What should you look for in a financial advisor? I think for most investors, knowledge, cost and performance come to mind. But how can you tell if an advisor is truly knowledgeable? 

Unlike attorneys and medical doctors, who undergo years of rigorous education and training before they are certified to practice, anyone can present themselves as a financial advisor.  In reality, some “advisors” are merely salespeople for either insurance, annuities, or their own company’s proprietary products. 

When evaluating whether an advisor has sufficient knowledge or not, it is important to check the advisor’s educational background, as well as their professional designations. Please keep in mind that not all professional designations are equally prestigious. Some require years of education and rigorous testing.  In contrast, others just require a check for an annual membership fee. Please watch my video “Not all Financial Designations are Equal” for a detailed explanation of the different professional designations within the financial industry. The most respected designations include CFP, CPA/PFS, CFA, and ChFC.

Cost is obviously, very important. Many times, investors focus on ONLY on the advisory fee; however, this is often just a small part of the cost. What’s important is the overall or all-in cost. The main components of the all-in cost include the advisory fee, the product’s internal costs, and trading costs. Some financial firms will charge you a smaller advisory fee but will put your funds in inefficient, expensive products or programs. Keep in mind that in the financial industry, price and quality are NOT at all positively correlated. Unfortunately, the costs of financial products are not always transparent. So how do you know whether an advisor and a firm are likely to put your money in expensive products and/or programs? You need to find out whether there are conflicts of interest.  

Proprietary products, commissions, and kickbacks from product companies are all conflicts of interest that can stand in the way of your advisor serving in your best interest.  Let me give you an analogy.  If doctors receive kickbacks from some drug companies, but not others, whose drugs do you think they will most likely prescribe? The chances are you may end up with expensive but ineffective drugs, or worse, drugs you don’t even need to take. The same conflicts of interest apply to the financial services industry.   

Unfortunately, a firm’s website will give you very limited information. They won’t list their many conflicts of interest on their website, they also won’t list that they have been fined and sanctioned by the SEC or other regulatory bodies. Please watch my videos “Do You Know Your Advisor as Well as the SEC “, and “Fee Only vs. Fee Based and Commission Financial Advisors” for a discussion on advisor compensation models and how to conduct due diligence on your advisor through regulatory filings. You can also watch my video about Fidelity and TIAA CREF for examples of conflicts of interest.  (show “The Web of Conflicts of Interest at Fidelity” “The Web of Conflicts of Interest at TIAA”) You owe it to yourself to perform a thorough analysis before trusting someone with your life savings and financial success. The stakes are high.  

The last item is performance. Honestly, the question “what has your return been for the past 10 years” bears minimum significance. First, returns are correlated with risk, secondly, past performance does not guarantee future results, and third, it is easy for an advisor to cherry pick a portfolio with great returns to show you.  A successful portfolio is the result of a combination of, among other factors, a solid investment philosophy, sophisticated rebalancing strategies, smart trading strategies, continuous tax planning and unwavering discipline. 

So here is what I suggest, at the starting point, ask your financial advisor the following questions and make sure to get the answers in writing: 

Are you a fee-only advisor? 

Are you licensed to receive commissions?

Do you receive commissions or kickbacks? 

Does your company have revenue sharing agreements with product companies? 

Does your company have proprietary products? 

Does your company have other affiliated entities? 

Do you have a legal or disciplinary history?

Does your company have a legal or disciplinary history?  

What is your educational background? What professional designations do you have?  

Are my assets going to be custodied by a third-party custodian? 

Your financial advisor is your partner on the way to financial success. You and your partner should share the same goals and avoid having conflicts of interest. A good partner can guide you to success and a bad partner can compromise your mission. 

To watch the videos I mentioned above and many others, please visit www.zhangfinancial.com.