Trusted Advisor

It’s probably safe to say that everyone who wants a financial advisor wants a “Trusted Advisor”.

The Trusted Advisor

So let’s look at the notion of a Trusted Advisor. How do you know if you can trust an advisor?  Often people base the ability to trust someone on their intuition or if they get a “good feeling” from that person.

The problem is, if you could easily judge a person’s technical competence (i.e. portfolio construction, selecting investments; income taxation; understanding of insurance products and annuities; knowledge and use of wills and trust) then you probably wouldn’t need to hire someone to help you, right?

However knowing just a little about the ethics and educational requirements of the various types of advisors will help confirm or validate your intuition when choosing your trusted advisor.  

Ethics

Anyone can call themselves a financial advisor, financial planner or wealth manager.  All these terms are unprotected and not regulated like a doctor or lawyer where they are regulated by state boards. (If you hold yourself out as a doctor or lawyer, you’d better be registered with the State Medical Board or State BAR Association.)  Before these boards will license an individual, that person must have a defined level of education, experience and have passed a rigorous exam demonstrating a minimum level of competence in the subject material.

Additionally, doctors and lawyers have a strict code of ethics they are required to abide by. 

• Doctor’s “Do No Harm”
• Lawyer’s “Protect the Client’s Interest”

Now, we all know there are good and bad apples in any profession; however, the important point here is THERE IS A COMMON PUBLIC PERCEPTION.   Bad apples aside, these professionals will work in your best interest; they can be trusted.  This is trust is based upon minimum levels of education and experience established and regulated by state boards.

So let’s go back to the Financial Advisor, or the financial services world.  Because anyone can call themselves a financial advisor, financial planner, wealth manager, etc., there is no common public perception, no basic level of education, experience or ethics that you can presume.  To make matters more confusing, some advisors are really sales people selling investment products, and some are advisors providing advice.

The financial services world acknowledges this is a problem.  In a feeble attempt to provide a little, but not too much, clarity they focus on how an advisor is compensated. Have you heard of the terms “fee-only”, “fee-based” or “commissioned” financial advisors?  These terms are specifically related to how a financial advisor is paid.  A little known fact is that these terms also indicate the standard of care, or the ethics, an advisor must adhere to when working with a client/customer. 

There are two different standards of care in the financial services world: Suitability Standard & Fiduciary Standard.

• The Fiduciary standard requires the client’s best interest always comes first.
• The Suitability standard of care requires only that recommendations be “suitable” instead of what is best, for the client. 

To illustrate the difference, suppose your advisor lays out five similar investments that are suitable to meet your needs. Of the five products, there may be one that is clearly the best selection for you, but the financial advisor, under a suitability standard, is free to recommend any one of the five investments. You might ask; why the financial advisor would recommend something that is not in your best interest? It’s possible that one investment product pays out a higher commission than another. It might be that their recommendation is the best product for the client.  The point is there is no requirement, under the Suitability standard, for the advisor to act in your best interest.

The point of this discussion is not to suggest one form is better than another.  Rather, it’s to provide education and information about the facts related to various requirements of different types of advisors.

Education

So just because someone is a fiduciary (who is required to act in your best interest) does not ensure you can rely on their technical knowledge of the various financial subjects.  Nor does it mean you can’t trust commissioned brokers or fee-based advisors.   In fact, the terms fee-only, fee-based or commissioned financial advisors relate to compensation and compensation alone.  Ethical requirements and compensation do not bear on the level of education or technical expertise.  

In order to do the activities related to investments such as  buying or selling securities or to provide advice about investments, tests and licenses are required by the Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA).  However, these tests focus almost entirely on investment markets and investment products.  There is little to no testing on taxation, risk management needs (insurance), retirement planning, college/education planning, employee benefits or estate planning.

Below is a summary of the most common types of financial advisors, financial planners, wealth managers, et al. and the required education, experience and ethical requirements:

In addition to the above, there are a number of other financial designations. For example CFA, ChFC®, CLU®, and CDFA™ are also common. Each of these designations has significance and generally indicates a specialty in a specific area.  The number of designations and organizations in the financial services field is steadily increasing.   This is not an indication that the original associations are not effective. Rather it is a sign of growth and diversification in the needs of the public. As of January 2005, in the financial services industry/profession, there are at least:

• 89 Designations, Certifications and Degrees
• 87 Financial Services Associations and Professional Institutions

More about the various other designations may be found here: http://www.financialcertified.com/financial-designations.html or http://www.iarfc.org/content_sub.asp?n=64

In Closing/Summary

Regardless of what type of financial advisor you choose to work with, being aware of their ethical requirements, educational background and specialties will help you find your “Trusted Advisor”.  

Before you set out to find a trusted advisor, take some time to think about what you want the advisor to do for you – navigating a job change, investment help, retirement planning or a comprehensive financial plan.  To assist you in your search, we have provided the following questions to make finding your trusted advisor easier.

1. What are your credentials &/or designations?
2. Can you tell me about your experience?
3. What services do you offer?
4. Will others in your office be working with me?
5. Do you specialize in a particular area?
6. How are you compensated?
7. Do you recommend specific investments?
8. Have you ever been subject to disciplinary action?
9. Can you give me references to some of your clients?
10. Do you have questions for me?