Financial Advisor Experience – 7 Questions You Must Ask!

A critical key to successfully selecting your financial advisor is know what questions to ask. The painful truth is most consumers of financial and investment planning services don’t ask some of the most basic questions when finding, interviewing, and choosing the right financial advisor for their specific needs and financial goals. Rather they tend to be wooed by flashy signs on imposing buildings, fancy decor, ultra-slick TV ads and impressive titles. Choosing the wrong financial advisor however can lead to financially disastrous consequences for you and your financial security – and those flashy signs, smooth marketing campaigns, and embellished sounding titles are the least of what you as a consumer should be concerned with.

The problem stems from the Wall Street machine and their monstrous marketing budgets. Wall Street firms label their salespeople “Financial Consultant” or “Vice President of Investments” (I know, I had both titles at points in my career) – remarkable job titles to say the least, and most certainly comforting in nature to the consumer. They piece together emotionally provocative marketing campaigns with catchy slogans and striking logos. They advertise their spectacular investment products and financial planning services on TV, on the radio, and in the most popular trade magazines.

The sordid truth is the Wall Street machine engages in this “financial pornography” to wow and woo you, to impress you, and to give you comfort in the quality of their advice and value of their investment products before you even walk in the door. In reality, the flashy signs and chic titles mean nothing.

Checking your financial advisors background, credentials, philosophy, compensation and experience in the financial services industry can quickly weed out the “less professional” financial advisors – and effectively simplify your decision making process in finding the right financial advisor.

One of the most important “qualifiers” of a professional financial advisor is their level of experience in serving client’s financial needs and helping them accomplishing their goals. Notice I didn’t say “length of experience in the business”. Length of financial services industry experience may mean little if anything, because a financial advisor may have 20 years of experience which may include years of nothing remotely related to serving clients financial needs.

There are plenty of financial industry jobs which may give the impression of real-life “in the trenches” client services experience, but in reality these jobs aren’t much more than administrative, managerial, or sales in nature. To choose the right financial advisor, focus on asking the right questions, and expect thorough answers:

  • How long have you been working directly with clients as their primary financial advisor?
  • How long have you been recommending investment and insurance products?
  • How long have you been actively and consistently creating financial plans for clients to help them achieve their financial goals?
  • What is your training background, and where did you learn how to diagnose, manage, and solve your clients financial problems?
  • How many years did you spend training for your position as a financial advisor?
  • What firms have you worked for in the capacity of a financial advisor?
  • How many written financial plans have you created for clients?
  • Those seven questions will garner the majority of information you’ll need to make an informed decision on your financial advisor’s experience level. But just what should their answers entail? In terms of acceptable financial advisor experience, I would argue the following:

      A minimum 3 years of experience. Anything less is a threat to your financial future you can’t afford to take. Financial advisor’s can intern (or act as a para-planner) with more experienced financial professionals working with clients directly, and should do so for at least three years before taking on the primary role as your financial advisor. Given the volatility and uncertainty of current times, it’s easy to make a case for 10 years or more of practical, real-world experience. You wouldn’t lay on the operating table for open heart surgery knowing your doctor graduated from medical school yesterday would you?
      A college degree. This is a new requirement for NAPFA (the National Association of Personal Financial Advisors, registered financial advisors. While a college degree isn’t the “be-all end-all”, it shows dedication to training and increasing your knowledge early in life – a trait which commonly caries over throughout your career.
      A CERTIFIED FINANCIAL PLANNER™ (CFP®) or Chartered Financial Consultant® (ChFC®) designation. Both credentials show substantial dedication to being among the best in the financial services field. Both credentials are difficult to achieve and require ongoing continuing education to maintain. Both credentials illustrate the experience and training so vital to your financial success.
      20 written financial plans. Many “financial advisors” don’t do written financial plans (but many “financial advisors” are that only in title, and are actually salespeople in practice). Regardless of whether you need a written financial plan or not (not every client needs a written financial plan), your financial advisor should understand how to create one and have reasonable experience in doing so. You may not need that open heart surgery, but don’t you want your cardiologist to have the experience requisite to making a wise decision when you have chest pain?

    Experience is but one primary component of excellence in financial advice and superior client service. There are many other facets of a financial advisory practice that are important. In the end however, don’t you feel more confident you’ll be able to reach your financial goals knowing that this isn’t your financial advisor’s “first rodeo”?

