5 Things to Check When Hiring a Financial Advisor
Eighteenth century English author Samuel Johnson once noted that there are two types of knowledge. The first is actually knowing something, and the second is knowing where to find it.
That, in a nutshell, sums up the situation for most people trying to manage their own money. Either you know enough to feel comfortable investing, know where to get the information to make informed decisions, or know that you need help.
But if you fall into that last group and all you know is that you need to hire an advisor, your knowledge is still short by at least one piece of crucial information. You must know how to do a background check on a broker or financial planner.
Recently, the Investors Protection Trust--a group that promotes investor education and fights securities fraud--issued a survey on financial literacy which showed, again, the alarming lack of money management knowledge of the average American.
No matter how unsettling, the findings on America’s financial knowledge level weren’t particularly new and enlightening.
But the group also looked at the number of investors who investigated the disciplinary background of their broker or financial planner and found that nearly 90% of the people paying for advice never did a background check. Experts believe that they doubt 10% even do much checking and that really virtually no one checks out the experts before signing on.
That’s the financial equivalent of riding a high-speed motorcycle without a helmet, walking a tightrope without a safety net or skydiving without a back-up chute. You might be fine, but you could end up hurt because of your carelessness.
“One of the things that amazes me is that people give their money to someone they have never done business with before, based on business cards and appearances, and those are really dangerous waters to be swimming in,” said Neal E. Sullivan, executive director of the North American Securities Administrators Assn. “They are just playing with fire.”
It’s easy to find out if an advisor is now or has ever been in trouble. If you have a financial counselor--or plan to get one in the future--here is what you will need to do:
1. Line up the advisors you are considering.
Round up the names of a few planners or brokers whose services meet your needs. You may develop this short list from referrals or off of the bulletin board at the health club, but the idea in picking an advisor is to interview several.
Call each advisor to be sure they are taking new clients and are willing to meet with you. Be sure that you would fit comfortably into their clientele, in terms of your assets and advisory needs, but hold off on arranging an interview until you are satisfied with their personal history.
2. If you are hiring a financial planner, ask for a copy of their Form ADV.
This is a background sheet that gives some basics on how a planner is compensated, where they got their schooling and more. But here’s the tricky part. Most advisors only hand out Part 2 of the form, and that’s not where the disciplinary actions would show up. Those are on Part 1. Ask for it.
The advisor knows you can get this from other agencies, and should be willing to give it to you upon request; any planner who won’t give you their ADV is not worth dealing with.
3. For both brokers and financial planners, your next call is to the state securities administrator.
The primary role of the state securities administrator is to protect the small investor. They do this by registering financial planners (all but four states now require planners to register) and tracking the actions taken against brokers, monitoring both individuals and entire firms.
Call the securities office in a state where the advisor is registered to do business. To get the number of administrators in your state, call the North American Securities Administrators Assn. at (202) 737-0900.
You can also call the National Assn. of Securities Dealers public disclosure information center at (800) 289-9999, although state agencies typically offer more detailed reports.
Typically, the state agencies and the NASD will examine a broker’s Central Registration Depository or CRD to see if a broker has some dirt in their past. They will send you the CRD file, although some states do require that you make the request in writing or pay a nominal fee.
Many financial planners also function as brokers and have a CRD, but those who do not will be a bit harder to get details on. Still, the states generally can provide the form ADV and tell you if any actions have been filed against a planner.
4. Make sure professional designations are real.
Those letters that some financial counselors have after their names look impressive, but may not be. While the majority of advisors respect the marks they have earned, others fall behind in the continuing education process and lose their designations.
That doesn’t stop them from using the letters or force them to change their letterhead, however.
If you care about the mark--that is, you want to hire a certified financial planner, and not just a plain-vanilla planner--this is a necessary check. Experts agree that the CFP is the credential most commonly lied about. The Certified Financial Planners Board of Standards has a new toll-free hotline that allows investors to check out whether an advisor is currently licensed by the Board. (The line doubles as a place to register complaints against CFPs who act inappropriately, so it’s another good place to see if an advisor has been in trouble in the past.) Call (888) CFP-MARK.
