The more click-baity and hopefully funny title could be “How Not to Get Swindled and Bamboozled by a Financial Advisor.”
I’ll never forget the first house we bought. Big mistake. A $36,000 mistake. But oh how I loved that little condo. It was 2004 and house prices were increasing rapidly. We were newly married and afraid we were going to get priced out of the market. So we jumped into a hot housing market. We ended up with an interest only ARM loan where after the first 2 years we were told we could refinance. We would have had to because the interest rate would have made it impossible to make the payment. We only lived there 14 months. Luckily, we were able to sell it and came out with $2,000 to cover some of our moving expenses from California to Colorado. I’ll never forget our crooked mortgage broker telling us that he got our 2nd mortgage down to 8.5% but he had to bamboozle them. How I hate that word now. Well, I still think it’s a funny word but it reminds me how we got bamboozled by his bad advice. It was good for him but not for us. No one is above being fooled and following bad advice.
My only advice for house buying is don’t find a broker who uses the word bamboozled. As for my advice in finding a great financial advisor, I’ve got that in spades.
Here are my 4 suggestions:
1. Ask them how they’re paid.
2. Notice if they mention conflicts of interest. If they don’t mention any, ask them.
3. Verify their licenses and any designations.
4. Judge them by how they act.
1. Ask them how they're paid.
To get a good perspective on the integrity of any financial advisor, ask them this question, “How do you get paid?”
If their answer involves anything like, “Well, it varies or depends on …,” they either don’t know how they get paid or they’re giving you a half-truth version. What you pay should be clear and you shouldn’t be reticent about asking. If you’ve got an experienced, transparent, and integrous advisor in front of you, they’ll answer that question without hesitation.
Some clients we have come across over the years are very suspicious of any financial advisor. I don’t blame them. Hearing their stories makes me rip-roaring mad. Their advisors took advantage of their lack of knowledge, flat out lied to them, or charged them more fees than were necessary. If your statement doesn’t have a section where fees charged to you are line-itemed out, how would you know what the cost is? You’d think it was free, right?
Jim has many stories about things he has seen over the years. He has seen churning (illegal) in client accounts and trading on margin without a client’s knowledge. That’s buying investments on credit. It doesn’t mean the clients were stupid. In fact, they are very intelligent folks. The fault lies with the crooked advisors. But don’t despair. As individual investors, I don’t believe that you have to know all the things about the financial stuff, in order to avoid a crooked advisor.
Look for them to mention conflicts of interest and ask them the loaded how-do-you-get-paid question.
2. Notice if they mention conflicts of interest. If they don't mention any, ask them.
There’s only two things you can do with a conflict of interest. You can disclose it or mitigate it but you can NEVER eliminate it.
I firmly believe that anytime money exchanges hands there is an inherent conflict of interest. Agricultural farmers sell feed to dairy farmers. There is an incentive to charge for the feed because the farmer needs to generate revenue. He feeds his family, pays his bills, and puts fuel in his tractors with the revenue. It’s not evil to sell. It’s capitalism and selling makes our world go round. If you have something I need and I am willing to part with money to obtain it, let’s do business. We all do this at grocery stores to feed our families. So it is just as honorable to pay for financial advice.
Us humans are fallible, and we like to do things in our own best interest. But the well-intentioned, good humans will put your interest above their own as much as they can. They charge a reasonable amount based on the expertise, products, or value they add. If an advisor freely discloses a conflict of interest, they likely have integrity. I also think they’re one of the smarter ones because they acknowledge that they can’t avoid all conflicts.
If the advisor doesn’t mention any conflicts of interest, be bold and ask them, “Do you have any conflicts of interest?” How they answer this question will tell you about their level of integrity. You might catch them off guard because most potential clients won’t ask this question. Catching them off guard is okay, but how they answer will let you know how self-aware they are. It will also give you their conflicts-of-interest perspective.
If they truly believe they don’t have any conflict of interest, may I suggest they don’t live in reality? Or maybe they haven’t pondered that before? Either way, I want a financial advisor that lives in reality, is self-aware, and thinks deeply about their profession and clients.
3. Verify their licenses and any designations.
Look at their business card, LinkedIn profile, and website. What licenses do they claim to hold? What designations have they obtained? Check that their licenses and designations are valid. Go to the official websites and check them out. For FINRA’s BrokerCheck (below), you will also find if they have any client complaints or settlements. Trust but verify.
Licenses and designations are different. Licenses are registered with a state or regulatory authority. Designations can be obtained by any number of private entities. Typically, both have required annual dues to remain active.
Advisors can have what we call alphabet soup after their name. It looks impressive and sometimes it is truly worthy of being impressed by all those acronyms. As in most industries, some designations are more prestigious and widely recognized than others. These additional designations add a layer of differentiation for advisors. Designations are great. Jim holds the CFP® or Certified Financial Planner™ professional designation. Other designations include the ChFC, CFA, CSLP, NSSA. The list of alphabet soup continues ad infinitum. Some designations require a 1-hour online course to obtain. That’s great but one hour of online reading and testing doesn’t equate to much expertise.
Don’t let an advisor fool you by saying that their designation is equivalent to the CFP®. The CFP® is the CFP®. The designation requires about 3 years of industry experience, a Bachelor’s degree (as of 2019), an approved completed curriculum (multiple courses with cumulative exams passed), signing a fiduciary standard and ethics pledge, plus the passing of the CFP exam. It’s difficult and no other designation is the same as.
Trust but verify.
Here are some examples of where to verify licenses and designations in the financial services industry:
- For insurance licenses (life, health, disability, long-term care), go to the respective state’s Department of Insurance website. In Idaho, you’d visit https://doi.idaho.gov. Jim's Idaho insurance license verification can be found here
- For all the numbered series licenses (7, 63, 65, 66, etc.) and RIAs (Registered Investment Advisors), visit FINRA's Broker Check.
- For the CFP® (Certified Financial Planner™ professional): https://cfp.net
- For other designations, visit their respective sites. For instance, for the CFA (Chartered Financial Analyst), visit https://www.cfainstitute.org/en/membership/directory
4. Judge them by how they act.
Keep this in the back of your mind while choosing an advisor: They can have an alphabet soup of designations behind their name and hold licenses in good standing, but if they lack integrity, they can flout any signed pledge, breach ethics, or breach the fiduciary standard.
The crooked advisors can say or claim anything. So, how do you avoid being a bamboozlee?
Evaluate their advice.
If they have told you to take your money and pay off your debt, that is money that can’t be used to generate revenue for them. It’s good advice. Debt should be eliminated. Judge them by how they act. Does their advice align with your best interests or theirs?
Full disclosure on my conflict of interest: I know I’m biased. My husband is a financial advisor, we feed our family doing this for a living. Hopefully that speaks to my integrity and self-awareness. Cheers to finding a great financial advisor and actions speaking volumes about integrity.