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Why you shouldn’t choose a financial adviser simply based on trust.

For some reason, it has always been easier to lose money than it is to make it and keep it. According to the Utah Division of Securities, during 2007 alone, they filed enforcement action on 63 cases. Within those cases, 727 investors lost over $77 million dollars.

Managing your own investments can be done successfully, but it is not easy.

First, it requires a commitment of time researching and tracking your investments. Second, it requires discipline to stick with your strategy though challenging times. Third, and most difficult, it requires you to remove emotion from your investment process. 

Most successful people recognize the need for a relationship with an accountant and lawyer. Many haven’t yet discovered the benefits of working with a financial adviser. Based on the variety of investment options and the myriad of people that call themselves financial advisers, it is easy to understand why. Often figuring out who to work with is so confusing that people give up and opt to manage their money themselves.

Studies have shown that most investors would be better off with the help of a financial adviser. Unfortunately, finding the “right” advisor is much more difficult than most people realize. Most investors hire someone they “trust”. However, “trust” is very intangible and difficult to quantify. Also, contrary to popular belief, the size of the firm or familiarity of the brand name does not indicate the quality of the advice provided.

Part of the problem is that titles for financial sales reps are completely unregulated. This means that brokers, annuity salesmen and insurance agents are all free to call themselves advisers, financial consultants, financial planners or whatever else they prefer.

To make sure you don’t get stuck with a salesperson when you are really looking for an adviser, make sure you ask these five questions:

Fiduciary?

Fiduciary advisers have a legal obligation to put your interests ahead of their own. Sales reps selling insurance, mutual funds or other financial products are most likely not fiduciaries. A minority of all financial advisers actually meet the fiduciary requirement. Registered Investment Advisers and Investment Adviser Representatives are fiduciaries. 

 Experience?

How many years have they been managing money? Markets are difficult to navigate and constantly changing. Ideally, your adviser has experience investing in both good markets and bad markets. In the final analysis, you are paying an adviser for their experience.

 Track record?

Legitimate advisers will be able to show you a clear report of what they’ve done for their clients over the years. Showing you the track record of a mutual fund, a hypothetical model, or anything else that they have recently started selling does not count. They need to show you their own track record which would be a composite of the results of their previous clients’ investments. Any adviser who refuses to show you at least a five year track record of their performance should be crossed off your list.

 Conflict of interest?

Many commission based salespeople are honest individuals. However, in the financial services industry, the worse the product the higher the commission. The easiest way to avoid those “bad products” and to eliminate potential conflicts of interest is to avoid salespeople who receive commissions. By working only with advisers who are paid through management fees and not commissions you can make sure their interests are aligned with yours.

Surrender charge?

If there is a surrender charge then that means there was a commission. If there is a commission then you are not dealing with a fiduciary adviser. You should be free to move your money out of an investment if you are dissatisfied. This means you should never own a product with a surrender charge.

As I mentioned at the beginning… It has always been easier to lose money than it is to make. Implementing these tips will help you keep your money and find a great adviser.