A Consumer’s Guide to Selecting a Wealth Advisor

After working with Sharon for five years, Brian finally took a critical look at his portfolio. He found his money scattered across a range of conservative investments – an investment plan you would expect of someone nearing retirement, not at the beginning of a career. Tens of thousands of dollars were just sitting in an account, uninvested “in case he wanted to buy a house” because of an offhand comment he once made. The fees he was paying were excessive based on the services he received. When Brian talked with his parents, he found they weren’t happy with their experience either.

Brian’s family had fallen victim to a common problem – they were intimidated by the financial services industry and its complexities, so they just accepted whatever their advisor said. And they didn’t properly vet their advisor, much less realize that there are different kinds of financial professionals who offer different services, many of whom are happy to take your money.

How do you find the right financial professional and avoid letting your money work for their company instead of for you?

Picking a financial professional

The first step in the process is identifying what type of financial professional you need. Financial professionals can be broken into three discrete categories: investment adviser representatives (IARs), insurance professionals, and registered representatives. Each one has a specific scope of work they are licensed to offer, and you want to make sure your professional’s licenses and qualifications match your needs. These services include fee-based asset management or advice, commission-based securities products, and insurance.

IARs are affiliated with a registered investment adviser (RIA) and offer investment advice and asset management services for an ongoing fee, generally a percentage of your account. These professionals must either pass the Uniform Investment Adviser Law Exam, also known as the Series 65, or combination exam (Series 66), or have a Chartered Financial Analyst (CFA®) or Certified Financial Planner (CFP®) designation. They are regulated by the Securities and Exchange Commission (SEC) and/or individual state securities departments. IARs are paid based on fees only; they are paid for financial advice, and by law, they act as fiduciaries and must put your interests first and foremost (unless they are dual registered). This category of financial professionals is what most people think of when looking for financial planning advice. Some individuals may represent themselves as IARs when they do not hold these qualifications and are paid on a commission basis for the sale of products.

The second category of financial professionals, registered representatives, is a term used to denote an individual registered with and regulated by FINRA. These professionals were once referred to as “brokers” or “stockbrokers” because they are licensed to buy and sell various securities on behalf of their clients. They can be referred to by various titles (approved by their firms), including vice president, managing director, financial professional or even “advisor.” These titles vary in meaning and are typically approved by the Registered Representative’s compliance department. One of the major complications with these titles is that Registered Representatives can have a wide range of capabilities based on whether they passed the Series 6 Investment Company and Variable Contracts Products Representative Exam or Series 7 General Securities Representative Exam. Passing the Series 6 allows Registered Representatives to sell certain mutual funds, variable insurance (if also insurance licensed), unit investment trusts (UITs), and municipal fund securities (e.g., 529 savings plans). The Series 7 exam is more comprehensive, adding additional capabilities, such as selling stocks, bonds, money market funds, exchange-traded funds (ETFs), and more. Registered Representatives are not required to put your interest ahead of their own. They are paid on commission, which carries an incentive to offer products that pay a higher commission rather than a product that is in your best interest.

Dually registered financial advisors are IAR’s who also pass a FINRA Registered Representative examination. However, although a dual registration sounds beneficial, it may work to your disadvantage. While dual-registered advisors may hold themselves to the fiduciary standards of an IAR, they don’t always have to. In fact, if they offer any non-fiduciary product, the IAR standards cease to apply, and the advisors are held to a suitability standard and are not required to provide ongoing advice. A suitability standard allows them to have only a reasonable basis for recommending plans to you, instead of your best interests. The end result is that while they are perceived as being advisors paid solely on fees, who must hold your interests first and foremost, they may give advice to increase their commission – a commission you may not be aware of because they promote themselves as an IAR.

The last, and most restricted, category is insurance professionals. These individuals are qualified by passing a state insurance exam. They are regulated by the insurance departments in states where they conduct business, many of which adopt the National Association of Insurance Commissioners (NAIC) model legislation that prescribes how these professionals should be regulated. These individuals can have titles such as agent, financial professional, or associate. Unlike professionals in the first two categories, insurance professionals can only sell products such as fixed and indexed annuities and life insurance products. Like registered representatives, insurance professionals are not required to put your interests first, so you may find some who are willing to offer you products that pay the professional a higher commission.