    Take the time, ask questions when you interview a financial advisor. Require and expect thorough and reasonable answers. Doing so will help you achieve confidence that you’ve found an experienced financial advisor able to deliver excellence in financial advice!

    Why You Should Not Trust Financial Advisors

    This month I received a fax from one of my clients requesting that I liquidate his IRA so that the funds could be invested in a guaranteed annuity product. In the letter, the client stated he was aware that market-driven investments have greater potential for growth but the annuity would provide him a guaranteed return. He also stated that he didn’t want further discussion on the matter, that he understood the pros and cons of the annuity, and that he did not wish to be contacted further. Upon receipt of his instructions, I immediately liquidated his investments and sent him a brief email stating that his funds were ready to be transferred.

    I was surprised when the client called me shortly after I sent the email. The client instructed that he did not wish to have his assets immediately liquidated. This was opposite the instructions I had received via fax. It also quickly became clear that the client was interested in my opinion of the annuity he was considering and was anxious to examine any analysis on the product I could provide. At this point, it became evident that the financial advisor who was selling the annuity to the client had written the letter I had received, and that the communication didn’t represent the wishes of the client. My belief is that the advisor had painted an unrealistically positive analysis of the product he was recommending and was attempting to ensure the client didn’t have the opportunity to get an unbiased opinion of the annuity. STRIKE ONE for the advisor.

    After my conversation with the client, I typed the name of the financial advisor promoting the annuity into Google. The first item that came up was a complaint filed against the advisor by the Utah Insurance Department. The plaintiff was found to have a recording of the advisor making statements such as “there is no risk” associated with an investment, which the State found to be illegal and deceptive. The advisor was also found guilty of having clients sign various incomplete documents associated with annuity applications, with blank spaces yet to be completed. As a result, the advisor was fined, placed on probation for 12 months, and required to take additional courses on ethics. STRIKE TWO for the advisor. (I know baseball requires three strikes, but this strike alone should be enough for investors to look elsewhere for financial advice.)

    Ultimately, the client determined it would be in his best interest to have a three-way conversation between himself, the advisor promoting the annuity, and me. I agreed that such a meeting would be beneficial and invited the discussion to take place in my office. However, I stated that I would need a copy of the annuity contract he was considering beforehand in order to complete my due diligence. I needed the contract in advance because annuities are so complicated (purposefully so) that it takes even a well-trained, fee-only Certified Financial Planner several hours to read and understand the pertinent information and determine if it may be a good fit for a client. The client agreed and immediately asked the advisor to fax or email me the relevant information.

    One week later, and the morning of the appointment, I informed the client that I had never received the information (despite multiple requests), and that it wouldn’t be beneficial to conduct the meeting until I had a chance to review the material. The client agreed and the meeting was cancelled. However, the annuity salesman showed up at my office at the time of the scheduled appointment informing me that the client was still planning on attending. I asked why I had not been provided with a copy of the relevant material in advance; the advisor replied he was out of the office during the last week. Essentially, the advisor was contending that he never had the opportunity to fax or email me a simple Microsoft Word document. Yet, the advisor had conducted multiple conversations with the client during the week. In today’s era of computers, fax machines, and smart phones, I find it hard to believe that the advisor (or any of his work associates) never had the opportunity to send me a simple email during a week when he was in clear communication with the client. My strong belief is that the advisor simply didn’t want to allow anyone the opportunity to determine that he had not adequately represented both the pros and cons of the product. STRIKE THREE for the advisor; he’s out! However, the saga continues.

    As the advisor had arrived at my office before the client, I suggested I take the contract and read as much as possible before the client arrived so that we could have a productive conversation. However, the advisor would not allow me time to read the contract or even permit me to hold the document despite my multiple requests to do so. STRIKE FOUR.

    In an attempt to educate myself as best I could before the arrival of the client, I agreed to let the advisor “walk me through” the material he had brought. As a result, the advisor placed the document on my table, pointed out the guaranteed rate of return and quickly flipped the page. He then pointed out the bonus return that was applied to new contracts and again quickly flipped the page. Finally, he pointed out the annuity contract’s income schedule and quickly turned the page. Clearly, the benefits of the annuity were being pointed out while the details – or fine print – were being avoided. STRIKE FIVE.

