Regular readers know that I prefer a do-it-yourself approach to personal finances over hiring a financial advisor. After all, so many "advisors" are simply interested in turning your money into their money. Here are some examples of why I believe this:
That said, many people simply don't want to manage their own finances, don't think they have the skills necessary to do so, or have some complicated money-related issues where they need a bit more expertise. These people need to be sure they hire a trustworthy, competent advisor. Here is some advice on how to do that from the fee-only advisors at Marotta Asset Management:
Newspapers and television reports across New England have been full of accounts of the alleged activities of financial advisor Bradford C. Bleidt in the past few weeks. Mr. Bleidt is alleged to have defrauded his clients of more than $100 million over the past 20 years, and to have concealed his actions by taking money from new clients to cover his thefts from old clients.
Fraud by financial advisors is exceedingly rare. Nonetheless, the tragic losses by Mr. Bleidt’s clients are undoubtedly making other people wonder if their financial advisor is acting in their best interest. The National Association of Personal Financial Advisors (NAPFA) offers the following advice about how to protect yourself as you work with a financial advisor.
Know where your money is. Whether your advisor is managing your money or you are the person who signs-off on each financial decision, an independent financial institution will hold your money. This company has "custody" of your money. Make sure you know which company it is, how to contact the company, and what your account numbers are.
Read your financial statements. The firm that has custody, typically a broker/dealer, bank or trust company (known as the "custodian firm") is required to provide you with financial statements at least quarterly. Read them. Most importantly, make sure that these statements are coming to you directly from your custodian firm – not from your advisor. In the case of Mr. Bleidt, the government alleges that he had the custodian firm’s financial statements sent to him instead of his clients, and then he created fictitious financial statements that he sent to his clients.
Stay in contact with your advisor. Visit with your advisor at least annually, and stay in contact by e-mail or telephone. If your advisor is vague or evasive, ask for more information. Holding these regular meetings has the added benefit of making sure that you and your advisor are clear about your financial goals, risk tolerance, and investment strategy. In fact, poor communication between client and advisor is a more common source of dissatisfaction than any type of illegal activity.
Having a financial advisor, even a person with great credentials, is no substitute for devoting some attention to your personal finances. It’s your money, so you need to remain involved.
Consumers need to be aware of situations in which their advisor is not proactively placing the good of the client above all else. Many of those in the financial profession do not put their client’s interests first. They do not accept fiduciary responsibility to act in their client’s best interests. This often has a significant negative impact on a client’s finances. This isn’t illegal – but it’s a practice NAPFA finds troublesome. That’s why every year each NAPFA member signs a fiduciary oath, committing to act in good faith and in the best interest of the client.
Many financial advisors, such as those who work for large financial services companies, have a fiduciary obligation to their employer, not to their respective clients. NAPFA members are different. They have no employer quotas to fulfill and do not accept commissions or any type of third-party compensation for providing financial advice.
When seeking a financial advisor, you should find out if they are willing to sign a fiduciary oath putting your interests above those of their employer.
NAPFA members all agree to the following fiduciary oath:
NAPFA Fiduciary Oath
- I shall act in good faith and in my client’s best interest at all times.
- I shall provide written disclosure to my client of any conflicts of interest that may compromise my impartiality or independence.
- I shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product.
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One thing to add: when picking an advisor, be sure to consider my guidelines for picking a financial advisor.
Like you, I'm a do-it-yourself type. "Many financial advisors, such as those who work for large financial services companies, have a fiduciary obligation to their employer, not to their respective clients." - I think that's a key point.
Posted by: Tim | September 21, 2006 at 01:36 PM