The article’s title makes it “must reading”: Steps to find a qualified financial advisor. Its author is Kathryn Hauer, a certified
financial planner (CFP) and holder of an MBA degree, with more than 30 years in
the advisory field. I anticipated advice
on how to choose a fully competent professional to guide a client through the investment
maze so to insure financial success.
I acknowledge Ms. Hauer presents certain
useful information. I’m now aware of methods
to learn whether an advisor is in good standing with industry regulators. I also understand certain persons in the
field may be designated as “fiduciaries,” requiring they must only recommend
what is in their clients’ best interests.
Lastly, she described procedures to determine if an advisor has incurred
complaints, lawsuits or criminal charges.
These are certainly worthwhile things to know. However, the real question not answered
relates to how you find an advisor who will truly advance your economic
well-being. In short, who may you trust
with both expertise and your best interests at heart?
With this said, I too have a few thoughts on
selecting a financial advisor. As a
first concern, you’ll note the reference to a fiduciary, relating to the “clients’ best interests.” This is a term dating back to15th Century
English common law. A person acting in this
capacity is one who assumes a relationship of trust and confidence with
another. It literally requires this
designee not be in a situation where personal interests conflict in any way
with the interests of the client.
Brought down to more present times and relating to financial advisors,
it becomes a bit hazy. For many years
councilors who receive their compensation through fees on their clients’ gross assets,
and who refer to themselves as “financial planners,” have been trying to eradicate
their chief competition, licensed brokers, whose remuneration comes from
brokerage commissions on the purchase and sale of securities. The former normally subscribe to the
fiduciary code whereas the latter do not.
It’s gotten pretty ugly these past few years, with the U.S. government
now running interference for the financial planners by having enacted
legislation which will prohibit non-fiduciaries from servicing retirement
accounts.
Whether this new law will actually benefit
retirees is questionable. In fact, it’s
no longer clear what constitutes conflict of interest. Perhaps an advisor who receives fees based upon
the value of a client’s assets might claim to have “no personal interest
conflict in any way with the interests of the client.” What, however, if the advisor then recommends
to his clients of all ages, as does a most prominent CFP who champions his
fiduciary designation, that their homes be mortgaged to the hilt, with the
proceeds to be delivered to the advisor for further investment? Do you detect a slight conflict of interest? Of course, regardless of the vows and
pledges, the reliability of a fiduciary is only as
good as his or her moral character. The
notorious swindler Bernie Madoff qualified as a fiduciary, but he perpetrated
the most massive financial fraud in our nation’s history.
As an aside,
recognize what is the practical effect of incurring mortgage debt with the
funds delivered to your investment advisor.
Very simply, you’re borrowing to invest—normally referred to as leverage. You must
pay the mortgage loan; you may or may not profit from the investment. This concept led to the 1929 stock market
crash, followed by the greatest depression in U.S. history. Leverage is fine in a rising market; it can
be a disaster in a falling market. I’ve
found over the years that it invariably pays to hedge your bet.
Before we try to zero in on our advisor of
choice, let’s take a look at what you will find as you survey the world of
financial functionaries. First of all,
be aware there’s a multitude of salespersons, posing as investment advisors,
simply trying to eke out a living as best they can. Insurance agents are pumping annuities;
precious metals dealers will assure you there’s no finer investment than gold
and silver; even timeshare reps will try to induce you to dump a few of your
bucks into one of those losers. You’ll
also encounter stock brokers who will assure you they can systematically
outperform the market. Perhaps they
can—perhaps not. And finally you’ll be
accosted a varied assortment of self-styled entrepreneurs and confidence artists,
who’ll do their best to coerce you into investing in whatever they have
available at the moment. Understand this
is a hostile world, and without some defenses you may expect to be eaten alive.
The greater likelihood is you’ll wind up with
a financial planner, certified or otherwise, who will place you into the
conventional index funds which are now the investment by default for most
Americans. The rationale is as follows:
As the historical stock averages, such as the Dow Jones Industrial Average
(DJIA), consistently rise over the decades, you may expect your portfolio to do
the same. You will therefore be invested
into whatever funds your advisor recommends.
Inasmuch as the DJIA does not experience the overhead fees skimmed by both
your advisor and the fund management, nor is it subject to state and federal
capital gains taxes from rebalancing, as will your portfolio, you’ll not enjoy the
predicted return. Naturally, these details
will not be shared with you. Instead, you’ll
be assured, regardless of any short term volatility, and irrespective of any
boilerplate slogans suggesting “Past performance is no guarantee of future
results,” that your long-term future is secure.
This gets us back to our starting point: How
do you find a qualified financial advisor?
Although, unlike Ms. Hauer, I’m neither a CFP nor the holder of an MBA
degree, I’ve developed some pretty firm convictions on this subject. If you’re reasonably astute and organized,
there’s no finer advisor than the face in your mirror. No one else will match your interest in your
own well-being. Investment concepts can
be learned and with trial and error you’ll soon get the hang of it. If, for example, corporate securities are
your choice, you’ll devote time and effort in selecting specific corporations
with lower price-earnings ratios, that show consistent profits, and which pass
a portion on as quarterly dividends. You
then review your personally-managed portfolio regularly, disposing of those
failing to meet these requirements.
On the subject of financial advisors, I’ll leave
you with this final thought: Ideally, your advisor shouldn’t profit unless you
do. However, as members of the advisory
trade don’t operate this way, there’s usually nowhere else to go. If you suspect the face in your mirror is not
quite up to the task, your best bet is a financially astute friend or relative
who provides counsel gratis, often inviting you to join in as a fellow investor. I’ve involved myself in this fashion for many
years and it works well.
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If you enjoy this
weekly Straight Talk by Al Jacobs, you’re invited to check out my monthly
Financial Newsletter, as well as my new book, The Road to Prosperity
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