There are other financial professionals who offer similar services. For example, attorneys and CPAs may offer financial planning services incidental to their tax or legal practice, respectively. Indeed, no licensing or certification is required to provide purely financial advice; those requirements extend only to those selling investment products or insurance. There are also financial professionals who work at banks who have a separate set of standards they must follow. Before agreeing to pay for such services, ask the financial professional about their credentials, the types of services they offer, the fees or commissions you will pay, and whether they adhere to a fiduciary standard.

Once you determine the type of financial professional you are looking for, the next step is to find a professional you connect with on a personal level. This is an individual that you will be working with very closely for a long time, so it should be a professional that you can feel comfortable sharing your private and personal information – your current financial status, your health issues, and your long-term goals. Sharing this information can be very awkward, especially if you are a private person, so finding a financial professional that matches your personal style is crucial.

Do your due diligence

You’ll note we advocate choosing a professional first. Great financial professionals can be found in boutique financial advising offices or well-established companies – the environment doesn’t have a monopoly over the best people. Certain financial professionals love having the support of an organization with extensive resources behind them, and certain others prefer the freedom of a small organization that lets them connect with their clients in their own way. However, the financial advising field has had more than its share of scandals over the years, and you want to make sure that the person you’re working with truly has your best interests at heart. New stories about fraudsters who claimed to help their clients earn unbelievable returns (only to steal the money) or an advisor recruiting people into a pyramid scheme pop up each month. Therefore, research your financial professional and their company to make sure you’re not headed for a similar path.

A good place to start is either FINRA’s Brokercheck® or The SEC’s Investment Adviser Public Disclosure. These two databases allow the general public to review a financial professional’s background. Be on the lookout for customer complaints, arrests, bankruptcies, or any other signs of distress.

Another research tip is to look for a disclosure, a notification about something potentially problematic in the professional’s history like a bankruptcy, a criminal charge, or a client complaint against the financial professional. However, a disclosure on either Brokercheck® or the Investment Adviser Public Disclosure or IAPD (SEC) may or may not have any merit. Every complaint must be investigated by the firm and/or potentially FINRA. Even if the complaint is not justified and the firm closes the matter without any findings, the disclosure is still required to be displayed on the public website. Financial professionals have very limited options even when they have not made any errors except hiring an attorney to file an expungement with FINRA. That process is not only expensive; it can also take years. Not all complaints are justified – complaints have been filed against financial professionals for various groundless reasons such as for not reaching unrealistically high rates of return or for being unhappy with the state of the market. (For example, the 2008 market crash resulted in a slew of unmerited complaints.)

On the other hand, if there was an Acceptance Waiver and Consent (AWC) where the financial professional did not admit or deny any wrongdoing, then that should be a cue for heightened vigilance because chances are some wrongdoing was done.

You should also review your financial professional's Outside Business Activities (OBA). This section is where your financial professional’s regulator will require them to list all outside work activities. You should check this section on Brokercheck® and the IAPD® to see if your financial professional is advising part-time or full-time. The financial professional is required to disclose the nature of the OBA, how many hours per month, and how many of these hours take place during trading hours. This should help you ascertain if the financial professional has a part-time job that may conflict with their ability to perform their job function. While some financial professionals choose to work part-time, taking on fewer clients, it’s a good litmus test for how committed your financial professional is to the industry.

Checking the business

Researching the company the financial professional is affiliated with is just as important as researching the financial professional. Oftentimes, financial professionals use various doing business as (DBA) names to market their services other than the name of their parent company. For example, a financial professional who works for Big Bank of Washington might call themselves Smith Capital Advisors, which is nothing more than a marketing name. This obscures their connection to their parent organization and makes it appear that are an independent entity, when in reality they are just an employee or contractor of Big Bank of Washington. Oftentimes, there are no barriers to entry or requirements the financial professional needs to fulfill prior to calling themselves by the DBA name. You should not interpret a financial professional as having achieved any level of success simply by the title they use or the name of the name of the company with which they are affiliated.

