One of the most frequent concerns investors and consumer have about their Financial Advisors is trust. Should I trust my advisor to recommend the right strategy? Do I trust my advisor to suggest an investment that is in my best interest, and not his? Is my advisor trustworthy enough to share my deepest personal money concerns?
The answer to this important question is that we should all channel our inner Ronald Reagan and adopt the term “Trust but verify”.
The world of investments and wealth management is complicated, technical, changes daily and for most people not nearly as interesting as our other endeavors in life and therefore most are not educated on these important topics. The ability for an advisor who happens to be expertly deceptive to pull the wool over our eyes will always be there and master criminals like Bernard Madoff can sometimes be nearly impossible to spot ahead of time. The good news is the number of bad actors, whether a real Madoff or a mini-Madof, is quite small, likely in the low single digit percentages. You however, want to do everything in your power to avoid being in that single digit club. The other good news is you can often spot someone who either never has been trustworthy or has become untrustworthy
What is the key to avoiding an advisor who is not trustworthy, and conversely build trust with your quality advisor? Ask questions. Ask lots and lots of questions.
Investors need to sit face to face, or at worst via Zoom or the like and go through a litany of questions, write the answers down and review them with a spouse, close friend or another advisor. This process may be uncomfortable for both you and for the advisor, but it is a critical step in order to sleep better at night.
So, what questions should you ask? There have been many questionnaires created over the years and most of the recent ones cover the basic and important topics such as what is your training, what is your investment philosophy, what and how do you charge, what are your conflicts of interest (all advisors have some kind of conflict, some quite minor, some significant), do you have any regulatory disciplinary history, etc.
One of the most extensive questionnaires was written by our Founder as part of his book on finding a new advisor, and this questionnaire is provided to any consumer or investor that registers for our free matching service However, it is how you use any questionnaire that can be quite impactful. First, have someone with you when you are asking the questions, as a friend or spouse makes it easier to ask some of the more difficult questions, and can observe the advisor’s reaction to the questions. Second, make sure you ask every single question and write down each answer the advisor gives you. Tell the advisor you will be reviewing these in the quiet of your home. Third, you ideally want to interview several advisors and compare their answers side by side. The ability to research what each advisor tells you is much easier these days and makes your diligence more effective.
Finally, with any advisor you have or newly hire, it is best practice to review these questions once per year with your advisor. It may seem like overkill to grill an advisor like this annually, especially if you have become close friends, as is common. However, there is another old saying, “Familiarity breeds contempt” and there have been cases of advisors that did the right thing for years, but for a variety of reasons, started doing the wrong thing.
Again, these instances are likely in the low single digits’ percentage wise, but you do not want to be in that unfortunate club.
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