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Separating the Wheat from the Chaff …

Trusting a Financial Advisor

 

How can a client trust a Financial Advisor? There are over 650,000 folks with registrations to sell products of one kind or another. It is awfully confusing for a consumer to figure out which person is best suited to help them and has the consumer’s interests (and not the advisor’s pocketbook) at heart.  

 

Consider the source of the advice and follow the money.  For comprehensive advice, it’s best to be working with someone working on your side .

The results of various industry surveys can be sobering.

 

In a poll of 1,200 individual investors, more than 83% admitted to not knowing how to determine the quality of a financial advisor.  More than 88% noted that they did not know the critical difference between advisors and financial sale representatives.  Nearly 85% base their selection of an advisor on some subjective criteria. These investors rely on an emphasis on personalities, brand names and advertising slogans.

 

A major source of investor confusion lies in the titles used by those in the industry. Financial planner, advisor, wealth manager, advisory representative titles mean very little to lay people.  And there is a virtual alphabet soup of credentials out there.  Some are issued by nothing more than “credential factories” earned in a weekend in a crowded hotel ballroom.

 

Consumers may assume that just because someone has initials after his name or passed a regulatory exam that that conveys some sort of expert status onto the advisor.

 

Since we live fast-paced and complex lives, it is sometimes difficult to have the time to do our own due diligence and we rely upon short-cuts to fill in the blanks here. As consumers we look to other trusted outlets to help in the comparison of products.  Think here of Consumer Reports and their monthly reviews of various products.  We are all familiar with Morningstar’s famous star rating system for mutual funds.  But there has rarely ever been an independent rating service for financial planners and advisors.  Consumers should consider the industry trade organizations as a resource.  Another non-affiliated third party trying to bridge the gap is the Paladin Registry (www.paladinregistry.com) , a four-year old firm that invites advisors to submit their information for review.  Those who meet their stringent list of criteria and background checking are rated as five-star advisors and featured as part of their network.

 

Whether a consumer decides to rely on a third-party organization, a trade group or a referral from a friend, I think that it is imperative that a consumer have a process in mind to selecting an advisor.

 

I would suggest that a consumer needs to consider at the very least:

·         Education

·         Credentials

·         Experience

·         Compensation Methods

·         Fiduciary Status

·         Background Checks

 

Anyone can hang out a shingle to be a “financial planner” or “financial advisor.”  There are minimal requirements to be licensed to sell securities.  But there is more to financial planning than just investing.

 

This is why the industry, trade groups and the media have been gravitating toward the CERTIFIED FINANCIAL PLANNER ™ designation as the standard.  This designation requires a commitment to education covering six major areas of financial planning ranging from insurance to retirement to estate and tax issues.  There is a rigorous multi-day, multi-part exam which has an average 50% pass rate of the typical 6,000 test takers each year.  Even if one passes, one can only use the CFP ® marks by passing an equally rigorous personal and professional background check including demonstrating a minimum of three years of related work experience. And there is an additional requirement for on-going professional education.

 

To learn more about the CFP ® marks or how to interview a prospective advisor, please visit the CFP Board of Standards web site at http://www.cfp.net/learn/knowledgebase.asp?id=8.

 

To access the regulatory agencies to check on a licensed sales professional, please visit http://www.cfp.net/learn/knowledgebase.asp?id=16.

 

Beyond the knowledge, skills and experience to do the job, consumers should consider if the advice they are given is compromised by the method of advisor compensation.  For a carpenter with only a hammer, all problems may look like a nail.  For someone who just represents life insurance, then all solutions will center on using insurance.

 

Working with an advisor should not be dictated by the size of one’s investment portfolio. 

 

I think it is imperative that an advisor be like other professionals and act as a fiduciary. Most do not. Acting as a fiduciary requires the advisor to act in the best interests of the client.  Advice has to be the best available for the client’s situation.  It is more than the standard that brokers must adhere to in their business of financial product sales. For a more complete discussion, you may want to check out the organizations I cited above or the independent rating service at www.paladinregistry.com.

A true planner is not expected to know everything but if you look in the text books you’ll note that the visual used is one of a quarterback – someone who can call the plays, leads the team and coordinates with other professionals. At the very least, a planner knows the client and can marshal resources and other experts.  

Planning is a process that requires full cooperation by the client, too.  A client has to also understand his responsibilities in the relationship. They can’t abdicate. They must be actively involved in the decision process. This means being truthful with the advisor and providing complete documentation. (Heck, if the same client went under the knife and didn’t disclose all the meds they take, can the doctor really be at fault if something goes wrong?).

With consumers burned by bad advice or inappropriate products offered by salespersons, it is no wonder that there is a lack of confidence.  But that is no reason to ignore taking action and working with someone qualified to lead through the financial jungle. Finding a qualified advisor does not have to be like searching for a needle in a hay stack. Using some common sense and the resources from reputable industry resources will help in finding the right person with the right approach for you.

 

 

CHARTERED RETIREMENT PLANNING COUNSELOR and CRPC® are registered service marks of the College for Financial Planning. CERTIFIED FINANCIAL PLANNER™ and CFP® are registered with the Certified Financial Planner Board of Standards, Inc.

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