    At this point, I communicated to the advisor that this exercise was not helping me develop my understanding of the annuity, and that I needed to read the contract. To this, the advisor stated “I’m the annuity expert in the room; you should allow me to explain the product to you.” At this point it became clear that the advisor was not going to allow me an opportunity to review the product, and as a result, any conversation involving the two of us and the client would not be an educated discussion about financial planning and what was best for the client. I refused to continue the conversation and asked the advisor to leave my office, stating that the client was interested in my opinion of the annuity and that he should leave the contract with me so I could inform the client of my opinion and of questions that should be asked. Again, the advisor refused to let me look at the contract and would not leave it with me. STRIKE SIX.

    The client ultimately required the advisor to return to my office and leave a copy of the material he had brought to the meeting. After several hours of reviewing the contract, I discovered the annuity included several major drawbacks that had not been clearly communicated to the client; as a result, I found it was not a particularly attractive investment.

    How can one be confident they can trust their financial advisor and avoid individuals like this? Unfortunately, the term “financial advisor” has become vastly overused and is frequently quite misleading. When is the last time someone introduced themselves to you as an insurance salesman, annuity salesman, or stock broker? Those terms don’t exist anymore because all those professions now refer to themselves as “financial advisors.” These individuals can be wolves in sheep’s clothing. If you meet with an annuity salesman who calls himself a “financial advisor,” he is going to recommend an annuity 100% of the time, regardless of what is in your best interest.

    The key is to find a fee-only Certified Financial Planner® who acts as a fiduciary. Fee-only means the advisor is only paid by the client, and never collects commissions from selling products. This will ensure the advisor is recommending a product that is a great fit for you rather than simply selling a product in order to collect a large commission. A Certified Financial Planner® (CFP) is an individual who has completed the gold standard of education in the financial planning industry and is well educated in every aspect of financial planning, ranging from investments, to retirement planning, to taxes, to insurance, to estate planning. Finally, a fiduciary is someone who is legally obligated to act in the client’s best interests, similar to a doctor, attorney, or accountant. Surprisingly, most “financial advisors” are not fiduciaries. In fact, there are over one million people in the US who refer to themselves as “financial advisors.” However, less than 1% of those million people are fee-only CFPs acting as a fiduciary.¹

    When looking for a trustworthy financial advisor, do your homework. The National Association of Personal Financial Advisors (NAPFA) is a great place to start. NAPFA is the nationwide association for fee-only financial planners. Further, insert your advisor’s name into Google to ensure no complaints have been filed against the person. It’s worth the effort – being sold a product that is not in your best interest will cramp your retirement efforts for decades.

    ¹As measured by the percentage of financial planners who are NAPFA members.

    Wall Street Exposed – What You Must Know About Your Financial Advisor Now!

    There is a simple but undeniable truth in the financial consulting and wealth planning industry that Wall Street has kept as a “dirty little secret” for years. That dirty little, and nearly always overlooked secret is THE WAY YOUR FINANCIAL ADVISOR IS PAID DIRECTLY AFFECTS THEIR FINANCIAL ADVICE TO YOU!

    You want, and deserve (and consequently SHOULD EXPECT) unbiased financial advice in your best interests. But the fact is 99% of the general investing public has no idea how their financial advisor is compensated for the advice they provide. This is a tragic oversight, yet an all too common one. There are three basic compensation models for financial advisors – commissions based, fee-based, and fee-only.

    Commission Based Financial Advisor – These advisors sell “loaded” or commission paying products like insurance, annuities, and loaded mutual funds. The commission your financial advisor is earning on your transaction may or may not be disclosed to you. I say “transaction” because that’s what commission based financial advisors do – they facilitate TRANSACTIONS. Once the transaction is over, you may be lucky to hear from them again because they’ve already earned the bulk of whatever commission they were going to earn.

    Since these advisors are paid commissions which may or may not be disclosed, and the amounts may vary based on the insurance and investment products they sell, there is an inherent conflict of interest in the financial advice given to you and the commission these financial advisors earn. If their income is dependent on transactions and selling insurance and investment products, THEY HAVE A FINANCIAL INCENTIVE TO SELL YOU WHATEVER PAYS THEM THE HIGHEST COMMISSION! That’s not to say there aren’t some honest and ethical commission based advisors, but clearly this identifies a conflict of interest.

