by Lauren Aimes
With the popularity of websites like Yelp and TripAdvisor, more and more people are searching for financial advisor ratings and reviews when looking for someone to handle their finances. If someone else recommends a financial advisor, he or she must be good enough for me too, right? Unfortunately, this is very rarely the truth. While referrals can shed some valuable light on an advisor’s business practices, reviews for financial advisors can be tricky.
It can be reassuring to know that other investors would recommend an advisor, but remember:
- Did they need the same services that you do?
- Why are they providing the review? Free services? Is it a business colleague? Advertisement?
- Is the review based on good investment advice or simply a positive market, and therefore, not an advisor’s skillset at all?
- Is the review from a reference or current client passed on by the advisor? Think about it: Who’s going to give you a bad reference?
There are a lot of factors that need to be considered when choosing a financial advisor to work with. It’s one of the most important decisions you will make, considering this person will affect when you can retire, how you can retire and what you can leave behind when you’re gone, if anything.
We’ve warned before: Good friends can be bad financial advisors.
Your finances and your future are much too important to base the decision on a few good financial advisor ratings and reviews. Instead, when searching for a financial advisor, you should research an advisor’s credentials, services, ethics and compensation. Fortunately, there are a number of resources you can turn to for this.
The Financial Industry Regulatory Authority (FINRA) and other regulatory bodies provide information about advisors on their websites, and you can also gain information directly from an advisor through the interview process. We understand that sifting through all this data can be confusing and time-consuming, especially if you don’t have extensive experience evaluating advisor track records and qualifications. So, let’s walk through what a review process should include and analyze the information gathered during the review process.
What to Look For in an Advisor Review
Remember, there are four key areas to focus on when performing an advisor review:
By researching an advisor’s qualifications and performance pertaining to these areas, you can gain a better understanding of how the advisor’s expertise and business practices fit your needs.
In addition to the licenses required by the government to offer advice to investors, either as a securities salesperson (the Series 6 or 7 tests) or as a financial advisor (Registered Investment Advisor or Investment Advisor Representative designation), there are a number of other relevant designations provided by financial organizations that an advisor can acquire. These include Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Certified Public Accountant (CPA) and Certified Investment Management Analyst (CIMA).
Another source of advisor credentials that should be considered is association memberships from quality organizations. Some of the best financial industry associations are the Financial Planning Association (FPA), National Association of Personal Financial Advisors (NAPFA), Investment Management Consultants Association (IMCA) and American Institute of Certified Public Accountants (AICPA).
Registered representatives sell investment products for commissions, while investment advisors charge fees for their services (on an hourly, fixed or Assets Under Management basis). Some advisors are licensed as both investment salespeople and investment advisors. And in some cases, advisors will also hold licenses that allow them to sell insurance products for commission.
When reviewing an advisor, make sure to verify that all of their relevant licenses and designations are active before hiring them. You can use Paladin Registry’s Check a Credential function as a free online method for evaluating the quality of advisor certifications and designations.
Ideally, the services an advisor offers should match your expectations as closely as possible. For example, if you prefer to review the performance of your account regularly, make sure that this is a service offered by the advisor you select. Some advisors offer extensive financial planning services in addition to helping select and manage investments.
An advisor’s investment focus is also something to take into consideration to ensure that it matches your investment strategy and goals. Some advisors focus primarily on generating income for their clients, while others are more focused on growth-oriented investments.
Broadly speaking, there are five major categories of wealth-related services that advisors can offer. Depending on your financial goals and approach, you might require an advisor to provide just one, all five or somewhere in between. They include:
- Financial Planning (college, retirement, estate, charitable)
- Investment Advice (asset allocation, manager selection)
- Insurance Products (life, health, long-term care)
- Tax Advice (planning, tax returns)
- Legal Advice (wills, trusts, probate)
Each of these services requires advice from a professional with expertise in the field in question. Some advisors provide all of these services under one umbrella, while others will provide you with referrals to specialists in the fields in which they lack expertise.
