Be Careful Choosing a Financial Adviser

Stories of financial scams — and alleged financial scams — are littered throughout complimentary investment publications I receive.

Stories like these …

JPMorgan broker barred after stealing $20 million. This former broker was barred from the securities industry after admitting he stole more than $20 million from clients. The looted funds went towards paying his mortgage, sports gambling, option trading and credit card bills.

Registered Investment Advisor (RIA) cheats first client out of $800,000. This advisor claimed assets under management in the millions and annual returns ranging from 20% to 66%. Both were false. The firm had no assets. And performance was phony. When the first client showed up with $2 million in assets … the advisor redirected $800,000 for business and personal expenses.

“Religious” investment advisor schemes pro athletes out of $30 million. This reported CPA (certified public accountant) gained the trust of a few NFL and MLB players through religion and charitable work. After they invested huge sums of money earmarked for a low-risk, conservative approach, their investments were channeled to their financial consultant’s outside, money-losing business and his own pocket.

Broker churns blind widow’s account for $243,000 in commissions. In this case, a broker generated $243,000 in commissions for himself by trading one account over a three-year period. He placed more than 700 trades with markups /commissions between 2.5% and 4.25%. In the process, his elderly, blind widow client totaled $184,000 in net losses.

All four of these instances are just from the last few editions (yes, I included some “brokers”)!

And while these publications are reserved for financial advisors, money managers and other financial professionals, a simple Google search reveals the heightened amount of financial corruption taking place nowadays …

“Investment scam” turned up 23 million results.

“Investor fraud” produced 30 million results.

And “SEC charge” generated 151 million results.

Granted, not every result is a separate case. But there are plenty of actual incidents within the results.

Take notorious “Ponzi schemes,” for example. Although these Madoff-esque shams have decreased, they’re still happening. And they’re costing investors millions of dollars …


A Washington Post article reported earlier this year:

Economists Mark Egan, Gregor Matvos and Amit Seru conducted an ingenious analysis of unique BrokerCheck dataset that covers 644,277 currently-registered financial advisors in the United States, and an additional 638,528 who have left the industry between 2005 and 2015.

More than 7% of registered advisors have been disciplined for misconduct or fraud. Many such cases involved placing clients into unsuitable or overly-risky investments. Misrepresentation and omission of key facts were other large categories. The misconduct was also financially significant. In cases involving settlements, the median was $40,000. Many cases involved products such as variable annuities, which are notorious for their complexities and hidden fees.

Perhaps the most surprising finding is the high proportion of repeat offenders still present in the industry. Among advisors with documented misconduct, 38% were repeat offenders.

Point is, there’s grave danger in selecting a financial advisor — or broker — today.

Now, don’t get me wrong … I think most financial advisors do an admirable job.

I used to work for one that I’d put in this camp. My old firm had an unblemished record throughout its 30-plus years in business. It ranked — and still does — in the top 1%, by assets, of all fee-only registered investment advisory firms in the U.S. And there are many other high-quality and trustworthy wealth management firms to choose from.

But you have to be careful. And I’d be remiss if I didn’t tell you that the process of choosing one is critical.

Are you in the market for a professional financial helper? Someone to handle your investments, tax planning, retirement strategy, estate work, etc.? If so, chances are you’re seeking a financial planner, financial consultant, or investment advisor.

Here are 10 guidelines to consider during your search and initial meetings:

1.  Check on financial industry experience. How long has the advisor been in the business? If they’ve been helping clients for a while, they’ve probably studied countless investment products, been through a bear market and seen all sorts of investment trends and fads.

2.  Look for credentials. In this case, a CFP (certified financial planner) should be at the top of the list. CFPs have passed tests administered by the Certified Financial Planner Board of Standards on personal finance. They also must complete continuing education each year to maintain their designation.

3.  Ask to see “Form ADV.” Form ADV is a registration form that details an advisor’s business practices, fees, conflicts of interest and disciplinary information. Your financial advisor should provide you with this form or have it readily accessible on their website.

4.  Do a background check. Go to FINRA’s BrokerCheck to see regulatory actions, violations and complaints. You can also see employment history, certifications and licenses. A firm’s ADV Form is often available here.

5.  Check fee structure. Typical options are: hourly rates, flat rates, commissions, or fees tied to assets. More financial advisors are gravitating towards the fee-only business (for example, a 1% to 2% fee on assets they’re managing for you). This is usually good for the client since it aligns interests. In other words, if your money manager wants to earn more, he/she needs to grow your assets.

6.  Ask about additional expenses. Many advisors use mutual funds, ETFs, separately managed accounts and other investment products. Be sure to ask what the average — or weighted average — expense ratio is for their fund line-up. If a lot of actively-managed mutual funds are used, you could be sacrificing another 1% or more in expenses. While it’s worth paying up for some active managers, it’s helpful to know all-in costs, nevertheless.

7.  Evaluate historical performance. How have their chosen funds and model portfolios performed versus comparable indices in the past? Ask to see some real numbers even if they have to white out client names. Don’t fret over short-term underperformance. Instead, look for returns in bull markets, bear markets and over full market cycles. And remember, advisors can provide more value in other areas beyond strict investment performance.

8.  How often will you receive updates. When will you hear about your investment portfolio, goal-based progress and overall financial situation? Typical answers will be quarterly or yearly. Also, ask what’s a fair response time to expect if you have a question for them? Hopefully, the answer is same day or within 24 hours.

9.  Ask to speak to existing clients. Some firms will even offer this up. Or they’ll have a hand-picked list ready. If not, it shouldn’t be too hard to locate a small handful of clients willing to speak highly of their services.

10. Come with a list of questions. Write down a list of additional questions to ask and bring it to your meeting. Here’s a MarketWatch article with a list of 25 questions if you need more to consider.

[This list goes well beyond what a broker provides. But some of these tips may apply to broker selection, too.]

There are many high-quality and trustworthy wealth management firms just like my previous employer. To start the process, get a referral from a friend … settle on a big, reputable shop like Charles Schwab or Vanguard … or interview some local advisors face-to-face.

At the end of the day, if you’re going to allow someone else to handle your money, make sure to do your homework. Not only will you feel more confident in choosing a financial advisor, but you’ll most likely reduce the risk of ending up in the news, as well.


Grant Wasylik

Your thoughts on “Be Careful Choosing a Financial Adviser”

  1. A Google search of news articles about broker-dealer reps and financial advisors might be misleading, as we journalists are more likely to write about the bad apples in the barrel. When my family and friends ask about financial advisors, I usually send them on research missions to a few of the professional organizations that seem to do a good job- the CFP board, the FPA, NAPFA – to get their search started.

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Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…