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Finding a Trusted Financial Advisor

By: Terry Roe
Published in Articles on October 26, 2012

For many people, finding a trusted financial advisor is a difficult and daunting task.  I would like to suggest four questions you should ask anyone providing you with financial advice and seeking to become your trusted financial advisor.

  1. Will you provide me with a Fiduciary Standard of Care?

This is the highest degree of business responsibility one person can have to another.  It means that those who provide you with advice always put your interest ahead of their interest.  A federal law, the Investment Advisers Act of 1940, requires registered investment advisors to meet this fiduciary standard of care.  However, many people who provide investment advice are not registered investment advisors, and therefore are not required to adhere to this standard.  Many providers of investment advice follow a lesser standard, called the suitability standard.  This means that although a particular investment may not be in your best interest, it is deemed suitable for someone in your circumstance.  I recommend that you request, in writing, that anyone providing you with investment advice agree to meet the fiduciary standard of care provided for by the Investment Advisers Act of 1940.

  1. Will you disclose how much you have been paid, both directly and indirectly, on a quarterly or annual basis?

Most consumers are not aware of the many different ways financial advisors are compensated.  Some compensation methods used in the industry have the potential to create a conflict of interest.  You have the right to know how and how much your advisor is being paid for the advice he is giving you.  Remember, the advisor is working for you.  I recommend that you request, in writing, that anyone providing you with investment advice fully disclose how and how much compensation he receives for the advice he provides you.

  1. What range of investment advisory services do you provide?

Some advisors limit their services to simply recommending investments, but others provide a full range of wealth management services.  It is important to remember that every investor’s situation is unique, and that every investment should have a purpose and be appropriate based upon the situation and purpose.  I recommend that, at a minimum, you seek advice from an advisor who will help you establish a written investment policy statement (IPS) or investment plan.  The IPS should always address certain factors, including the reasons for the investment, the investment horizon and the degree of risk the investor can comfortably tolerate.  The IPS should serve as a guide to achieving your long-term goals and should be developed before the advisor makes any investment recommendations.  Depending on your circumstances, you may want to consider seeking the services of an advisor who provides wealth management services.  This includes working with your estate planning attorney, income tax advisor, insurance agent and others to coordinate your financial planning.

  1. What are your  educational background, credentials and experience?

Unfortunately, no standardized education is required for someone to call himself a financial advisor.  Therefore, a huge disparity exists in the qualifications of individuals who provide investment advice.  However, some credentials you can look for can help you determine an advisor's level of education and training.  A Certified Financial Planner (CFP) is a credential from the Certified Financial Planner Board of Standards, Inc.  Beginning in 2007, a bachelor’s degree is required for this designation, in addition to passing the CFP certification examination.  A Personal Financial Specialist (PFS) designation is granted by the American Institute of Certified Public Accountants.  To obtain this designation, an applicant must first earn the Certified Public Accountant (CPA) designation, which, in most states, requires a bachelor’s degree, an additional year of postgraduate study and passing a series of examinations.  I recommend you understand the background, training and experience of the person you are entrusting with your financial future.

In conclusion, all financial advisors are not created equal.  You need a trusted advisor to help you sort through complex financial decisions and develop a sound investment plan for a secure financial future.  I recommend you invest some time and do a little due diligence to ensure that those from whom you are seeking investment advice have your best interests in mind, and the qualifications to become your trusted advisor.

Terry L. Roe is a managing member of Onyx Financial Advisors, LLC, a Fee-Only Registered Investment Advisor, located in Idaho Falls, ID.  He can be reached at (208) 522-6400. Published March 1, 2009 in the Post Register Financial Planning Insert.

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