How to Choose a Good Financial Advisor - A Lawyer's Perspective

How to choose a good financial advisor and finding the best one for you is much like interviewing candidates seeking employment; you are the employer and the advisor is the employee. Working in the area of estate planning, I can offer some criteria I look for in light of my experience working with financial professionals.

Here are seven tips when "interviewing" candidates that are competing for your business:

(1) Qualified Referral: Did the candidate come to you, or did you contact the candidate, based on a qualified referral? By "qualified referral," in other words, is the candidate someone who was recommended to you based on their proven success with their clients, or is it someone whom is referred to you because of a person you trust that is making a recommendation? Keep in mind that advisors are in a business which relies heavily on referrals. Advisors are also in "sales." Therefore, they are frequently soliciting referrals from new clients who have yet to "qualify" the referral based on empirical proof of their advisor's actual performance - though the client may have received good advice or service and thus wants to promote their advisor.

(2) Objective Ratings: There are sources such as A.M. Best and TheStreet.com (formerly known as Weiss) that rate financial companies with an A,B,C, (+/-), system. These are helpful to know if the advisor works for a well rated company or firm. Yet, at least with A.M. Best insurance and financial companies pay for their ratings to be published, which then calls into question objectivity. So, rely on more than just one rating source. There are also the Better Business Bureau reports (BBB), Security and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), as well as the Federal Trade Commission (FTC) that announce any wrongdoings committed by financial among other companies. Searching through the above will at least reveal any "red flags."

(3) Compensation Driven Advice: Unfortunately, those in financial positions may like other sales-related industries be held to scrutiny. When it comes to making financial recommendations, advisors' own compliance dictates acceptability, to some extent, based on whether the product advised passes a "suitability" test. The SEC thus has some built-in consumer protections in its regulations. However, the financial industry is very clever in making product recommendations that can get around suitability restrictions in attempting to be one step ahead of the SEC. As such, know how much your advisor is making on the deal as well as exactly what his or her company's share is of the compensation. The lesson of the past is that advisors are notorious for making recommendations based on compensation.

(4) Do not be fooled by guarantees of any kind: If your advisor guarantees anything, be highly skeptical. Some financial instruments, such as cash value in a whole life policy, can have some degree of guaranteed protection of principal. Yet, with any third party holding your money or assets,even if FDIC insured, there are no 100% guarantees - although there are some financial instruments that are safer than others (FDIC insured being relatively safe). In fact, promises of guarantees on financial products or plans that are not so can get an advisor in trouble with his or her regulatory agency.

(5) Good Standing: It is not offensive to simply ask about an advisor's good standing with his license and/or any disciplinary actions that may have been taken. You may even request that he or she furnish paperwork demonstrating a "clean record." Why not? Employers obtain background checks on employees. Right?

(6) Who is on the advisor's team: Know all the "players" on the advisor's team who will be a part of making recommendations and managing your account. Does his or her company have someone watching your money all the time? Will your investments be frequently assessed for risk and will precautions be taken ahead of market crashes like the one experienced in 2008 and 2009?

(7) Availability and Specialty: If your advisor or someone on his or her staff does not get back to you before the end of the day or at least first thing in the morning, this gives cause for concern. Good advisors tend to get back in touch with their clients within 24 hours after they are contacted, usually within the same day. On another note, is your advisor specialized in anything important to your needs. It is one thing to have an advisor "tend to your needs," but is he or she knowledgeable in desired products and areas that matter to your financial bottom line, such as in variable annuities, variable life insurance, long term care insurance, ETF's, etc., or college planning, distribution planning, aggressive growth investing, commodities, etc.

In addition to these seven tips, make sure your advisor takes ownership for bad recommendations as well as be modest about good ones. These indicate someone who is likely more accountable and less the defensive or ego driven type. Otherwise, it is good to know that someone will do everything they can when things do go wrong.

Ultimately, there are going to be advisors that are good and bad; the advisor that is good for you is equally important to choosing someone who is "good." A professional recommending the best products to meet your goals and protect your money is critical. Therefore, doing some of your own due diligence in financial products is a good idea despite seeking an advisor for their opinions. The money and finance section at your local book store ought to carry good publications that will assist you. In the end, seek a neutral opinion from someone outside the financial industry who has no reason to either defend or criticize companies or advisors themselves. Financial industry people may have a tendency to protect their own or be too quick to criticize another. After the recent aftermath of this recession, caution and deliberation with your current advisor or in finding a new one are well justified.

About the Author: Frank A. Cseke is a Fort Collins, Colorado-based attorney whose practice is focused on the areas of Estate Planning (Wills and Trusts), Business Law, VA and Governments Benefits Assistance. He serves as President of the Northern Rocky Mountain Chapter of the Society of Financial Services Professionals. Before setting out on his own, Frank practiced civil litigation and criminal defense for two Northern Colorado law offices, where in his general practice work he grew his passion for Estate Planning and Elder Law. Moreover, he has taken on an emphasis in Veterans and Special Needs trusts. Frank received his J.D. from the University of Colorado, School of Law (Boulder), in 2004, where he also worked as a student associate for LexisNexis, Inc. Prior to attending law school, Frank gained experience as an entrepreneur and LLC manager, and later as General Counsel, with 4 Guys Investments, LLC of Fort Collins. Frank obtained his undergraduate degree (a B.A. in Political Science with High Honors) from Franklin Pierce University (Rindge, NE) in 1999, where he was a member of Alpha Chi, Phi Alpha Theta, and Sigma Tao Delta. Frank, who grew up in Fort Collins, Colorado, now lives there with his wife, Daffney, and his son, Matthew, and step-son, Austin. "We are here to add what we can to life, not to get what we can from life." -William Osler