If you’re looking for the best financial advisor in Los Angeles, you’ve got a dizzying array of choices. As a consumer, it’s hard to understand how to even begin the search to find someone most suitable for you.
Ask Your Friends for a Financial Advisor Recommendation?
Most people ask their family and friends for a recommendation. While that sounds good in theory, most people don’t know what to look for to ensure they have hired an advisor who:
- Is good at what they do
- Has a clean background
- Is required to always act in their best interests
While there are many competent, honest experts out there, there’s also some not-so-great players. And that’s not just the extreme (and fortunately rare) Bernie Madoff types.
The Extremely Common Problem: ‘Conflicted Advice’
The issue many people face is something far more subtle, but still very damaging. It is often called ‘conflicted advice’. That’s where you may unknowingly hire an advisor who is not legally required to act in your best interest.
Sadly, when advisors aren’t legally required to put your interests before theirs (or their employers), they often don’t. So they end up recommending higher cost products to you that pay them higher commissions.
So they make more…at your expense.
You would think this is hard to get away with. Surprisingly, it’s not, because it’s perfectly legal. It’s also extremely common. So common that a White House Council of Economic Advisors report found that it costs American families $17 billion per year. Yes, that’s billions with a “B”, every year.
I’m sure you don’t want to be one of the people contributing your part of that $17 billion to the financial services industry. Fortunately it’s not difficult to avoid if you know the right questions to ask.
Do They Have a Good Investing Track Record?
At the same time, you also need to find a financial advisor that is competent. Honesty is great, but if they are not good investors, then it’s not a good idea to put your money with them.
Strangely, you’ve got to dig for that too, since most advisors don’t publish their investing track records. Most don’t volunteer this information and many don’t even calculate it. So it’s hard to evaluate how good they are…how do you rank the baseball player without knowing their batting average?
How To Get the Answers You Need
Fortunately, if you take the time, it is possible to find an advisor who is both working in your best interest and a competent investor. Here’s five questions to ask to create a short list of candidates to consider.
Are you a Fiduciary?
Not all financial advisors are fiduciaries. Fiduciaries are required, legally, to put your interests before theirs.
So you have the best chance to avoid this conflicted advice by working only with fiduciaries. Your future is too important: insist on it.
Can I see your Verified Investment Track Record?
Being required to do the right thing, of course, is vital…but you also need to hire someone who is good at what they do. You don’t want to pay someone to do your investing when they are not good at it.
This is another area where you need to ask questions, because most advisors can’t or won’t tell you how good they are at investing.
But you deserve to know:
- What’s their track record?
- Are they good at safeguarding and growing wealth?
- Have they successfully navigated volatile markets and tough economic times?
These questions seem elementary, but according to the Wall Street Journal article “Financial Advisors, Show Us Your Numbers,” most advisors simply don’t disclose their performance records. Or they talk about their results, but offer no written and independently verified performance records. So sadly, most people end up trusting this critical role to someone they really have no way to evaluate.
When your life savings is at stake, you have to get past the awkwardness and ask. And get it in writing, too. Verbal promises in a sales meeting may sound good at the time, but countless investors have been burned when the actual services delivered didn’t match the sales pitch.
And you don’t want just any numbers, because as you are probably aware, there are ways to “fudge” the numbers.
Fortunately, there’s a solution. It’s called GIPS®, which stands for Global Investment Performance Standards. GIPS® is a worldwide standard of reporting investment results created and maintained by the CFA Institute.
Those firms who comply agree to:
- Measure their own results in a very specific way
- Have their results verified by an independent third party to ensure compliance
With GIPS® standards, you get the transparency you need to compare and evaluate investment managers. In other words, this allows you to compare apples to apples.
Bottom line? Ask to see their independently verified track record. If a firm doesn’t provide one, there is not enough information for you to evaluate their performance. They may still be competent, of course, but may not be as committed to transparency as you may prefer.
