Saturday, April 4, 2015

Evaluating the Competency and Integrity of Your Financial Advisor

Today’s financial world is very complex. So when you are in need of financial advice or products, where do you turn or who do you trust?
When speaking about his investment product, a business colleague used to say, “A person without integrity will cheat you deliberately. A person without competency will cheat you inadvertently.”
So how do you protect yourself against the unscrupulous and the incompetent?
The best way is to be informed.
In my book “Money Matters Made Simple” an entire chapter is devoted to this topic, For purposes of this article, I’ll touch on just a few of the points from that chapter.
Evaluating the competency and integrity of a financial advisor involves a 3-legged stool.
First leg of the stool is Credentials.
Financial advisor, financial consultant, financial planner, certified financial planner, investment rep, investment advisor –  all sound alike and seem interchangeable.
EACH term and credential has a very specific meaning. Let’s start with explaining:
Certifications, Designations and Accreditations
The average person is confronted with an alphabet soup of acronyms dealing with advisor’s qualifications. Some certifications involve extensive training and demonstration of competence, others involve simply attending class.
As a foundation for comparison, let’s start with the Certified Financial Planner® (CFP®) designation. To be become a CFP® requires a demonstration of both competency and the ability to integrate the major areas of personal finance, which include:
·         Preparing and analyzing Financial statements

·         Preparing Budgets

·         types of and managing Debt

·         Taxes – how impact financially

·         Insurance – appropriate use of

·         Investment – types of, diversification of, appropriateness

·         Retirement planning – calculating financial needs to prepare for as well as during

·         Estate planning – protecting assets while alive as well as after your passing.
In addition, the CFP® MUST ADHERE TO CFP ETHICAL STANDARDS and fiduciary responsibilities or risk losing their designation.
Because obtaining the CFP® is among the most vigorous processes, it is considered to be among the prestigious. Throughout most of the country, a person is required to have CFP®™ or comparable designation to refer to themselves as “financial planner.” Someone who calls themselves a financial planner without the appropriate designations should raise a red flag.
Some designations involve a more limited scope of personal finance such as Accredited Financial Counselor (AFC); others are geared to specific areas i.e., divorce planning, retirement specialists or geriatric planning. Each carries different requirements, some no more than attending a class. They may – or may not – carry a fiduciary requirement.  
Where does one go to learn meaning of and compare various designations? One website is FINRA (Financial Industry Regulatory Authority) is the agency that regulates investment representatives. Their site offers information on the various designations and the requirements for achieving them. Another good site for research is
Second set of credentials involves specific licensing, such as for insurance, real estate, securities (investments). WHY is licensing important? Because an advisor can only be compensated for products or services for which they are licensed.
For instance, a person licensed for insurance but not for securities can only be compensated for insurance, they can’t sell investments. The same is true of securities reps that are not insurance licensed.  
Here’s where it gets a bit more complicated: some products are a hybrid of insurance and investments. These hybrids – called “variable” products - evolved because investments inside insurance products have preferential tax treatment. To be compensated on those products, then, requires the agent to have both insurance and securities licenses. The products in question include variable life insurance and variable annuity.
But here is where much confusion enters: some insurance products mimic variable products. These products do not actually invest. Instead they use an index to determine your return. Indexed annuity is one example. I have heard them advertised as “get the same return as the market without the risk” and touted as “like investments.” But they are insurance products not investments!
SO BE CAREFUL – know what you are getting into and do your homework.Good question to ask the advisor: are there other products that are a better fit for my situation?
IF NOT OFFERED, ASK ADVISOR FOR HIS/HER CREDENTIALS. Ask what licenses they hold and which (if any) accreditation and certifications have been obtained? This will tell you whether they are limited in what they can offer which influences the advisor’s recommendations.
The second leg of 3 legged stool is Compensation.
Just like you expect to be paid for the work you do, so does your financial advisor. And just like most humans, advisors are influenced by the compensation they will receive for their work. Whether consciously or not, an advisor’s recommendation may be influenced by a number of factors such as
·         Whether higher commissions are paid on certain products,

·         Whether sales of certain products will qualify him/her for awards, trips, bonuses, or

·         Whether the sales will contribute to earning higher compensation levels.
So know how your advisor will be compensated.
Compensation may be one or a combination of 3 methods:
1.      Salaried employee from who typically one can expect unbiased recommendations. The employee, however, may be influenced by employer incentives to promote specific products or services.

2.      Commission – to receive a commission almost always requires licensing such as is required for securities (investments), insurance, real estate broker, and mortgage broker. The agent may be influenced by higher commissions on certain products, such as proprietary products. Sometimes the commission is paid by you upfront or on the back end, such as with certain classes of mutual funds. Other times it is factored into the price you pay. This is especially true of insurance products so you may be unaware of how much commission was paid to the agent. It is okay to ask whether and how much commission will be received.  It is also oaky to ask whether the advisor will receive incentives.

3.      Fee based –can take several forms:

a.      Retainer – which is a pre-set dollar amount paid monthly or quarterly in return for specified services;

b.      Flat Fee for service such $2000 to prepare a comprehensive customized financial plan;

c.       Hourly rate; or

d.      Management fee – typical of when someone manages your investments and receives percentage based on the value of assets being managed.
These compensation methods are not mutually exclusive.
If this information is not volunteered, ask! Know how they are compensated so you can make an informed decision as to whether the recommendations are in your best interest or the advisor’s interest.
The third leg is Experience.
Prior experience influences advisor’s recommendations. How long has the person been in the current role? What was his/her previous career?
For instance, back in 1999 when the stock market was exploding, one agent with whom I was acquainted (who had been an investment rep for 3 years and had not experienced a full market cycle) stated he never put his clients into bonds. After all, he said, why would he when he got such fabulous returns for them in the stock market. Both he and his clients rued that decision when the market plummeted in 2000.
In summary, learn as much about your financial advisor as you are able and make informed decisions!

To read more on this topic, you are encouraged to purchase “Money Matters Made Simple: A Woman’s Guide to Financial Health and Wealth” on either or through my website where you can receive a discount code for 10%.


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