by Jack Waymire
Most investors do not have formal processes that they use to select financial advisors. They usually interview a few advisors and select the ones they like the best. Or, they take shortcuts. For example, they select a financial advisor who is referred to them by a friend, family member, associate, or another professional (CPA). Because this is something they do every few years they fail to see the flaws in their processes and how they can be damaged over longer time periods.
Select a high quality financial advisor and you will have more money for your future use. Select a low quality advisor and you have less money. The major challenge facing investors is how to identify and select high quality advisors who do not have:
- Mandatory disclosure requirements
- Historical track records
- Quality ratings (Morningstar mutual fund ratings)
It is up to investors to ask the right questions, know good answers from bad ones, and require documentation so there is a record of advisor responses. This is a process that is based on:
- Gathering the same data from multiple advisors
- Comparing advisor responses
- Interviewing advisors
- Selecting the advisor with the best qualifications
This process produces the best advisor. Selecting advisors based on personalities and sales skills produces the best salesman.
A Subjective Selection Process
The biggest trap that investors fall into is basing their selection decisions on advisor personalities. They fail to realize advisors want to be liked. Advisors know investors trust people they like. Once trust is established, the advisors are in the driver’s seat. They can sell good products, bad products, or the products that make them the most money.
The second biggest trap is selecting advisors based on verbal sales pitches that include undocumented sales claims. Sales pitches reflect the advisors’ sales skills, not their competence and ethics. And, sales claims are worthless. There is no documentation that supports the claim. Automatically reject advisors who say they can produce high returns for low risk. This is a fake sales claim.
References are worthless. References are not substitutes for track records. No financial advisor will give you a bad reference. Most of the time advisors have personal relationships with their references, which is why they agreed to act as references. And, references can be coached to always make the right statements about advisor competence, ethics, business practices, and results.
Legitimate financial advisors do not have track records. They provide different services for a broad range of clients. Money managers have track records because they provide one service to multiple clients. A legitimate track record is GIPS (Global Investment Performance Standards) compliant and audited by a reputable third party. This is an expensive process, which is another reason why financial advisors do not have track records. Advisors, who profess to have track records, are usually more aggressive salesmen.
Personality & Sales Skills
If you do not have a process, or better yet an objective process, there is an 85% chance you will select the advisor with the best personality and sales skills. Why? In the absence of a process you control you have allowed advisors to maximize the impact or personalities and sales skills that have nothing to do with their competence, ethics, business practices, or services.
Paladin provides an objective process in the form of free tools that you can use to select the advisor with the best qualifications, not the best sales pitch. The tools do the work for you. You make the right decisions. The tools include:
- Request for Information: Asks the right questions and documents responses from multiple advisors.
- Advisor Scorecard: Compares advisor responses side-by-side.
- Advisor Ratings: Scorecard produces a quality rating for each advisor.
- Interview Guide: An agenda that gives you control over the content of interviews.
- Selection Score Sheet: You rate the qualities of each advisor. You select the advisor with the highest rating (objectivity).
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