Can You Trust Your Financial Advisor?

man gives hand shake to trust financial advisor

Can You Really Trust Your Financial Advisor?

Life is getting busier and more complicated, so it’s not surprising to learn that more and more people are hiring financial advisors to help them.  From just 2010 through 2019, the percentage of people in the US using financial advisors doubled.  That’s the good news; trying to navigate an increasingly complicated financial landscape on your own can be a recipe for disaster, so reaching out for help is a wise decision.  But can you trust your financial advisor?

This is a critical question, and too often (as we will demonstrate) the wrong choice is made.  Amazingly, most of us seem to know this in our gut.  A survey by the Certified Financial Planner Board of Standards found that 60% of the people using financial advisors “believe their advisor acts in their company’s best interest rather than the consumers’ best interest”.  We wish that were just a bad rap, but unfortunately America’s mainstream financial firms have provided ample evidence that this is true.  Consider this short list of settlements paid due to malfeasance:

Company                    Settlements Paid

Wells Fargo                 $10.2 billion

Bank of America         $77.0 billion

JPMorgan Chase         $40.1 billion

Morgan Stanley          $  4.7 billion

Citigroup                     $18.3 billion

(source Keefe, Bruyette & Woods)

Looking at this list of top brand names and the size of these settlements, it’s pretty clear that deciding whether you can trust your financial advisor or not is a very important decision, and that you cannot simply rely on picking one of the well-known national firms.  How do you make the right decision?

How The System Is Designed

The first step is to understand how the system is designed.  You see, even if an individual financial advisor is basically an honest person, he or she may still be working for a firm in a system with incentives that reward them for selling product, not providing objective advice.

Of the roughly 90,000 “financial advisors” in the US, 90% of them are brokers, who are paid to sell financial products.  Despite the fancy title, they are salespeople.  Now, there’s nothing wrong with sales – it can be an honorable vocation – but sales is different than advice.  And that difference is important.  If you know you want to buy a certain financial product, by all means go to a low-cost broker and buy that product.  But if you don’t know whether you need a financial product, or which product to buy, then you need professional objective advice.  You need an advisor, not a broker.

Find The Right Advisor

The second step is to find the right advisor.  As you’ve probably concluded by now we firmly believe you need objective advice.  Advisor is a word which covers many different roles.  As we’ve seen above, “advisor” is a title used by a lot of brokers.  Here’s the breakdown of who uses this title and whom you should choose.

People Using The Title “Advisor”

Brokers – they sell products for a commission and are allowed to call themselves “advisor”

Fee-based Advisor – they offer advice and have met some basic legal requirements to offer advice, but they still sell product for a commission and have a conflict of interest.

Fiduciary (Fee-only) Advisor – they offer advice (do not sell any product, nor accept commissions) and are legally obligated to work for their client’s best interests.

It has been estimated that less than 2% of all the “advisors” in the US are truly fiduciaries, truly people who will work for your best interest rather than for their own or their firm’s best interest.  Fortunately, with the internet, this is not an exercise of finding the needle in the haystack.  You can easily search for Fee-only advisor or Fiduciary and generate a short list to interview. First Financial Consulting is proud to say that we are true fiduciary financial advisors.

How To Tell If You Can Trust Your Financial Advisor

There are other issues to consider before you make a final decision.  In addition to integrity, you need quality and a good fit with who you are and how you approach life. The following criteria and questions may be a good start in determining whether you can trust your financial advisor:

Criteria To Use

  1. The advisor should have advisor’s credentials – some advance certification that establishes them as qualified to offer advice.
  2. The advisor should offer more than just money management. They should offer full scope planning.  You may not need a full suite of planning services, but the fact that an advisor could provide them means they are attuned to looking at the whole picture, not just at your investment account balance.
  3. The advisor should have experience working with people like you. Your situation will be similar to other clients’, but it will also be unique.  Don’t be afraid to explore how your situation fits into the experience the advisor has.
  4. The advisor should be aligned with you philosophically. This isn’t deep, college-level philosophy stuff; it’s basic chemistry and approach to life’s big questions.  If you don’t resonate with your advisor, even the best advice won’t be followed because you won’t trust it.

To help you in your task of finding the right 100% objective advisor for you, we offer the following questions to guide you along.  These are not the only questions you should ask, but they will frame the conversation and naturally allow you to ask more detailed questions as you go.

Questions To Ask

  1. Are you qualified to act as a fiduciary?
  2. Will you sign the fiduciary oath?
  3. Will you provide a list of advisory credentials that you have?
  4. What services do you offer beyond money management?
  5. What is your philosophy when it comes to investing?
  6. How many other clients do you have like me, and why are they like me?
  7. If you’re sick/vacationing who else in your firm will know about my situation and needs?

Check out some other important questions to consider.

Valuable Advice From A Financial Advisor You Can Trust

Choosing the right advisor is important because he or she can significantly help you accomplish your goals, and in many ways this is actually measurable.  The world is becoming more, not less, complicated and specialized.  Most of us are fairly capable, and we’re smart enough to know that we don’t set our own broken bones, build are own houses, make all of our own clothes, grow our own food, etc.  Even if you do some of these, you probably don’t do all of them.  You know that allowing a specialist to do some of these will save you time and money, and give you a better-quality product or service than you could provide.  The financial arena is no different.

Getting good financial advice can be among the best decisions you make.  A Vanguard research study concluded that advice can provide 3.75%/year in added value, but it has to be the right advice from the right advisor.  Choosing someone you can trust is a critical decision and well worth the effort to pursue.  If we can be of assistance, please let us know.  We’re committed to offering 100% objective advice that fits your specific needs.

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