choosing a financial adviser

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Choosing a financial adviser

by Tony Novak, updated 4/8/2012

Most people choose a financial adviser based on the recommendation of a friend or other professional. This makes sense and is an especially effective method when you are looking for “status quo” and simply want to ensure similar results without the risk of choosing a bad provider. A personal referral, for example, works well when choosing a dentist. A friend who had a pleasant experience with a dentist’s office, a tooth cleaning and checkup is a good source of information about your choice of provider.

But this general logic may not apply as well to the process of choosing a financial adviser. The financial services industry and the specific nature of the services provided are so widely varied that a comparison from one person to another rarely makes sense. More importantly, the “status quo” of financial advice is simply not good enough anymore. The never-ending flow of news about financial firms facing censure or fines is increasingly making us aware that the financial advisory business has some serious problems. While most advisers are honest, hardworking and operate within the law, that is just not good enough. In these days, no one should want to hire a “typical” financial adviser and, of course, the effects of trusting a “bad” or untrustworthy adviser can be disastrous.

Selecting a financial adviser should be more carefully considered than taking a personal recommendation of a friend. Investing some time to learn about the advisory process, the overall financial services industry and the specific details about the individual advisor will prove to be well worth the effort. These five points highlight some of the most important considerations facing financial advisory clients today.

Understand the basics of the financial service industry

Much has changed in the financial advisory industry over the past few years. Most of the change is good news for affluent consumers but bad news for middle income clients. It would be foolish to assume that the impressions and insight you might have gained a decade ago about an advisor or the advisory community are applicable today.

Realize that the majority of people who call themselves financial advisers are really not advisers but sellers. Most earn their living from commissions of fees built into the financial products you buy from them.

Financial advisers typically earn additional fees by “managing” investment assets, regardless of whether the investment performance benefits from this additional management (usually it does not) and even if the assets just sit there with no impact from the adviser. (For example, this is called a “12(b)(1) fee” in mutual funds). The more the advisers sell, the more they earn. That is not advising, that is selling – no matter what title is placed on the business card. There is no connection whatsoever between the adviser’s compensation and the quality of the advice given to the client. In fact, the Securities Exchange Commission has recently undertaken a publicity campaign to inform the public on an issue known as “the Merrill Lynch rule”1 of the difference between an adviser who is a “fiduciary” (a person who is held legally accountable to act in your best interest) and an adviser who is a “registered representative” for a broker (whose primary legal responsibility is to the employer) who is only required to avoid “unsuitable” recommendations to clients.

It may come as a surprise that most of these people who call themselves “advisers” are not even required under the law to act in the best interest of their clients. Of course, that certainly does not mean that all of the advice is bad, but rather it means that the financial adviser is motivated by something other than providing you the best information available. For example, you will rarely if ever hear a financial adviser mention that a competing firm’s services are less expensive than those of the adviser’s firm. If you want to avoid this conflict of interest Jon Clements, the personal finance columnist for The Wall Street Journal wrote on 5/31/06, “your best bet is to use fee-only advisers who charge an hourly fee”. Since your financial future is likely to be affected on your selection, it makes sense to spend the time to find an adviser who is not compensated for anything other than providing you advice.

If you decide to go this route, this means filtering out more than nine out of every ten people who call themselves financial advisers. It is not always easy to find an hourly-fee adviser who does not accept commissions or asset-based fees. Once you locate a candidate, ask to see a copy of the advisers “Form ADV” to be sure that the information reported to you is the same as what is reported to the government.

Aim high

Of course you have to make sure that the adviser is credible and knowledgeable. Some people look for a CFP designation or a CPA
with a CFS credential. But if you really want your money’s worth, knowledge and designations are not enough. When making in this important decision, it makes sense to set your sites higher. How about finding an adviser who is recognized as a leader or an expert within the financial industry? How about an adviser with a long list of endorsers? How about someone who is well-connected in the business community and in the financial services industry? How about someone who has made a mark as a well known teacher, writer or lecturer in the financial planning topic? In other words, why not look for an adviser who makes an impression that “knocks your socks off”? Put another way, if you choose an “average” financial adviser, then you should expect average results.

