Paladin’s Registry service actually started in 2003 when “Who’s Watching Your Money?” a book that was written by the founder, was first published. This book established Paladin as one of the leading experts on all types of financial and investment advisors. Paladin added a Registry of pre-screened, 5 stars rated financial planners and investment advisors in the fall of 2004. Since then Paladin researchers have evaluated the credentials, ethics, and business practices of more than 30,000 financial planners, investment advisors, and money managers.
It stands to reason that all investment advisors market themselves as experts. That is what investors want to hear so it helps advisors market investment advice, services, and products. It has been Paladin’s experience that less than 10% of advisors are real experts based on education, experience, and certifications. 80% of the remaining advisors are sales representatives whose licensing limits them to selling investment and insurance products for commissions. Their licensing does not permit them to provide investment advice or ongoing services. The remaining percentage of investment advisors is too new to the advisory business to call themselves experts.
So how can you measure the expertise of investment advisors who do not provide audited, GIPS compliant track records that document the results of current clients? You need other methods to identify experts. Following are a few tips that will help you do that.
1. Investment Performance
Investment advisors may not have track records, but they can show you the performance of actual clients with the names blacked out. Make sure you are looking at clients who are similar to you: Age, asset amount, working or retired, moderate risk tolerance, etc. The more the clients mirror your situation the higher the probability you are looking at data that applies to you.
2. Investment Recommendations
Ask the investment advisor to document his top ten investment recommendations for clients like you and their performance for the past three years. Advisors will not be used to this type of request and documentation means they are more likely to provide accurate information. Then ask them to document the performance of their top and bottom recommendations. This may be as close as you will come to obtaining any type of track record from an investment advisor.
3. Risk Exposure
Once you have determined your tolerance for risk ask the advisor to document the most volatile investments he has recommended to clients with your tolerance for risk. For example, if several of his recommendations have lost 25% of their value you can fairly assume the investment advisor is taking a fair amount of risk with his clients’ assets.
4. Investment Expense
Similar to risk, you should also ask the investment advisor to document every nickel of expense that is associated with his investment recommendations. That includes all fees, commissions, and transaction charges that are deducted from your assets. Make sure you include any fees that are billed direct to you – for example, a fixed fee for a financial plan. Expenses are a big deal because they dilute the performance that is produced by the investment advisor.
In the final analysis the best investment advisor will be the one with the best judgment. But, how do you measure judgment? That is the role of the track record that financial advisors do not produce. When performance, risk, and expense converge you have a track record that measures judgment. Therefore, your evaluation should use these tips and focus on the advisor’s education (one or more degree from accredited colleges and universities), Experience (more years are better), and certifications (CFA®, CIMA®, CFP®, CPA® are best). You have to hope the advisor has good judgment or follow these tips that help you compare advisors to each other. Select the advisor with the best credentials and ethics, not the best personality and sales skills.