If the financial professional is associated with a firm with minimum sales quotas, they must still meet those requirements. These requirements may include a provision to sell a minimum amount of insurance or investment products. Thus, solely because the financial professional is the founder and CEO of a DBA does not mean they are working as a sole owner with their own standards. Always check your professional’s Brokercheck® record to determine if they are affiliated with another firm and to see the bigger picture.

Once you identify whether there is a parent company (or that the firm isn’t a DBA), research whether the firm has sales quotas for their financial professionals. If so, the parent company may put extreme pressure on their employees to meet certain thresholds of sales, which could lead them to make sales that are not in their client’s best interests. As mentioned before, when your future is on the line, a thousand dollars lost today can result in tens of thousands of dollars by the time you’re ready to retire – or even delay your retirement. This doesn’t mean that you can’t have a productive and successful relationship with companies that focus on their bottom lines, but you should be aware of the temptation your financial professional may have to make sales that are not in your best interest.

All firms aren’t created equal. Some firms offer a wide universe of products. However, other firms only allow their top salespeople to offer the full suite. They may restrict some or all their professionals to only proprietary products – products that give the firms the biggest profit margins. Other firms impose product restrictions based on experience, education, and assets under management.

Be warned: It’s common for a firm to hire younger professionals out of college and ask them to create a list of their closest 100 or 200 friends and family members and turn them into clients. Then the firms provide the young professionals with sales scripts and tell them to “hit the phones,” or in this day and age, “hit LinkedIn.” One of the firms’ goals is to evoke emotional connections through a “warm market,” which may induce their friends and family to purchase something from them regardless of whether they need the product. Success for these fresh recruits is measured by how many calls they make that result in appointments and how much money they bring in. They may also be rewarded for offering the company’s proprietary products, or even worse, terminated if they don’t offer those products over all others, even if they aren’t nearly as beneficial for the clients. Moreover, these new employees know that their jobs are on the line; the recruits are paid on commission and little else. This strategy is a problem because you are much more likely to agree to working with someone you have a connection with and agree to pay for services that you aren’t interested in to help a friend out. However, this can mean thousands of dollars lost and long-term commitments to a product you may not want.

One final consideration is whether the company uses a custodian, a third-party entity that custodies or holds client funds. Examples of some large custodians are Charles Schwab, Fidelity, LPL, NFS, and Pershing (BNY Mellon). Custodians serve an important purpose for investors because they offer a buffer between you and your financial professional. Since your funds and securities are held by a third-party, this makes fund misappropriation more difficult and offers you additional protection. Unless you are doing business with a large institution, we strongly advise against allowing a firm to custody your funds directly.

Designations: What do they mean?

As of November 2021, FINRA maintained a list of 216 professional designations. A designation is a professional certification that a financial professional obtains by fulfilling certain education requirements.

Not all designations are equal.

It may be cool to see Jacob Advisor, CFP®, RIS®, AAMS®, but what do these letters mean? You can go to FINRA’s website to obtain a list of commonly used designations. When you evaluate the merit of designations, consider the rigor of the exam, the educational requirements, and the background and fitness standards that the credential holder needs to complete. In our opinion, there are very few meaningful designations out of the 216 commonly used ones.

Two of the most recognized are CFP® and CFA®. The CFP® designation is granted by the CFP® Board and requires that the certificate holder have a bachelor’s degree, pass the CFP® exam, and complete coursework. For the CFA® Charter, the charter holder must pass all three levels of the CFA® exam and submit reference letters. For both designations, the holder must have met work experience requirements to hold the credentials and complete continuing education requirements.

Investment analysis tools and financial planning software

Technology is only as good as its developers. Many firms utilize their own proprietary software to run an analysis of your investments or create a financial plan. There is nothing inherently wrong with this, but be vigilant about the output. Some common non-proprietary software used for financial planning software are eMoney, MoneyGuidePro, and NaviPlan, and the assumptions their programming is based on have been rigorously tested over the years and are constantly being refined. However, your financial professional may be able to override these assumptions. Boutique programs may not be as good as these standards. Ask about the underlying assumptions built into the program. Ask about things like the life expectancy, rate of inflation, and capital market assumptions they’ve built in. Don’t just assume that the program will give you the optimal results – a small change in these numbers can result in very different outcomes.

Key takeaways

1. Don’t let titles fool you. A financial professional may be only qualified to sell you an insurance-based product, and only certain ones must put your interests first. More letters do not necessarily mean a better professional.