    Fee Based Financial Advisor – Here’s the real “dirty little secret” Wall Street doesn’t want you to know about. Wall Street (meaning the firms and organizations involved in buying, selling, or managing assets, insurance and investments) has sufficiently blurred the lines between the three ways your financial advisor may be compensated that 99% of the investing public believes that hiring a Fee-Based Financial Advisor is directly correlated with “honest, ethical and unbiased” financial advice.

    The truth is FEE-BASED MEANS NOTHING! Think about it (you’ll understand more when you learn the third type of compensation), all fee-BASED means is that your financial advisor can take fees AND commissions from selling insurance and investment products! So a “base” of their compensation may be tied to a percentage of the assets they manage on your behalf, then the “icing on the cake” is the commission income they can potentially earn by selling you commission driven investment and insurance products.

    Neat little marketing trick right? Lead off with the word “Fee” so the general public thinks the compensation model is akin to the likes of attorney’s or accountants, then add the word “based” after it to cover their tails when these advisors sell you products for commissions!

    FEE ONLY Financial Advisor – By far, the most appropriate and unbiased way to get financial advice is through a FEE-ONLY financial advisor. I stress the word “ONLY”, because a truly fee ONLY financial advisor CAN NOT, and WILL NOT accept commissions in any form. A Fee-ONLY financial advisor earns FEES in the form of hourly compensation, project financial planning, or a percentage of assets managed on your behalf.

    All fees are in black and white, there are no hidden forms of compensation! Fee-Only financial advisors believe in FULL DISCLOSURE of any potential conflicts of interest in their compensation and the financial advice and guidance provided to you.

    Understanding the conflict of interest in the financial advice given by commission based brokers enables you to clearly identify the conflict of interest for fee-based financial advisors also – they earn fees AND commissions! Hence – FEE-BASED MEANS NOTHING! There is only one true way to get the most unbiased, honest and ethical advice possible and that is through a financial advisor who believes in, and practices, full disclosure.

    Commission and Fee-Based financial advisors typically don’t believe in or practice full-disclosure, because the sheer magnitude of the the fees the average investor/consumer pays would surely make them think twice.

    Consider for a moment you need to buy a truck specifically for towing and hauling heavy loads. You go to the local Ford dealership and talk to a salesperson – that salesperson asks what type of vehicle you’re interested in and shows you their line of trucks. Of course, to that salesperson who earns a commission when you buy a truck – ONLY FORD has the right truck for you. It’s the best, it’s the only way to go, and if you don’t buy that truck from that salesperson you’re crazy!

    The fact is Toyota makes great trucks, GM makes great trucks, Dodge makes great trucks. The Ford may or may not be the best truck for your needs, but the salesperson ONLY shows you the Ford, because that’s ALL the salesperson can sell you and make a commission from.

    This is similar to a commission based financial advisor. If they sell annuities, they’ll show you annuities. If they sell mutual funds, all they’ll show you is commission paying mutual funds. If they sell life insurance, they’ll tell you life insurance is the solution to all of your financial problems. The fact is, when all you have is a hammer… everything looks like a nail!

    Now consider for a moment you hired a car buying advisor and paid them a flat fee. That advisor is an expert and stays current on all of the new vehicles. That advisor’s only incentive is to find you the most appropriate truck for you, the one that hauls the most, tows the best, and is clearly the best option available. They earn a fee for their service, so they want you to be happy and refer your friends and family to them. They even have special arrangements worked out with all of the local car dealerships to get you the best price on the truck that’s right for you because they want to add value to your relationship with them.

    The analogy of a “car buying advisor” is similar to a Fee-Only financial planner. Fee-Only financial advisor’s use the best available investments with the lowest possible cost. A Fee-Only financial advisor’s only incentive is to keep you happy, to earn your trust, to provide the best possible financial advice and guidance using the most appropriate investment tools and planning practices.

    So on one hand you have a car salesperson who’s going to earn a commission (coincidentally the more you pay for the truck the more they earn!) to sell you one of the trucks off their lot. On the other hand, you have a trusted car buying advisor who shops all of the vehicles to find the most appropriate one for your specific needs, and then because of his relationships with all of the car dealers can also get you the best possible price on that vehicle. Which would you prefer?

