Choosing a financial advisor is at least as important as picking a babysitter, yet some people give it less thought. Learn how to select a financial advisor who will protect your money and put your interests ahead of their own. Let’s assume you want to invest your assets in a mutual fund. How would you go about selecting the best fund? You would visit a website like Morningstar that provides independent fund ratings plus other data that will help you make informed, objective decisions. Examples of data include performance records, expense ratios, and risk metrics.
Chances are you will select the fund with the best track record. Morningstar says 82 percent of investors select five-star-rated funds. This makes sense because Morningstar knows more about researching mutual funds than you do, not to mention, you save a considerable amount of time. However, what happens if you decide to use the services of a financial advisor? Who will research the advisor for you, and how much will it cost you? It is your sole responsibility and you will find that selecting a financial advisor is a complicated, risky process. Risky because there can be catastrophic consequences if you select the wrong advisor— just ask Bernie Madoff’s clients.
Most financial advisors are salesmen who use high-pressure sales tactics to convince you to buy what they are selling. If that isn’t a big enough problem, financial advisors also have minimal disclosure requirements for their credentials, ethics, business practices, and services. Sure, you can view the advisors’ compliance records at FINRA.org, but you need a lot more information to select the best financial advisor. It is your responsibility to obtain this additional information from financial advisors. High-quality advisors are more forthcoming. Lower-quality advisors withhold information that would cause you to reject them.
Is there a simple solution for selecting the best financial advisor? The answer is yes, there are definitely ways to find excellent financial advisors. But if you prefer to be part of the choosing of a financial advisor, you have to ask the right questions and know good answers (ones that benefit you) from bad ones (ones that will damage you). You also need a process for gathering the information so you can make an objective decision that is not excessively influenced by the sales skills of the financial advisors.
Institutions (pension plans, endowments, foundations) use RFPs when they select financial advisors. They use the RFPs to gather the same information from multiple advisors. Anyone who refuses to provide the information is automatically rejected. There are three primary RFP benefits:
You may or may not want to use the RFP process. At a minimum, you should ask the right questions and require written responses.
Choosing a financial advisor is at least as important as choosing a babysitter, yet many people give it less thought. And just as you wouldn’t leave your precious children with just anyone, you should leave your financial future in the hands of someone you don’t know. By asking the most strategic questions, you can be more confident that your assets are in good hands.