How Investors Are Told to Pick an Advisor

Investors can be easily duped by unscrupulous FAs and aren’t asking the right questions when selecting one, according to an article in the New York Times which purports to give investors the low-down on how to hire a financial advisor.

In a “makeover” experiment conducted by the Certified Financial Planner Board of Standards several years ago, a professional DJ shed his dreadlocks and piercings, dressed in a suit and learned a few key phrases relating to 401(k) and 529 plans, according to the Times. The physical change and canned knowledge were enough to convince all but one person in a test group to hire him after just a 15-minute conversation, Joe Maugeri, managing director for corporate relations at the CFP Board, tells the publication.

According to the Times, this highlights the fact that investors aren’t sure what to do when selecting a broker.

Using Finra’s BrokerCheck doesn’t offer much help aside from ruling out proven bad seeds, of which there aren’t that many, the Times asserts. Professional designations, of which there are more than 176, according to Maugeri, are also not indicative of one’s actual ability to do the job nor their intent to defraud, according to the publication.

In addition to professional designations, investors should be asking prospective advisors about their qualifications, commitment to their job, and their teams, John Bucsek, managing partner ofMetLife Solutions Group, said in a recent report, according to the Times.

Maugeri suggests investors ask questions in specific areas and present scenarios that would demonstrate an advisor’s ability to listen to the specific needs of the client, the newspaper reports. Such precautions would also help rule out advisors coming in from failed careers in other industries with little knowledge of the job, according to the Times.

But in some instances advisors coming in from a specific field – as long as they get proper training in the advice field – can bring valuable expertise only they would have, such as medical professionals who become advisors to others in their former field, the publication suggests.

Investors should eschew questions about portfolio performance at the first meeting and focus instead on how the advisor works on a daily basis, such as what entity actually holds the funds and how the business is run, Kathleen Hastings at FBB Capital Partners, tells U.S. News.

Asking about succession plans will also help rule out unprepared advisors, Joe Heider of Cirrus Wealth Management Group, tells the publication. Furthermore, investors need to determine whether they’re talking to a broker, whose history could be checked on BrokerCheck, or an investment advisor, whose record they could check on the form ADV with the SEC or a state securities agency, U.S. News writes.

Investors should also ask about the advisor’s target audience rather than firm size, according to Amit Seru, a co-author of a report from the University of Chicago and the University of Minnesota.

Finally, investors need to walk away from any advisor that doesn’t want to disclose fees, Hastings tells the publication.

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