    Truly unbiased financial advice and guidance comes in the form of Fee-Only financial planning. You know exactly what you’re paying and what you’re getting in return for the compensation your Fee-Only financial advisor earns. Everything is in black and white, and there are no hidden agenda’s or conflicts of interest in the advice given to you by a true Fee-Only financial advisor!

    The fact is unfortunately less than 1% of all financial advisor professionals are truly FEE-ONLY. The reason for this? There’s a clear and substantial disparity in a financial advisor’s income generated through commissions (or commissions and fees), and the income a financial advisor earns through the Fee-Only model:

    Example #1 – You just changed employment and you’re rolling over a $250,000 401k into an IRA. The commission based advisor may sell you a variable annuity in your IRA (which is a very poor planning tactic in most cases and for many reasons) and earn a 5% (or many times more) commission ($12,500) and get an ongoing, or “trailer” commission of 1% (plus or minus) equal to $2,500 per year. The Fee-Only financial advisor may charge you a fee for retirement plan, an hourly fee, or a percentage of your portfolio to manage it. Let’s say in this case you pay a $500 retirement plan fee and 1.25% of assets managed (very common for a Fee-Only financial advisor in this situation). That advisor earns $500 plus $3,125 ($250,000 * 1.25%) or TOTAL COMPENSATION of $3,625 – FAR LESS THAN THE $15,000 THE COMMISSION (or Fee-Based) financial advisor earned! In fact it takes the Fee-Only financial advisor over four years to earn what the commission (or fee-based) advisor earned in one year!

    Example #2 – You’re retired and managing a $750,000 nest egg which needs to provide you income for the rest of your life. A fee-based financial advisor may recommend putting $400,000 into an single premium immediate annuity to get you income and the other $350,000 into a fee-based managed mutual fund platform. The annuity may pay a commission of 4% or $16,000 and the fee-based managed mutual fund portfolio may cost 1.25% for total compensation of $20,375 first year (not including the “trailer” commissions). The Fee-Only advisor would possibly shop low load annuities for you, possibly put the entire portfolio into a managed account, possibly look at municipal bonds, or any other variety of options available. It’s hard to say how much the Fee-Only advisor would earn as their largest incentive is to keep you the client happy, and provide the best planning advice and guidance possible for your situation. BUT, in this case let’s just assume that a managed mutual fund portfolio was implemented with an averaged cost of 1% (very common for that level of assets), so the Fee-Only financial advisor earns roughly $7,500 per year and it takes that financial advisor THREE YEARS to earn what the fee-based financial advisor earned in ONE YEAR!

    The prior examples are very common in today’s financial advisory industry. It’s unfortunate that such a disparity in income exists between the compensation models, or there would likely be many more truly independent and unbiased Fee-Only financial advisors today!

    Now consider for a moment which financial advisor will work harder for you AFTER the initial consultations an planning? Which financial advisor must consistently earn your trust and add value to your financial and investment planning? It’s obvious the financial advisor with the most to lose is the Fee-Only advisor. A Fee-Only financial advisor has a direct loss of income on a regular basis from losing a client.

    The commission or fee-based financial advisor however has little to lose. You can fire them after they’ve put you in their high commission products, and as you can see from the examples they’ve already made the majority of the commissions they’re going to make on you as a client. They have little to gain by continuing to add value to your financial and investment planning, and little to lose by losing you as a client.

    Wouldn’t you prefer a financial advisory model where your financial advisor must continually earn your trust and add consistent value to your planning?

    It’s clearly more difficult to earn a living and run a profitable financial advisory firm through the Fee-Only financial planning and guidance model. For this reason, most financial advisors take the easy way and sell products for commissions and charge fees on assets managed – that way they can make a nice living on your investment portfolio and still have an ongoing stream of revenue every year. For this reason also, less than 1% of financial advisors are truly Fee-Only, yet it’s that 1% that is truly objective and unbiased, and that 1% whose only incentive is to manage your financial plan, investments, and overall wealth to accomplish the goals you wish to achieve!

    The real “dirty little secret” Wall St. has is the undeniable truth that the commission and fee-based financial advisory model has inherent conflicts of interest, and your advisor may be “selling you investment products” rather than “solving your financial problems”!