Is Your Financial Adviser Really an Adviser – 3 Ways To Tell

Does your adviser look puzzled if you ask him the difference between a capital gains tax, and an ordinary income tax? What if you just want to pay him an hourly fee, like you do for your attorney, and implement his advice on your own? Can you do that? Finally, during your initial meeting, does he ask questions about ALL areas of your finances, or is he too busy looking for a point where his product is the end-all, be-all to fulfill all of your dreams? True financial advisers are difficult to come by these days. Many have knowledge of only a small part of the “financial puzzle,” and while it’s impossible for anyone to know every subject in-depth, I don’t believe expecting your adviser to know some basic facts on an important subject, such as taxes, and being mindful of them when guiding you is too much to ask. What follows are three “checkpoints” that, while being far from a complete list, are at least a beginning to learn if you have a true adviser working for you.

1. GENERAL KNOWLEDGE-Expecting your adviser to help you fill out a Form 1120 for your C corporation is a tad unreasonable, but expecting him to be familiar with the tax implications of selling out of a particular investment is not only NOT unreasonable, but should be expected. Unfortunately, many financial professionals carrying business cards that contain the word “adviser” as part of their title do not know much, or anything, outside of what the company they work for require. Even more sad, these people don’t take it upon themselves to learn their area of expertise in detail, or know adjacent subjects at all. While an “ignorance is bliss” mentality may be good for the company’s bottom line, it’s almost always bad for you. General knowledge is easy to come by here in the information age, one can “Google” their subject matter, take a trip to the local library (in my area, Pittsburgh, the libraries are linked so somebody is more than likely to have the book or information you’re seeking), or even see if that topic is part of a continuing education course that almost all licenses and certifications require of their members. Being an automaton that only knows how to “parrot” a financial services company’s talking points is probably not your best bet to hire as a financial adviser.

2. COMPENSATION-Can you pay for just advice, or do you need to purchase a product for the adviser to be properly compensated? Hey, I’m all for people getting compensated for what they do for a living. Besides, we all have to pay the bills, put food on the table, and provide for our families, it’s just that WHAT we do for a living should be straightforward. If a financial services professional only sells life insurance, for example, which is NOT a dishonorable profession, but they don’t really have at least a general knowledge of investments, or tax, or banking, they SHOULDN’T list “adviser” as part of their title. Calling themselves an insurance agent or broker is proper. Also, if your adviser’s company or firm will not allow them to acknowledge a fiduciary duty, then again, “adviser” is not a proper title. That’s not to say that a true adviser can’t act as an insurance agent, tax preparer, as well as investment adviser. BUT, that adviser, by way of their fiduciary duty, should EXPLICITLY state, or even provide it in writing, when they are “taking off one hat and putting on a different one.” A true adviser will have the ability to allow you to pay only for their advice on an hourly or flat fee basis, and implement that advice elsewhere if you so choose.

3. PORTFOLIO CONSTRUCTION- Does your adviser ask you a bunch of targeted and relevant questions in areas such as insurance, investments, taxes, and banking? Does your adviser express concern when you’re lacking in a particular area EVEN IF he or his company DOES NOT specialize or offer services in that area (property and casualty insurance comes to mind)? In many instances a potential client wants to invest in the volatile financial markets, but this client has no life or disability insurance, or does have it but an inadequate amount. This client might also lack an emergency fund of three to six months cash in an FDIC or NCUA insured account. A true adviser will discover this in his questioning and recommend that the potential client provide for his family in case of disaster before risking the chance of a significant loss (Heck, a term life insurance policy for the average person, is NOT that costly!) If the person still wants to invest in the financial markets without taking steps to protect their family in the case of their untimely demise, the true adviser should either refuse to write the business or get a waiver signed by the client that they were told of the need for insurance or an emergency fund, but decided against it by their own choice. There is no guarantee that the waiver will hold up in court or arbitration if you’re sued by that clients’ heirs because the client was killed in a car accident and the market crashed shortly afterward, but, hey, it’s better than having no acknowledgment, right?

As stated above, this is far from being a complete list, and you can’t even go completely by title as even some Investment Adviser Representatives have been known to push a particular third-party adviser, while a broker or agent without a fiduciary duty takes his time to know his clients and recommend appropriately. No amount of legislation can prevent a person from doing harm if that is their intent. Caveat Emptor (let the buyer beware) will always apply, but as illustrated, there are ways to know who is more than likely on your side and who isn’t.

By Suzana