Choosing a trustworthy financial adviser can be confusing and stressful. In last month’s column, we learned that researchers have not been able to find a link between financial literacy education and improved consumer decision-making. However, even alleged experts don’t necessarily produce better returns on client investments. Combined with high levels of misconduct within even the most reputable brokerage firms, finding a trustworthy adviser can seem hopeless.


This month, we continue exploring how revised fiduciary regulations, which are intended to address concerns about retirement plan investments, can help clients find credible financial advisers who are bound to act in the clients’ best interests. For information on how specific issues such as “best interest contracts” and insurance annuities will be affected, read the Department of Labor’s fact sheet on fiduciary rule finalization at www.dol.gov/ProtectYourSavings/Fact
Sheet.htm.


A fiduciary designation requires the adviser to prioritize the client’s interest and disclose actual or potential conflicts of interest associated with recommended investments. The purpose of this kind of regulation is to reduce risk to the “entrustors”—the clients who bear the risk and cost of any losses. Fiduciaries have more limitations on their freedom than investment brokers but can also market themselves as more honest, enhancing their reputations. With enforcement provided by the judicial system, the costs shift to taxpayers.


As an entrustor seeking either personal or corporate financial advice, you must ensure that you choose the right professional. Here are some steps to take to specifically define your needs and avoid the pitfalls of confusing a financial product salesperson with a fiduciary.


1. Understand the difference between a financial adviser and an investment broker-dealer. A financial adviser may charge you several thousand dollars for a complete financial plan, while an investment adviser will recommend products such as stocks and bonds and earn fees or commissions on each sale. If you have a cash-flow problem, a financial adviser may recommend paying down credit card debt, refinancing your mortgage or analyzing spending habits. Asking a broker to recommend investments with higher-than-reasonable returns is not likely to cure a spending problem. Neither investment brokers nor financial advisers can control the fiscal markets, but financial advisers help their clients set goals and assess the degree of risk involved to implement various plans.

2. Interview several potential advisers. The National Association of Personal Financial Advisors (www.napfa.org) allows you to search its list of fee-only members. The site also offers “Pursuit of a Financial Advisor,” a 16-page guide to the selection process. It contains extensive information on vetting a specialist, including questions to ask and links to useful tools such as the Comprehensive Financial Advisor Checklist, which you can use to screen potential candidates.

3. Verify that credentials are meaningful and current. A certified financial planner, for example, has passed a rigorous exam, and the certification can be withdrawn for inappropriate behavior. Other credentials can be purchased and provide no assurance of adherence to professional standards. New designations are being created to indicate fiduciary responsibility.

Don Trone, who established the Foundation for Fiduciary Studies, originated the accredited investment fiduciary designation in 1999. His current company, 3ethos, offers the global fiduciary strategist designation, which comprises two phases of training—a core curriculum leading to a certification in fiduciary studies, followed by eight electives in an area of specialization. The intent is to combine the fiduciary function with leadership and decision-making processes.


4. Use the tools available on the Financial Industry Regulatory Authority (FINRA) website. For example, the “Tools & Calculators” menu tab offers Broker Check (brokercheck.finra.org), where you can search by individual or firm name and locate employment history, licenses, certifications, complaints and violations. The same area contains information on designations, a fund analyzer, a risk meter and a scam meter.

5. Find the right fit. A financial adviser may have impeccable credentials but still may not be the right professional for your needs. Meet with and interview several candidates. Do they charge a flat fee, an hourly fee or a percentage of your assets? Do they deal with small entrepreneurs or only the very wealthy? Do they specialize in a particular area, such as retirement? Will they badger you, when necessary, to save you from unrealized potential caused by procrastination? Do they work with other clients like you with similar needs and goals?

6. Finally, trust your gut instinct. Review goals, strategies and results at least annually, and ask about anything that causes you discomfort. If necessary, change advisers, and use the links on the FINRA site to make a complaint if you believe there has been a lapse in fiduciary responsibility.

Next month, we’ll look at investment pitfalls and how to avoid being scammed by unscrupulous brokers.