Determining the Quality of Financial Advisors

Determining the quality of financial advisors is similar to judging a beauty contest. Both judgments are based on what you see and hear. There is one big exception. The winner of the beauty contest receives a crown. The advisor wins a relationship with you and the opportunity to influence or control your future investment decisions and results.

Financial advisors and financial planners don’t have track records that document the results they have produced for their clients. Plus, they don’t have mandatory disclosure requirements for information that impacts their competence, ethics, and business practices. Consequently, advisors can say just about anything that helps them win relationships and control of your assets because there’s no way for you to determine if they are telling the truth.

One claim that virtually all advisors make is that they are financial experts who have specialized knowledge that will help you achieve your financial goals. Maybe you’ve already heard this one. There is no regulation that says this claim has to be true and since it’s verbal, you have no proof the claim was ever made. It’s up to you to determine the validity of what’s being said and there’s a major financial risk if you’re wrong.

The evaluation process is made more difficult because most advisors are skilled sales professionals who know how to present themselves as competent, ethical professionals. They control the information you use to evaluate them and they use their sales skills to present the information, answer questions, overcome objections, and close the sale. Plus, if you are like most investors, you don’t have enough objective information from advisors to know who is telling the truth and who is using deceptive sales practices. Consequently, a lot of investors select low quality advisors who “sound” good. They were sold high expectations by advisors who are not compensated for helping them realize those expectations.

Like beauty contests most investors use subjectivity that’s influenced by advisors’ appearance and sales pitches. Some of the subjective principles include:

• They like the personalities of the advisors
• Advisors say what they want to hear (high return for low risk)
• Advisors look and sound professional
• Advisors work for brand name firms
• Advisors are referred by people who are trusted by investors

None of these subjective valuations are based on the competence, ethics, or business practices of the advisors. In fact, most of these characteristics are a reflection of the sales skills of the advisors and the marketing activities of their companies.

Investors should use an objective process for selecting advisors that has three core principles:

• You control the evaluation information and process; not advisors.
• All information must be documented by advisors.
• Advisors must provide third party proof for their competence, ethics, and business practices.

Competence is determined by a review of the advisors’ education, experience, certifications, association memberships that have continuing education requirements, and the expertise of other team members.

Ethics is determined by financial professionals being Registered Investment Advisors or Investment Advisor Representatives, and acknowledged fiduciaries with clean compliance and criminal records.

Business practices are based on a review of the advisors’ willingness to provide full disclosure, their potential conflicts of interest, their methods of compensation (fees are the preferred method), and their client service practices.

All information must be certified complete and accurate by advisors and it must be documented in writing. Verbal information is heavily discounted because it’s a reflection of the advisors’ personalities and sales skills.

You can’t afford a beauty contest when the quality of your retirement and financial security late in life are at stake.