If you currently have a financial advisor that you trust you should feel very fortunate. While Madoff has been the center of media attention due to his being the largest scam-to-date, there have been way too many others in this seemingly “crook of the week club” where more and more dishonest individuals, poising as advisors, have been found out.
Does this mean all advisors are suspect and they should be avoided like the plague? No, but some honest to goodness due diligence needs to be done before entrusting your precious resources to someone else. The Wall Street Journal’s “Seven Questions to Ask When Picking a Financial Advisor” provides an excellent base to start from. The article’s seven questions provide some important resources to conduct a beginning investigation.
In checking out an advisors background some regulatory agencies such as the SEC and FINRA were identified, but one should also do some simple things such as a Google search on the advisor, the advisors firm and the key principles of the firm. On more than one occasion in conducting this search, we came up with additional questions that should be asked, and in one case uncovered an “allegation” of fraud that was not identified in the regulatory sources.
Compensation is a key factor in assessing conflicts of interest and understanding that it is one of the key questions. Many feel a fully disclosed, fee-only compensation agreement is the most pure and consumer focused. Many firms describe themselves as “fee-based” these days which sounds an awful lot like “fee-only”. Fee-based simply means that while the advisor may receive fees, and intends to for some or all of their relationship with a client, they can still receive commissions. It’s important to be clear on what you are looking for and what is being offered. An organization that serves “Fee-Only” advisors is the National Association of Professional Financial Advisors (NAPFA) and they have a data base of fee-only advisors.
In virtually all of the scams, the common denominator is the lack of independent parties such as custodians they do not control. Having an independent custodian makes it much more difficult to deceive an investor as the statements are coming from a third party source. Also, virtually all of the deceptive advisors provided track records that were simply not true. Look for independent validation such as third party performance provider reports and/or certified audits of the process.
As the article points out advisors today need to earn your trust, not simply expect it. Those advisors who exhibit a “trust me or don’t bother me” attitude has been another common denominator in manipulating investors. Only smart and rigorous due diligence can find the right advisor for you.
Written By Bob Klosterman who writes at blog.whiteoakswealth.com
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