The Informed Investor
When you’re looking to hire someone to help manage your money, you may be surprised at the overwhelming array of choices out there. So many titles. What is the difference? Who is right for you?
What’s In a Name?
If you go to see a doctor, you can be reasonably sure you are getting help from someone who is educated and trained in medicine. Many people automatically assume things work the same way in the financial industry. Unfortunately, that is not the case.
There are surprisingly few requirements to fulfill if someone decides to hang a shingle and call themselves a financial advisor, financial planner, wealth manager, or any other variation of those names. The people who go by these titles might be knowledgeable experts, as these titles imply. Or, they might be someone who just landed at a large insurance company… someone relatively new to managing people’s life savings.
In these cases, they may have more sales training than actual investment and money management experience. Or worse, that person may be incentivized to sell you certain products, even if they are not right for you.
These Financial Professionals Can Cost You Money
With all this in mind, you can picture the scene. A smiling, well-dressed person uses the title of investment advisor, financial planner or wealth manager to convince you to trust them with your life savings even though they are not an experienced money manager. They may have some knowledge, but their company incentivizes them to sell you products, not give you true advice.
As someone who has been in this industry for over 40 years, this frustrates me. People lose real money trusting these “advisors.” In fact, that is the reason I started my own independent, fee-only firm decades ago, so we could provide financial services that people could actually trust.
I’m not alone. As one financial blogger put it:
“The bar to hold oneself out as an investment advisor is low, shockingly low. This is all the more shocking because the stakes are so high. Clients have only one chance to save and invest for retirement. If bad advice leads to the unnecessary loss of capital, there is no time to start over.”
~ Blair H duQuesnay
Like it or not, Wall Street advertising dollars have succeeded in muddying the waters on financial industry titles.
And it’s not only titles. Something similar has occurred with financial credentials. In medicine, an MD after a person’s name means the person has earned a full Ph.D. in medicine. This takes many grueling years and not everyone gets through medical school, so an MD is at least well-versed in medicine.
But in finance, you can’t assume that. Some credentials, or designations, as they are often referred to, require specific education, testing, and experience. Unfortunately, other designations have been created more for marketing. The letters sound impressive, but may only require taking a course or two.
As it stands now, consumers would need to be the ones taking a course to understand all the financial designations and discern which ones truly have merit. With billions of investment dollars at stake, there’s plenty of motivation to keep people in the dark!
How to Avoid Hiring a Salesperson Instead of Financial Professional
The problem is, many people hire investment advisors without checking out their credentials and experience. Instead, they rely on the fact that their friend or family member uses them and likes them. Sadly, many learn the lesson too late that their advisors had more sales skills than financial knowledge and experience.
This is compounded by the fact that the stock market is cyclical. There’s a saying that “everyone’s a genius in a bull market”. Bull markets can mask problems for a very long time…and we’re now in the 11th year of the current one. At this point you want – need — to be sure you have competent hands managing your money.
As you can see, it is truly buyer beware. So moving on, how can you make sure you hire a quality advisor/wealth manager?
Tip #1: Ignore Titles and Instead Focus on Credentials and Designations
In a world of confusing marketing titles, there is really only one way to find people who are qualified to help you manage your money. That’s through the right use of professional credentials.
But remember, Wall Street does not make it easy. Along with a handful of real credentials that are difficult to obtain, there are many credentials “for sale”. In fact, it is estimated that there are more than 250 certifications and designations currently in use.
As previously stated, some of these financial certifications and designations do happen to be recognized and reputable. The quality ones require many hours of education, study and testing to acquire and not everyone passes the exams. Others go even further by verifying experience and requiring the professional to adhere to a code of ethics.
Here is a list of ones to look for:
- Accredited Investment Fiduciary Analyst (AIFA®)
- Certified Investment Management Analyst (CIMA®)
- Certified Financial Planner (CFP®).
- Chartered Financial Analyst (CFA®).
- Certified Public Accountant (CPA)
For any other designation, be careful as they may be designed to make people look more knowledgeable than they really are.
So my advice is to always research the initials behind the prospective advisor’s name. Here is a free online resource where you can check the quality of advisor certifications and designations:
Tip #2: Interview Your Candidates and Ask About Their Experience
When it comes to handling someone’s money, experience is critical. So be sure to ask detailed questions about a person’s experience with questions such as:
- How many years of investing experience do you have?
- Who is your typical client?
- What is your experience through different market cycles?
- How will you manage risk for me?
- Are you a fiduciary investment advisor?
Look for detailed responses. Also, it’s recommended to look for an investment advisor who has helped clients with similar needs to yours. They will understand your goals and challenges better.
Tips #3: Stick with Independent Advisors
As I previously noted, many of the large Wall Street brokerages — the brand names — are set up to make money, a lot of money, for their shareholders. That’s their business model. Their first loyalty is owed to shareholders, not to you, the client.
Case in point: you’re probably familiar with the Wells Fargo saga, where the reach for profits caused employees to open up accounts for people without their knowledge. This was not an isolated case. Most of the large firms have sales contests where the top “producer” wins a substantial prize for selling his or her clients more of the highest margin products.
My advice? Look for independent fiduciary advisors that don’t have a brand name. That means they need to build a reputation for integrity and satisfied clients because they probably only grow by referral. They don’t spend large amounts on advertising to keep people walking in the door. With independent advisors, they must work to achieve their clients’ financial goals, help their clients make informed decisions, and always keep their clients’ best interests at the forefront in order to succeed.
Tip #4: Always Demand a Fiduciary
There is some good news. You do have control over the ethics of an advisor that you eventually select. As I mentioned, some advisor business models are built on the fact that they can put their interests ahead of yours. But there’s another type of investment advisor, one who acts as your fiduciary. That means they legally must put your interests before their own. In other words, they can’t recommend the more expensive product that would put a higher commission in their pocket. Or if they do, you have legal recourse.
So always ask whether a prospective advisor (or your current advisor) will act as your fiduciary, all of the time. If the answer is no, don’t work with them. There’s too much at risk.
Tip #5: Get it In Writing
Trust, but verify.
~Old Russian proverb
My final piece of advice is this: get all the answers to your questions in writing, then hold on to that documentation. Verbally, it will do you no good. Any quality advisor will completely understand and respect that you are educated enough to ask for these answers in writing. If a prospective advisor is not understanding, that’s a valuable red flag. Walk away.
Remember, it’s up to you to watch your money closely. Commit to being an informed investor and you’ll be better equipped to make sure your money stays safe.
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