Given the impact their advice can have on their clients’ ability to meet their financial objectives, financial advisors should be held to the highest ethical standards. To check the compliance records of financial advisors, you can use FINRA’s Broker Check. The U.S. Securities and Exchange Commission (SEC) also has information on advisor wrongdoings, and you can check with your state’s securities and insurance commissioners for information of this type. Investment salespeople who hold Series 6 or 7 licenses and their broker dealers are regulated by FINRA, while the SEC and the states regulate investment advisors and their firms.
Financial advisors (RIAs and IARs) are held to the highest ethical standard as they are considered fiduciaries who must place your best interests before their own personal interests. This is not true of registered representatives who charge commissions for buying and selling securities. These investment salespeople are only required to recommend “suitable” investments – a fairly vague standard that is subject to a variety of interpretations.
You should also check for any criminal convictions on a potential advisor’s record, as an advisor may be able to have a current license even with a conviction on their record. Additionally, given their status as financial experts, one would expect that an advisor has managed his or her affairs well enough to avoid a foreclosure or bankruptcy, so this is another area to investigate.
In addition to being held to a fiduciary standard, advisors who charge fees rather than commissions are also compensated in a manner that typically more closely aligns their interests with those of their clients. A broker who charges commissions makes money whether the investment he or she sells goes up or down in value, while an asset fee-based advisor’s compensation is linked to a portfolio’s performance – as the portfolio rises in value, so do the fees generated for managing it.
In addition to determining how an advisor is compensated, your review should show the level of fees or average commissions charged by an advisor so that you can compare them with the amounts charged by other advisors.
How to Check the Validity of a Review
When reviewing an advisor, it is important to verify the information provided in the review process. You can get a start on this by knowing the right questions to ask in the interview process, and how to tell good answers from bad ones. You also need to know where to go to double check the information an advisor provides about his or her background and credentials. The sites mentioned above provide a wealth of information you can use to confirm the validity of information about an advisor, including whether they have been forthright about the securities licenses they hold and any securities-related complaints that resulted in financial settlements.
Paladin’s Rating System
Paladin’s free financial advisor matching service provides investors with introductions to pre-screened financial fiduciaries with the highest qualifications. Since 2004, Paladin has connected investors to financial planners, advisors and managers as the only SEC-registered service validating and documenting advisor qualifications and business practices for individual investors.
Paladin’s service focuses on financial fiduciaries, as they are obligated to put your financial best interests first, ahead of compensation considerations. All of the advisors and firms profiled in the Paladin Registry operate as financial fiduciaries. To prepare the reports, Paladin’s due diligence team reviews public and private data on financial advisors and firms to document financial advisor credentials, ethics and business practices.
When to be Extra Cautious
When reviewing potential advisors, there are areas that should be treated with caution. These include:
- Advisor personalities: Be cautious of hiring an advisor based on their ability to pitch themselves as the best person for the job. Even if an advisor has the friendliest personality in the world, this is not relevant to the advisor’s competence, ethics, business practices or services provided. Your job in reviewing an advisor’s qualifications is to find the advisor best suited to help you reach your financial objectives, not the one who is most skilled at marketing him or herself. This is the main reason why financial advisor ratings and reviews mean little until much later in your selection process.
- Client referrals: Such referrals should be treated with caution because it is generally easy for an advisor to handpick a few clients who will say good things about him or her, even if those clients don’t represent the average client experience as a whole. Referrals should not be used as a substitute for a verified performance track record that has been audited by a third party.
- Unrealistic performance projections: You should be especially cautious if an advisor tells you he or she can produce high returns with low risk. This can be a sign that the advisor is overselling his or her services in order to try to win your business.
When it comes to reaching your financial objectives, a good advisor can help you draw up and implement a plan that helps you meet your goals and live the lifestyle you want. An advisor who is not in sync with you, on the other hand, can make it difficult for you to achieve success in this regard. As a result, it is crucial to take pains in the advisor review process to identify the main factors that can help you select an advisor who is well-suited to helping you make good financial and investment decisions. The four factors covered above (credentials, services, ethics, compensation) are key to helping you conduct a review that can help you identify an advisor who is right for you.
Do not use financial advisor ratings and reviews as your sole research standard.
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