How to Spot a Bad Financial Advisor
In a perfect world, hiring an advisor would be like choosing a doctor – if there is an “MD” after the name, you can be reasonably confident that any doctor you choose has the education, training and experience needed to help with your health concerns. Unfortunately, however, when it comes to financial advisors, that’s not the case.
There are hundreds of thousands of people who are basically salespeople yet call themselves “financial experts,” “financial advisors,” “wealth managers,” “wealth consultants” … sadly, the list goes on. How does this happen? The industry does not require a minimum standard to use these titles – not even a high school diploma! Even more surprising, with billions of annual revenue at stake, big Wall Street firms and insurers throw millions of advertising dollars into persuading you on their brands. They have products to sell, so these large firms hire and train salespeople but give them titles that imply they are actually experts or advisors.
So, how do you know if you’re hiring the best financial advisor, or more importantly, if you’re avoiding the worst?
Here are 5 questions to ask to help you spot a fake.
Question 1: Will you always act as my fiduciary?
Fiduciary is an important term, especially in the financial services industry. This term implies that a client’s best interest will be put first – before the advisor’s and before the possibility of a hefty commission. Not just anyone can use the term fiduciary.
Salespeople may not even be licensed to give advice for a fee. They can only give you product recommendations. Because these recommendations don’t necessarily have to be in your best interest, these salespeople cannot claim to be fiduciaries. Salespeople simply need to meet a suitability standard – if a recommendation is not unsuitable, then it is suitable. This is the minimal standard in the industry.
Linscomb & Williams was following a fiduciary model before that term was common in wealth management.
Question 2: Will you put that in writing?
One tactic salespeople may use is omission – if you don’t ask, they won’t tell you. This is often the case when it comes to the fiduciary standard. Salespeople assume investors don’t know this term and won’t ask. And they obviously won’t offer any information that makes them look bad.
When the question is asked, make sure the answer is in writing. That way, if there is any issue in the future, you have a paper trail that shows all claims that were made. When told verbally, there is no solid evidence that a claim was actually made.
Question 3: What are your credentials?
There are many ways salespeople may mislead investors to believe they are experts, and many involve fake credentials, degrees and titles.
- The best degrees are earned in applicable financial fields, such as finance, financial planning, portfolio management or economics.
- The best designations and certifications include Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Personal Financial Specialist (PFS) and Certified Public Accountant (CPA). You can find my credentials and the other Linscomb & Williams team members qualifications here.
Question 4: What is your experience?
Please note: Years in the industry does not necessary tell you about a person’s experience. An “advisor” may have spent many years selling products for an insurance company and just a few working in wealth management.
Experience becomes especially important as you approach retirement, since you can benefit from an advisor who has successfully navigated all types of markets over the years.
Don’t accept vague answers.
Question 5: How are you compensated?
It’s safe to say that most investors are usually very interested in how much a financial advisor’s services will cost, but what investors don’t typically ask is how these fees are actually paid? This might sound like a strange question, but it’s very important, and can tell you a lot about an advisor.
There are two major ways that advisors get paid: Fees and commissions.
Commissions may be hidden, which means the fees may appear to be less when you ask for the cost of a service. Also, what you might not know is that an advisor who is paid by commission may not be offering you the best product for your situation but instead, the product that will earn the advisor a bigger commission. If it’s the wrong product, this can be very costly over time!
Here’s an example we see time and time again: An “advisor” tells a new client that his or her services are free. (Watch out for this claim! Why would anyone work for free?) An investor falls for the pitch, uses the services and then has to change advisors later on because of bad financial advice.
I strongly believe that by sticking with fee-only financial advisors, you can be confident that you’re getting unbiased advice and not just product recommendations.
What if I Already Have an Advisor?
Just because you’ve hired an advisor, doesn’t mean you can’t still ask him or her questions about how business is done.
If you’re already working with an advisor, I recommend going back and double-checking their answers to these questions. Remember, it’s OK to be pushy; it’s your life-savings that is at stake after all!
It’s extremely dangerous, once you hire someone, to simply put your finances on auto-pilot. Stay involved, review your statements and always ask questions. It’s your money, so no one is going to watch it as carefully as you will. This is especially crucial as you approach retirement, because if there are any problems, you’ve got less time and income to make up for any shortfall.
If you don’t have an advisor yet, contact us to see if Linscomb & Williams (Houston, Austin, San Antonio, the Woodlands or Birmingham, Ala.) is the right fit for you. We have been working with families for more than 40 years and were one of the earlier wealth management firms in Texas to fully embrace the fiduciary business model. We take this role very seriously and are happy to give you a second opinion if you already have a financial plan in place.