How To Choose A Financial Advisor, Part III

by: John Lohr


Where you can obtain the best factual information about any financial advisor.

10 questions to ask a potential advisor.

Reasons to not solely rely on a referral.

"A stockbroker is somebody who invests all your money until it's gone." - Woody Allen

So I was having lunch at the Bozeman Trail Steakhouse the other day and talked to a local who had been to see one of these financial advisors for investment advice. I asked what the advisor said. The local replied, "Said I was a six on a scale of one to 10." I asked what that meant and got hemming and hawing and the conclusion was that neither the local nor the advisor knew.

Herein lies the problem in dealing with partially trained product salespersons that template a solution for investors. They ask a few simple questions like, "Would you be more comfortable owning stocks when the market was in a free-fall, or holding cash when the market was roaring up?"

What a dumb question. Investment questionnaires are intended to let the salesperson limit their risk of losing your money rather than in actually making you money. This is not personalized investment advice. Often the end result is to offer to put you in some mutual fund or series of funds, or maybe ETFs (or even worse, an annuity) -- for a fee, of course.

So, where are the best "free" helpers? You may as well ask me the air-speed velocity of an unladen swallow. (African or European?)

There are websites that claim to be objective, though, so let's look at a couple.

1. "Talk to Chuck." Charles Schwab charges fund families huge fees to be included in their "objective" fund or investment manager database. In addition, they used to charge financial advisors fees to be included as a "recommended" advisor. Their website leads you to buy their stuff (naturally), but it is by no means objective.

2. Fidelity. The "other" supermarket tries to sell you something (naturally), and most of the portals lead you to a fund choice. You can:

a. Do it yourself (buyer beware);

b. Get complimentary advice only when you need it. Ask: "How old is this helper and what training did they have?" Besides, when you think you need it, it's probably too late.

c. Pay a "nominal" fee for professional ongoing advice. Ask the same questions as the first two, plus "How much?"

3. Morningstar. Once in the business of only rating mutual funds, they have moved into the investment management business for the same reasons everybody else has -- there are big bucks in it. They still have their star funds and rate ETFs, but also offer analysis of your portfolio and feature "free" membership for a while. I didn't have the patience to see what and when you have to pay for something. I understand they also "rate" investment managers now. No idea what that means.

4. Vanguard. The low-cost brainchild of a great gentleman, John Bogle. They have good information for investors, including modules on: planning and education, controlling costs, retirement, general investment planning, college planning, investment basics, tax calculators

Vanguard funds are lower in costs than just about anybody else and their business focuses on index funds and ETFs. Look at their Admiralty Treasury Funds for some income options.

5. FINRA and the SEC. I guess most people don't think first of our regulators as a source of information. but they both have very good investor information.

But, what if you want an actual human being to help you navigate the Road to Retirement? In a recent Wall Street Journal article, it was reported that 78 percent of investors want unbiased advice in which the advisor and the firm are fee-neutral.

The level of expertise and independence of the advisor are a primary considerations in retaining advisors. If an investor wants to talk with an advisor, they may want information about asset allocation, taxes and estate planning along with un-conflicted investment recommendations.

Some of today's investors need someone who sits on the same side of the table as they do, and doesn't try to push products down their throat. Your helper should assist you in defining realistic goals and establishing an asset allocation strategy, evaluate investment options objectively, and guide you to the lowest cost vehicles with equivalent performance. Their concern should be for your welfare, not their revenues.

So, how do you pick an investment helper from among the 600,000 financial advisors?

First off, a recommendation from an investor friend or family member may help. Still, you should ask that friend or family member what they get from the advisor, what investments they use, and why are they referring that advisor? It's only common sense, but a referring party's investing needs, objectives and preferences might be vastly different from yours.

We talked in Part I about certifications and designations. CFP is great for financial planning and CIMA for institutional consulting analysis, but there are boatloads of certifications out there. Research what the letters actually mean. Ask me if you want. I have no horse in this race. Certifications: Caveat emptor.

There are some businesses that claim to "rate" financial advisors. First of all, their database is not exhaustive. Second, they may charge advisors to be in their database. Can you say "conflict"? It's that Latin phrase again.

Check out every potential advisor on both of these two sites:

If an advisor is or has been licensed as a broker he or she will be on this site. It will tell you firms they worked at, disciplinary actions, licenses. It's a factual gut check. This is a MUST.

It is the Investment Advisor Public Disclosure site. It has information on investment advisors registered with the SEC or states, including those who are not brokers. You should look at the advisor's ADV, Part 2. This is a MUST.

FOR BOTH SITES, GET THE DETAILED REPORT. If you have trouble understanding what you are looking at, email me.

After digesting all this, decide if you want to talk with this or that advisor. If you do, below are some questions that you should ask prior to hiring a helper:

1.What is their education? Did you know that someone without even a high school degree could call themselves a financial advisor?

2. Is the helper's advice independent and conflict-free? Are they affiliated with a brokerage firm or insurance company, or are they independent?

3. What training background, qualifications and experience do they have? And how thoroughly does the helper understand the markets, investment options and strategies?

4. How frequently will they communicate with you?

5. Are there any biases in their recommendations or the information they provide?

6. Have they made full and complete disclosure of how and what they get paid, including any direct and indirect compensation received by them and their firm from you or from any investment products they offer? Are these fees reasonable and level across product lines?

7. Do they adhere to the highest ethical standards? You can check with state and national agencies to see if a helper has had any complaints or actions. If you want to know how to check, call me.

8. Do you implicitly trust them?

9. Ask about investment performance, but don't just take their word for it -- ask for a report.

10. What do they get paid and what are ALL the costs in this arrangement? If you get an answer like, "Well, there are other costs, but they are not ours and we don't' control those," move on.

After all, what is really important is what you keep, not what you make. It's your money.



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: Some of this material was contributed by my son and fiduciary collaborator, Ian Lohr