2. Watch out for DBA names. These names may sound nice, but you may be dealing with someone who is working for a captive insurance company or an investment firm that has proprietary minimums.

3. Check Brokercheck® and the IAPD (SEC) for information such as years of experience, designations, other business activities, customer complaints and regulatory enforcement matters. Evaluate the information and ask questions.

4. Ask about quotas, minimums, and career contracts that oblige your financial professional to sell a certain amount of a particular product, service, or manufacturer.

5. Ask about what the technology platform is like. This should include what financial planning software is used. Be cautious of proprietary software programs that can potentially be used to encourage the sale of proprietary financial products.

6. Ask your financial professional about the investment and insurance platform. What products are available? Also, does this individual have access to offer these products and services.

Here are the top eight questions everyone should ask their financial professional before engagement

1. How long have you been in the business? If you have been in the business for a short period of time, do you work with a senior person to help guide you? What are his/her credentials?

• What are your credentials? Are you dual registered as an RR and IAR or are you an insurance professional?
• What designations do you have? Do you have a CFP® or CFA® designation?
• If the advisor is FINRA registered: Can I please see a copy of your Brokercheck® report? You, as the client, can also obtain this at https://brokercheck.finra.org/.
• Do you have any pending litigation or disclosures on your U4?
• Can I get a copy of Form CRS? (Only for Broker Dealers or Investment Advisor Representatives – this shows any material conflicts of interest and compensation.)

2. What is your money management style (active, passive, thematic)?

3. Who is managing the money?

• Is it the advisor individually managing your portfolio or is the advisor using a third-party money manager?
• Is this advisor qualified to manage your assets? If so, how?

4. Who has custody of your funds?

5. What are your assets under management and what is the account size of your average and largest client?

6. Do you perform tax-loss harvesting for taxable accounts? This is a way to lower your tax bill by selling some of your investments (strategically) at a loss to offset gains.

7. How are you compensated?

8. What is your fee schedule?

• Does this include fund fees?
• In addition to any expenses, are there any loads? Loads are upfront commissions (e.g., you invest $100 in ABC fund that has a 5% front-end load, only $95 will be invested in the fund and 5% will go to pay sales commissions)
• Is this an annuity product?

• If it is an annuity, is there a contingent deferred sales charge (“CDSC”)?
• If so, how long is the CDSC?

9. How do you obtain new clients?

• Do you use feeder lists to obtain referrals? (A feeder list is a list of someone’s friends or contacts they have obtained through LinkedIn, your firm’s directory, website, or any form of social media. The financial professional may then use your name as means to get an “in” with the people you know.) This can be done by way of reaching out via LinkedIn or cold calling.

Conclusion

Over the past couple of decades, “financial planning” has become a buzzword; however, its meaning varies from one financial professional to another. The CFP® Board defines financial planning as “looking at a client's entire financial picture and advising them on how to achieve their short- and long-term financial goals.” The relationship between a financial professional and client should be based on education and building confidence in the client’s financial future. Planning should not be a conduit to sell you a product or service. There very well may be cases where a client is already in the optimal financial position, and there is no need for any changes.

Although there is no exact science to evaluating a financial professional, the key is to ask lots of questions. Your goal is to find someone who will look for your best interests from start to finish. There are some people in the finance industry who will view you as a means to make money and ignore the fact that their decisions can have devastating impacts on your life, especially if you aren’t planning to retire for several decades. Less scrupulous individuals know that they will be long gone before you realize how their advice will compromise your financial future. Being proactive, doing your research, and asking questions will help make sure you find the right professional for you to give you peace of mind for your future.

Ensure that your financial professional is well qualified, has a reputable background, comes highly recommended, and has access to an open-architecture platform for both investments and insurance products. Understand if there are ulterior motives for product recommendations. Speak with many professionals and take your time!

Zach Brody, CFP® is the managing partner of Lumiere Financial Group and is a dully registered investment advisor representative and registered representative with Ameritas Advisory Services and Ameritas Investment Company, respectively. David Tomczyk, Ph.D., is an associate professor of entrepreneurship and strategy at Quinnipiac University.

Read more articles by Zachary Brody, David A. Tomczyk