Q: You brought up a great point about trusting financial advisers in a past blog post. How do I find a good financial adviser that I can trust to give me sound advice and not just sell me things that may not be appropriate for my situation?—Val
A: You’ve asked a really loaded question, Val. I’m going to give you a no holds barred answer.
I have young kids. I’ve started to explain to them lately that most people are good people, but that there are bad guys out there. Superheroes and villains have helped to provide a good frame of kid reference.
The adult world is no different—in the financial industry or otherwise. But the bad guys in the financial industry aren’t necessarily bad people. The industry is simply geared towards promoting, in some cases, bad practices.
Most financial advisers sell products including specific investments and insurance. Some of those advisers are only licensed to sell certain types of products, so they can’t really tell you about better products if they are available. Other advisers sell only products for their company, so they won’t tell you about the competitors’ products even if they are better. Yet others have been so brainwashed by their company’s training that they truly think that they are doing the right thing, even if they’re not. So I’d say few of them are really bad guys, Val. They may actually be trustworthy, just not the best choice and maybe not giving the best advice.
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There is a suitability crutch in this industry. As long as a financial adviser makes recommendations that could be considered “suitable,” they’re covered. But what is best is not necessarily what passes as suitable. Would you want to have a suitable heart surgery? A suitable parachute? A suitable brake pedal?
Furthermore, financial advisers do not necessarily provide financial advice. The term “financial adviser” and/or “financial advisor” is not regulated or indicative of any specialized training in this country. Instead, look for an adviser’s credentials (CFP, RFP, etc.).
Finally, financial advisers are not fiduciaries. They are not required to put your best interest first. Therein lies one of the big impediments for people like you, Val, in your pursuit of good advice.
I meet lots of great financial advisers. And I can honestly say that some put their clients first all the time and most do the best with what they’ve got. It’s really only a small subsection that are doing real damage to a client’s finances. And there’s probably just as many bad mechanics and gardeners as there are bad financial advisers.
The badness in this industry is moreso a result of the regulatory environment, the compensation practices and the size.
Regulation is weak. A suitability standard is not enough when you’re dealing with people’s money. Likewise, you can’t expect people to act as fiduciaries if they’re not fiduciaries.
The compensation practices are shoddy. While things are starting to change, how a financial adviser is paid is still a bit of a black box. People wouldn’t buy a car without knowing the price, but many do just that when they hand over their retirement savings. If you understand how much you’re paying and what you’re getting, at least you can assess value.
Finally, there are very few big players in this industry and the lack of competition means that they can charge too much when compared to other countries. And because they’re so big, it’s hard for them to be nimble from an investment perspective. Many active managers have a real challenge providing value and keeping pace with the index due to their size.
So how do you find a good financial adviser, Val? Ask them about your finances. Not the stock markets; not Apple shares; not what rate of return they got last year. Ask them about saving for your kids’ education. Ask them about your mortgage. Ask them about medical expenses in retirement. If they put themselves out as a financial adviser, make sure they can actually advise you about your finances. In particular, because your investment returns are largely out of their control.
Beyond that, if they sell investments, try to understand their approach, how they will manage your money and how they get paid. If they’re clear and concise in their answers, that’s what you want. If you don’t understand or they don’t answer you directly, shop around.
If you have less than $100,000, mutual funds may be your best bet. If you have more than $250,000, a discretionary portfolio manager may be a good fit. In between is a bit trickier.
If you’re a hands-on investor, consider a commission-based adviser who charges you a transaction fee to buy and sell, but be careful about churning the account. If you’re interested in managing your own investments, consider a simple buy and hold ETF portfolio with annual rebalancing.
Unfortunately, there is no one-size-fits-all answer.
There are plenty of different approaches to investing ranging from do-it-yourself to hedge funds. One of them is perfect for you and while I have my own opinion as to what works best in which situations, as do most people reading this column, only you can be the judge after understanding all of your options.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products.