How To Choose A Financial Advisor. Part I: Training And Designations

by: John Lohr


What is a financial advisor?

Don't stand for a questionnaire.

Are designations important?

By John Lohr and Ian Lohr

"On Wall Street, there are more commissions paid out to stock salesmen than profit is collected by stock buyers." - Will Rogers

From reading Gil Weinreich's recent thought-provoking articles here on Seeking Alpha, it becomes apparent that the lack of understanding by investors about who and what they signed up for is a big part of the advisor/investor dysfunction. There are more than 600,000 financial advisors in the United States today. In a 40-year career on Wall Street, I personally helped train about 50,000 of them. Maybe we didn't do such a good job.

I would estimate that there are 4,000 or 5,000 who actually know what they're doing and place your interests first. Far too great a percentage of the rest are salespeople trying to sell you something.

One of my heroes, Warren Buffett of Berkshire Hathaway, calls them "helpers." They come in a variety of shapes and sizes accompanied with designations -- a few which actually mean something. Under the guise of investment advice some give you a simple questionnaire and try to fit you into a "model" by scoring the questionnaire -- say a 1 for very conservative and 6 for most aggressive. Individual investment objectives do not fit into that matrix, however.

What I am going to do in this first of three articles is to describe some of these helpers, look at the designations and give you my take on them. In Part 2, we'll look at mutual funds and ETFs and even annuities. In Part 3 we'll discuss how to pick a helper.

1. The first place to look for a helper is your bank. Some banks employ branch or regional investment salespeople that are generally salaried and under-trained. They may know a little about mutual funds.

2. Insurance agents can be licensed mutual fund sales persons and they usually like annuities a lot. Go to an insurance agent for your investment advice? I ask you this: would you go to Russ the barber to buy life, home or auto insurance? (Okay, maybe some would, but they are beyond my ability to help.) Insurance agents are accustomed to receiving huge fees for selling their products.

3. Stockbrokers are trained to sell stocks and bonds, and a plethora of other products from which the firm made big bucks. Stockbrokers may get commissions on trades, but if you pay commissions, you're probably overpaying. Brokers may also get asset-based fees, but careful. Fees in lieu of commissions are seldom cost-efficient unless a lot of trading is done.

4. CPAs are perhaps your most important advisors. However, use them for tax, estate and audit advice at which they are very good. They are highly trained professionals and have a strict code of ethics to follow, which usually mandates the avoidance of rendering investment advice for a fee because of the inherent conflicts. Pay them well for the expertise they provide, but don't expect them to tell you exactly what to do with your money.

5. Lawyers. Get serious. The only people worse at managing their own money than lawyers are doctors. As a lawyer, I can personally attest to this fact. Whatever you pay my lawyer colleagues, it's probably too much. Don't pay for their investment advice.

6. Financial planners. They don't like that term anymore and hide under a variety of cloaks like "investment advisor," "financial advisor," or some other generic euphemism. You may pay them for a financial plan and then turn around and pay them fees for implementing it. (See "fees" in Part 3). Some tout "Fee-only service," but I wouldn't pay asset-based fees. Think cash.

7. Financial advisors represent a large growing population of variously trained and variously motivated salespeople. Their fees, like their training and motivations, are all over the board, and it's difficult to separate the good from the not so. Think of it this way: somewhere in this country there is the worst financial advisor. The bad news is that somebody has an appointment with that person tomorrow. (Thanks George Carlin).

8. RIA: Registered investment advisor (registered with the SEC) requires no specific qualifications and no testing. Registration with the Securities and Exchange Commission costs about $175, and means nothing. Don't get too excited about the designation. They are No. 7 who filled out long federal forms.

9. Investment consultant is another overused term, but the very good are well trained and don't charge you 1% of assets for their services. (See below for designations.) The best ones are the best of the helpers.

Now, the myth about designations:

There are hundreds of organizations that exist to charge helpers big fees to put them through a course (usually home study with an open book exam) and then give them a fancy certificate to hang on their wall and letters to put on business cards. There are a very few that actually signify investment expertise; most do not. Let's look at some:

  1. Certified Financial Planner - Good for very general advice and planning principles, but no investment depth.
  2. Chartered Financial Consultant - I have no idea what that means.
  3. Certified (or other official sounding term ) financial advisor - Probably costs less that the CFP, and there's a reason for that.
  4. Any designation with a "U" in it has nothing to do with investment advice.
  5. Fiduciary Advisor - A child of the Pension Protection Act of 2006 that empowered thousands of under-qualified persons to give some sort of advice.
  6. Senior Advisor - No, not an old one, but one supposedly specializing in advice for seniors. Are you going to trust a 31-year-old with a certificate on the wall with that power?
  7. Certified Investment Management Analyst - A difficult, demanding program taught at leading universities like U Chicago and U Penn Wharton that requires rigorous analytical study. Offered by the Investment Management Consultant's Association, it imposes a strict code of ethics on its members. For this reason, there are only maybe 4,000 to 5,000 CIMAs in the country. It is a symbol for qualifications, but heavy on the analytics.
  8. Chartered Financial Analyst - requires a rigorous three-year course of study that only the smartest analytical minds can endure. Look at it this way: I have a doctorate, passed the bar exam, and had a long career as president of a Wall Street firm, and this course frightens me. The best.

So with all these helpers with their designations, what are they trying to sell you? I'm glad you asked. Stay Tuned...

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: A version of my series originally began in the Buffalo Bulletin, July 8, 2008. After my son/co-writer edited it, it is still mostly relevant today.

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Tagged: Financial Advisors, Wealth Management
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