Are you a Fee-Only Advisor?
By now, your questions should be helping you narrow down your list. The next question will further shorten your list, and it’s about how they get paid for their services.
As previously mentioned, many advisors accept commissions. Anytime commissions are involved, that person will be tempted to sell you whatever is needed to get the highest commission. Of course, there are many honest commissioned advisors, but they are likely pressured by their bosses or corporate offices to meet a certain quota.
Or even if they don’t receive commissions, they may get other fees from third parties that make it very tempting to steer you toward certain products.
Best to avoid commissions and third party fees altogether. There’s an easy way to do that, and that’s by working only with those advisors that are “Fee-Only”.
But be careful, there’s also a class of advisors that are ‘fee-based”. Not the same thing…fee-based advisors can collect fees and charge you commissions.
Insist on a fee-only advisor. That way, you can be sure that your advisor is working only for you, not for product companies.
Do you have any complaints or issues on your record?
Because the financial industry is regulated, every financial advisor or broker a regulatory record (think ‘rap sheet’). According to research by the Wall Street Journal, about one in eight brokers or advisors has red flags on these regulatory records. These red flags can include customer complaints, bankruptcies, regulatory actions, terminations or even criminal charges…all things you need to know about.
- An estimated 70,000 advisors have at least one disclosure
- Nearly 3,000 advisors have at least five disclosures
If you’re like most people and don’t know where or how to check, you may be unknowingly working with one of these advisors. That’s obviously very troubling.
So, always ask. Then, verify what you heard to make sure it matches. To do that, simply plug their name into this online system:
You always want to work with advisors who have a clean record. There’s just too much at stake.
How do you keep your clients informed?
In surveys about satisfaction with financial advisors, communication is consistently a big issue. People feel frustrated if the advisor isn’t consistently reaching out and communicating.
Really, the most compelling reason to have a full-service advisor is to help you achieve your financial goals. Most people don’t. Robo advisors and discount brokers can’t help you there. But we full-service advisors can, simply by having frequent meetings to check in on progress. This way, we hold you accountable to meet your own goals.
Full-service advisors provide other services as well, such as helping you make smart day to day financial decisions. Should you buy or lease your next car? Buy a second home? Refinance your mortgage? All of these can help you make the right moves to help improve your financial future.
We’re also close by when you might be tempted to sell investments when the markets get rocky. This support is critical, as most investors give back a good portion of their gains when the markets get scary. Remember 2008 or the dot com craze? How many people you know held on to their gains? Many even had to delay retirement after these events.
It’s just human nature, but a good financial advisory firm can help you overcome those urges and not panic sell at the wrong time.
Conclusion: Stay Informed When Choosing a Financial Advisor in Los Angeles
Whatever you do, be sure to do your homework when looking for a financial advisor. Resolve not to be one of those Americans who contributes a portion of that $17 billion every year from conflicted advice. Instead, use these questions to find the right advisor. That way, your money will stay in your pocket, working for you, and you’ll be that much closer to reaching your goals.
But once you’ve found a good advisor, don’t sit back! It’s your money and no one is going to watch it as closely as you do. Be sure to always open your statements quickly and continuously monitor things. Schedule an annual ‘checkup’ to make sure all is in order:
- Check on brokercheck.org – make sure no new disclosures have been filed
- Review their verified investment performance – are they keeping up to market averages?
- Communication – are they keeping in touch with you as often as you’d like, or as often as they promised to?
- Fees – are the fees and expenses you are paying reasonable? Are they easy to understand and transparent?
If things are not great, it’s a good idea to get a second opinion. Your money’s too important.
For more tips on how to find and monitor a financial advisor, download our free eBook.
John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial planning and investment management firm based in Pasadena, California. As a GIPS-compliant firm, we bring institutional quality, high performance investment management and comprehensive financial planning to individuals and families. Visit us at www.arroyoinvestmentgroup.com.