Good help can be hard to find, and nowhere is that more apparent than when searching for a financial advisor.
Should you go with a large firm? A small brokerage? Maybe an independent financial advisor? How do you know what is the right fit for you — and who can you trust with your hard-earned money?
Not every financial advisor is trustworthy. Researchers at the University of Chicago and the University of Minnesota created a database of financial advisors that represented about 10 percent of the sector from 2005 to 2015. That found that 7 percent of advisors had misconduct records, but 44 percent of those were able to land new jobs at another firm within a year.
[See: The 9 Best Investors of All Time.]
And companies that hire advisors who already have blot on their records tend to have more misconduct on average, according to the findings of the study published this year.
“One could argue those that are hiring have less standards … on what sort of advisors can work for them,” said Amit Seru, a co-author of the report. “Maybe they think they can get away [with] hiding these guys.”
This speaks to the importance of vetting an advisor before providing an all-access pass to your financial accounts. It isn’t always easy to truly tell how your fiduciary will provide help in the first one or two meetings. But here’s how to tell whether that advisor will set you on the path to retirement comfort, or leave you scratching your head wondering where your money went.
Ask the right questions. When potential new clients sit with Kathleen Hastings at FBB Capital Partners in McLean, Virginia, they inevitably want to know one thing: How much better will the portfolio perform under her care? It’s all about performance. “They come in and ask why their account isn’t doing as well,” Hastings says. “‘What’s wrong with my account? Why am I losing money?'”
But this isn’t the question that you should be asking right off the bat. Initial conversations should be about understanding how an advisor will work with you to develop a plan that makes sense based on your goals.
Hastings says investors should understand how an advisor works on a day-to-day basis. How does the business run? Who actually holds onto your funds? Who has access to your funds?
Most will work through a brokerage company, like Charles Schwab or Merrill Lynch, to actually hold your funds. Know where your money will actually sit. “I’m not asked this enough,” Hastings says.
Finally, be sure to ask what their succession plan is, says Joe Heider of Cirrus Wealth Management Group in Cleveland. An investor needs to know what happens to their portfolio should an advisor retire or unexpectedly die. A strong advisor will have a clear answer.
[See: The 10 Best REIT ETFs on the Market.]
Searching for the right resources. Another issue that you will come across in your search for advice is the different level of services offered by financial advisors. Is the advisor a broker? Is she an investment advisor?
A broker actually trades stocks, bonds, mutual funds, or other types of products. They typically get paid by commission; unscrupulous brokers will push your money into higher-fee funds so they can pocket a higher commission.
An investment advisor, on the other hand, provides advice on the best way to manage your fund then goes through a broker-dealer to execute the plan. Plenty of registered investment advisors provide their service for a fee — instead of commission — and they have to abide by a fiduciary standard of putting your best interest ahead of theirs.
Depending on whether you’re talking to a broker or an investment advisor will dictate how you search for any past misconduct. For a broker, you can search FINRA’s BrokerCheck site, which provides any past accusations a broker may have faced.
Investment advisors have to register with the Securities Exchange Commission or the state securities agency. On the investment advisor’s website, find the form ADV. It will provide information on any past legal issues with clients. If you can’t easily find the ADV form on the website or they don’t provide it for you early in your conversation with them, be wary.
Bigger isn’t always better (nor is smaller). Seru recommends evaluating companies not by their size, but by their target audience. You want to avoid doing business with a company that targets “consumers that aren’t the most sophisticated,” he says.
Instead, make sure that your advisor is providing all the information that they have about your plan and strategy. The best way to tell this is whether or not the advisor lays out what your fees will be. “None of this is for free,” Hastings says. If they “avoid the conversation,” then that’s a big problem.
[See: 11 Stocks that Donald Trump Loves.]
Finally, if a financial advisor doesn’t take the time to listen to your goals and desires for your money, then walk away. You’ve worked too hard for your investment portfolio to risk it in unsure hands.
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3 Things to Know About Finding a Financial Advisor originally appeared on usnews.com
