Choosing a financial advisor

In Malaysia, to call yourself a financial planner, you must be qualified. However, in the United States, to hang out a shingle as a financial planner, all you need is a shingle and a place to hang it.

OK, so this post falls into the “sometimes no politics at all” category. In my real life, I get bombarded with people who are involved in financial planning, who hope that I will refer my clients to them. Truth is, there are very few financial planners that I have any confidence in. So many are only interested in making money for themselves, and if they make some for you in the process, that’s OK but certainly not a requirement. My clients sometimes have selected so-called “financial advisors” that are absolutely horrible. As a CPA, it often falls to me to try to sort out the mess these folks create.

A very good article on choosing a financial planner was reprinted in the Pilot today. Written by Jonathan Clements, a personal finance columnist for the Wall Street Journal, it lays out some important criteria:

• Use fee-only advisors, such as those who charge an hourly fee, a percentage of your portfolio’s value or a fixed annual retainer.
• Stick with certified financial planners.
• Avoid advisors who won’t commit to acting as a fiduciary.
• Make sure the advisor has the experience to assist you with overall money management, including such things as information on mortgages, planning for college costs, insurance, taxes and estate planning.
• Look at the total cost of the advisory service and compare it to the total return.

To Clements’ list, I will add my own personal favorite. If your new advisor suggests you sell assets in your portfolio without asking you what you paid for the asset and when you bought it, run as fast as you can. Any advisor worth his or her salt is going to take into consideration the tax implications of selling before advising you to sell. The only way to do that is to know what your investment in the asset is and whether the gain or loss is long-term or short-term, which can only be determined by the acquisition date.

As a corollary to this, if you decide to change advisors, get the date acquired and cost of each of your investments from you current advisor before you make the switch, especially if you are not one of those people who keep records of all of your investments. From experience I can tell you that getting this information after you change advisors is damn near impossible. After all, the responsibility for keeping records of cost and date acquired is really that of the investor, but too many people think it is the reponsibility of the advisor. It’s not. As long as you are a client, they are willing to provide this information to you. After you leave, they are generally not so willing.