5. Examine the trouble spots. Eliminate anyone whose past problems outweigh his referrals.
Just because a broker or planner has been involved in a lawsuit or arbitration case doesn’t make them a bad advisor. In today’s litigious society, advisors are sometimes sued just because the investor didn’t think a risky investment could actually lose value.
At the same time, a single black mark for a serious sanction or rules violation is a good reason to look elsewhere.
“You may have gotten a referral from people who you really trust, but where you find something on their CRD, you have to decide whether the good service someone has provided your friend outweighs a minor dispute,” says Michael Unger, an attorney with the Boston firm of Goldstein & Manello and former director of the Massachusetts Securities Division.
Remember, too, Unger cautioned, that your friends might be among the vast majority of folks who fail to do background checks before hiring financial help.
If you find violations, arbitration cases or lawsuits, don’t be afraid to ask the planner about them. You’ll have to decide for yourself if you believe the answer is honest, but any advisor who won’t discuss sins of the past is trying to keep you in the dark about what may happen in the future.
“Once you know where to go, it doesn’t take much time to find out if a broker or planner has a history of trouble,” says Mary Calhoun, a frequent expert witness in securities fraud cases and the head of the Calhoun Consulting Group in Watertown. “It takes a lot more time--and it’s a lot tougher--to sort things out once something has gone wrong.”
Charles A. Jaffe is personal finance columnist at The Boston Globe. He can be reached by e-mail at jaffe @globe.com or at The Boston Globe, Box 2378, Boston, MA 02107-2378.
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A Good Plan
What elements should a comprehensive financial plan include?
* Assets: To structure a financial road map that gets you where you want to go, figure out where you are. Take a look at what you owe and what you own. When you subtract what you owe from what you own, you come up with your net worth.
* Budget: How much you earn and spend on necessities each month determines how much you can save.
* Investment plan: All financial plans should include some element of savings for the future--and suggestions on how to divide your horde of cash among different types of investments, such as cash, stock, bonds and perhaps real estate. This investment plan should address your feelings about risk, your assets, income and goals.
For example, a person whose goals are mainly short-term will greatly prefer conservative investments, such as bank deposits, more than a younger person whose main goal is to save for retirement that’s 30 years away.
* Goals: Establish what you want in life--both now and later. A good financial planner will then calculate a rough approximation of what your wants will cost. At that point, most people will find themselves having to make choices--few have the resources to get everything they want now without mortgaging their future. A good planner should be able to help you strike a balance between today’s pleasures and tomorrow’s security.
LICENSE TO ADVISE
California has almost twice as many financial planners as any other state--4,108 as of the end of last year. Licensed financial planners in the U.S., in thousands:
(please see newspaper for full chart)
1995: 31.6
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Finding a Planner
Here are industry groups that offer help in finding qualified planners:
* The Institute of Certified Financial Planners will give you a list of up to three planners in your area, along with a brochure to help guide you through the selection process. All planners whose names are provided have the CFP credential. Call (800) 282-7526 for more information. (The phone number for the hearing impaired is [800] 438-9968.)
* The International Assn. for Financial Planning offers a longer list of area planners, along with a “Consumer Guide to Comprehensive Financial Planning” and other informational materials. To be in this referral program, a planner must have a financial planning designation (CFA, CFP, ChFC or CPA), a law or financial planning degree or have passed the Practice Knowledge Exam. Call (800) 945-IAFP.
* The National Assn. of Personal Financial Advisors, whose members must be fee-only planners, will give you a list of members from around the state, along with a financial planner interview form and a disclosure form to help you figure out how and how much you will pay the planner and planning firm if you sign on. Call (888) FEE-ONLY.
* The American Institute of Certified Public Accountants provides the names of members who have earned its Personal Financial Specialist designation. The PFS is for accountants who have several years of financial planning experience, have maintained a continuing education schedule and passed a rigorous exam. Call (800) 862-4272 to ask for CPA/PFS referrals in your area.