In the end, you can expect exceptional results only after you have taken the time to seek out an exceptional adviser.

See the big picture


Consider that there is far more to managing finances today than picking stocks and mutual funds. You might also want help with lowering your mortgage costs, handling college costs, improving your accounting system, online transactions, banking, evaluating insurance, tax strategies and return preparation, trust accounts, wills and estate planning. A positive contribution in any of these areas will far outweigh the contribution made by choosing investments. In fact, economists would argue that the task of picking specific investments play an insignificant role – perhaps is the least important factor – in your overall long term financial success. Make sure that your adviser is experienced and willing to help you with the broad range of financial planning issues. 

Also, consider this issue in relation to the two points in #1 and #2 above. Most advisers do not have a broad-based knowledge and experience in the important topics outside of investing. An adviser who is primarily paid to sell or manage your investments has no incentive to help with taxes, loans, college tuition bills or other concerns that are equally important to you. And even if the adviser was motivated to help, few would be qualified to offer broad-based services.

Consider the impact of the Internet

The Internet has changed the way all of us do business and has dramatically impacted the products, services and fees in the financial services industry. It is now possible to conduct financial transactions faster and far lower price than almost anyone would have previously dreamed to be possible. This has been good news for consumers, IF you can filter through all the junk and separate the good from the bad that cohabitate on the Web. Unfortunately, for every great deal on the Web there are also a handful of scams. Keeping up with this changing field of online services has become an area of specialization in the financial service community. Most financial advisers avoid online services simply because they do not pay commissions – that is one of the ways they save consumers money. Very few financial advisers embrace the Internet, have invested the time to become educated on the benefits, and are willing to show clients how to benefit from the latest technology. The few advisers that do offer this service add significant value for their clients.

The other impact of the Internet is the breakdown of geographic barriers. In the old days, we chose professionals in our own town. Now people are more likely to have a financial adviser across the country. Today’s Internet-savvy adviser is able to utilize video conference technology, document sharing capabilities that improve the efficiency and lower the costs of providing personal services. Even the simple technology of sequential telephone call routing now allows an adviser to answer more calls from clients on the first dial, rather than relying on voicemail tag.

This allows clients to select a financial adviser with whom they feel a connection – based on the things that are really important like communication, expertise and a matching of personalities – rather than choose among the advisers located within the same physical address.

Keep a lid on total costs


All of the adviser’s fees plus all other costs including commissions, built-in charges, account fees, “hidden” expenses and other financial charges play a role in your long term overall financial well-being. If this amount grows much past 1% of your invested assets, the rate of growth becomes impaired. Within 401(k) plans alone, some investors pay $25,000 more than others in mutual fund charges alone over their working careers. This means that there is $25,000 less in the investment account on the date of retirement that would otherwise be available to the client. Of course, it is equally important to evaluate non-investment-related costs. An adviser who is experienced with helping to reduce overall financial expenses can be far more valuable than an adviser who helps boost your investment returns. An adviser who shows you how to cut out mortgage points, for example, can reduce your cost of borrowing by thousands of dollars.

A client should expect to see a direct tangible net result from the adviser’s efforts and should evaluate the adviser’s return on investment in the same way as any other investment. The “investment” in this case, is the adviser’s fee. An adviser who charges a $2,000 fee, for example, but immediately saves you $3,000 in taxes and another $2,500 in mortgage loan expenses has clearly proven to be a good return on your investment; far more so than an adviser who is able to boost investment results on a client’s typical-sized portfolio from, say, 7% to 9%.

In summary, choosing a financial adviser should be a bit like choosing a spouse. We should be cautious and go slow at first, do our homework, test the relationship, and not make a hasty decision about any long term commitment. It takes some work to seek out the right financial adviser, but the long term benefits are worth the extra effort.


1Securities Exchange Commission 17 CFR Part 275“Certain Broker-Dealers Deemed Not to Be Investment Advisers”

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