A New Take on Evaluating Your Financial Advisor

By Craig Verdi, CFP®

There is a lot of news and information out there on how to choose a financial advisor. Typically, the general public is told to ask questions about items such as fee levels, specific investment strategies, performance, and opinions on future performance.

“Performance” is an illusion. The only performance that counts is your account. Each of our client’s accounts hold different securities, since each of our clients have different goals. Therefore, all of our client’s returns are different each and every year. It would be irrelevant and unethical for us to quote “returns.” Excessive fees will be weeded out by the steps below, as well as long term poor performance. In general, we think most of these columns are asking the wrong questions, and believe the focus should be very different from what is normally discussed in the media and in conversation.

There are some simple items you should investigate when selecting a person with the responsibility of guiding your family’s precious resources. Don’t focus on what he or she does (which is impossible to know) as much as who he or she is. More is learned by knowing someone’s character and past versus what they tell you they will do in the future.

The following are a few real life issues you should look at. Some may sound a little shocking, but we ask you to think differently here. Do you, not someone else, but you, want the steward of your family’s resources to:

  • Have been sued several times or sued someone else several times (excessive litigation)?
  • Been involved in domestic violence?
  • Been terminated from their prior advisory firm?
  • Have multiple complaints or arbitration settlements against them?
  • Be behind or delinquent in child support payments?
  • Declared bankruptcy or several bankruptcies?
  • Have poor credit?
  • Have a substance abuse problem?
  • Have 30-40 or more minor traffic violations?
  • Have no formal education?
  • Here are some action items you can immediately take to learn more about your current or prospective advisor:

Background check: Check out the FINRA site (www.finra.org). FINRA is one of our regulators. By performing a broker search on this site, you can find out a lot about an advisor. When you find the advisor you are looking for, look under “Disclosure Events.” You will see either a “Yes” or “No.” If “Yes,” click on the detailed report. If there are more than 3-4 incidents listed, I would search for another advisor.

It is no trivial event when something is reported. Items that get reported include personal bankruptcies, conflicts of interest, criminal suits, civil suits, complaints, and arbitration. Arbitration is our equivalent of being sued. The client has claimed damages and he or she’s exhausted other avenues of recourse. This could be for fraud, unsuitable investment recommendations, or other actions the broker has been accused of. In a small percentage of cases, the client’s claim is truly baseless, so read the case. The report should say who won in arbitration. If the broker has 3 or more arbitrations there is a serious problem. Ask the broker for their side of the arbitration judgment, as it is possible to receive a bad ruling. Look for a pattern, though, as multiple reports of similar complaints is definitely a red flag.

Other warning signs to look for on the FINRA site are if an advisor has left involuntary from a Broker/Dealer, switched Broker/Dealers several times within a short time span, or even been fired, or terminated by their Broker/Dealer. Even though he or she may have a simple explanation as to why this happened, it is a very serious issue to be terminated, as Broker/Dealers are not in the business of downsizing for no reason, and do not wish to take on the liability and cost of proving a lack of regulatory discipline on their part. There may be overwhelming evidence that this advisor did something wrong.

In today’s world, there is a lot of information available to the public. You look, you decide. It’s not as if the items listed above will keep someone from being a good advisor, but you should look for patterns of behavior that don’t align with your values. We use this screening process for potential clients as well, as we don’t want to work with someone with a trend of excessive legal problems.

Financial Stability: Is your advisor financially sound? Not rich, but sound. Young advisors may not be well off, but do they have overwhelming debt? Do they live beyond their personal means? Do they have poor credit? Are they behind in their financial obligations? Does their lifestyle (not wealth) reflect the values you have for your own lifestyle?

The first question to ask is, “What kind of retirement plan do you have for yourself?” and/or “What kind of plan does your company have for its employees?” If they don’t have a plan, I would search elsewhere. If the cobbler’s son had no shoes, one would find another cobbler. Second, does the advisor provide benefits to his or her employees? If employees are not cared for, your account will likely receive the same treatment.

“Could I have a copy of your credit report?” is also a perfectly valid question. You can get it on the spot. Offer to pay for it if you have to. It could be a tiny price to save you from disaster. Your advisor should have an exemplary credit rating. Why? Outside of the obvious reasons, if he or she is living paycheck to paycheck, behind on bills, saddled with debt or liens, etc., then he or she may get desperate. Through excessive trading, unsuitable investment recommendations, etc., he or she could use your account to make quick money on high commissions or fees, which is probably not in your best interest.

In conclusion, we believe you should start by finding more about the type of person your prospective or current advisor is. Performing due diligence on their regulatory history, criminal background, and financial standing, are all important when choosing someone to trust with your family’s assets. Once you are comfortable with the knowledge you have gained, then focus your attention on their specific advice. This component is obviously extremely important, but should be scrutinized only after the major vetting has been done, and you have found someone that you can trust.