Trust is one of those feelings that is hard to define and sometimes difficult to attain. When it comes to financial advice, trust is precisely what many consumers are seeking. However, they find it difficult to determine whether a current or potential financial adviser is likely to be worthy of their trust.
Many financial firms hire advisers, at least in part, because of their sales skills and their ability to “connect” with a client. Because trust is mostly an emotional response, that ability to connect can sometimes create a false sense of trust. Good salespeople are generally very friendly and personable, and it can be tempting to assume that you can trust someone because you like them.
While it is important to connect with your financial adviser, I want to look deeper at the logical and quantifiable aspects of determining whom you should trust. No set of questions or guidelines can guarantee that trust but doing your homework can help. Here are ten areas where you can dig deeper to help determine if you can trust your financial adviser.
10 Questions to Determine if Your Adviser is Trustworthy
1. How is the adviser compensated?
Because compensation can influence advice, it is important to understand how your adviser gets paid and if that compensation aligns with your interests. The Fee-Only method of compensation aligns the interests of the adviser with his or her clients. Fee-Only, according to both The National Association of Personal Financial Advisers (NAPFA) and the Certified Financial Planner™ (CFP®) Board of Standards means that the adviser receives no compensation or benefits from anyone but the client. Since there are no “kick-backs” or discounts allowed for fee-only advisers, their advice to their clients is not being influenced by any outside source. Some advisers may be fee-based or commission-based, meaning they are compensated in part with commissions from the companies whose products they sell.
If there are commissions involved or any other type of revenue sharing, conflicts of interest between you and your adviser could exist. You have every right to ask how your adviser gets paid, and even how much. If they squirm and try to avoid the question, that is a red flag. You should also ask if any potential conflicts will be fully disclosed so you can understand what is influencing the recommendations. Don’t be shy with this one.
2. Will he or she act as a Fiduciary for me at all times?
A fiduciary has a legal obligation to put your best interests first. In 2016, the Department of Labor (DOL) introduced an expanded definition of “Investment Advice Fiduciary” under ERISA (Employee Retirement Income Security Act of 1974). This new fiduciary rule required all advisers for retirement accounts like IRAs and 401(k)s to act as a fiduciary while advising on those accounts. After a long and arduous comment and review period, in March of 2018 the 5th Circuit of the US Court of Appeals ruled against enacting the legislation, citing it was beyond the scope of the DOL. Concurrently in March of 2018, the CFP Board instituted an updated version of their Code of Ethics and Standards of Conduct. These new standards clearly require CFP® professionals to always act as a fiduciary when providing financial advice to a client. These revised CFP standards will become effective October 1, 2019. Why would you want an adviser who is only required to act in your best interest part of the time? Ask if yours is legally required to act as a fiduciary at all times, and then ask to have it in writing.
3. How does he or she choose which investments to recommend for me?
To act in your best interest, it is best if there is no connection between the adviser and the product. It could also be a red flag if the adviser is limited in which products he or she can recommend. A car dealer who sells Ford vehicles will unlikely be able to recommend that you buy a Toyota even though the Toyota might be your best choice. You should ask for an explanation of the process they use to select investments and if they have a similar process to determine when to sell them.
4. What percentage of time does the adviser spend trying to find new clients?
Most advisers are responsible for bringing in new business. The time they delegate to those activities detracts from the time they can spend on client portfolios and needs.
5. What credentials does the adviser hold?
There is an alphabet soup of letters that could be after an adviser’s name. Some designations, like the CFP® and ChFC® designations are well regarded and require substantial education and testing to achieve them. Others are not so well regarded, nor do they have stringent qualification requirements. You can learn more and compare them on the Financial Industry Regulatory Authority (FINRA) website.
6. Does he or she follow a written code of ethics?
While this might be a red herring in that virtually anyone can say they follow a written code of ethics, some financial groups like NAPFA and the CFP® Board require their members to abide by a written code of ethics. Ask for it in writing during your interview.
7. Are there any regulatory issues on his or her record and, if so, what were the circumstances and any dispensation?
You can check out most financial advisers through FINRA’s Broker Check to see if they have any disclosures listed. For Registered Investment Advisers and Investment Adviser Representatives (IAR) you can also visit the SEC’s Investment Adviser Public Disclosure page directly or through a link from FINRA. Remember that not all disclosure items should necessarily cause concern, but you should discuss them with your adviser or candidate.
8. What services can you expect from the adviser?
Services range from investment advice on a single need all the way to comprehensive financial planning. Make sure you know what you want and need and match your needs with the appropriate professional. It can be difficult to know what services you really need, so discuss this with each professional to find out what services he or she offers and how it can add value to you. Forbes Magazine published an article that outlines The Value of Financial Advice. You may be surprised to learn that a more comprehensive relationship than simply picking investments may have a much greater impact on your financial life and at similar costs.
9. Is the adviser willing to put your plan in writing so you have a reference to look back on?
If your plan is not in writing, how will you know if you are on the right track? And how will you hold your adviser’s feet to the fire if he or she fails to provide what you were expecting? Even if you are only asking for some help with picking investments, how do you know, and how will the adviser determine what fits your needs? A written plan outlining exactly what you and your adviser have agreed upon provides the documentation for everything he or she intends to do for you. You might also consider requiring an Investment Policy Statement to make sure there is agreement on your investment strategy.
10. Does the adviser have a list of current clients that you can speak with regarding their experiences?
This is one of the best resources once you have concluded that a potential adviser might be a good fit for you. Of course, no adviser is going to give you unhappy clients to speak with, but you can learn a lot if you ask the right questions. Ask the client if the adviser does what he or she promised. This can help you get a feel for whether or not you can trust what you had heard during the courtship stage. Receiving the same answer from several clients, can be a good indication that the adviser is trustworthy. Also ask the client if expectations were met or exceeded. How the client responds to that question can also be a good indicator of how trustworthy the adviser is.
For more information on what it means to work with a trusted financial adviser, check out our newsletter that covers how the Department of Labor defines it. You can also learn more about our firm’s approach to developing trusting client-adviser relationships.