Ask Stacy: How Do I Find a Good Investment Adviser?

Before beginning my career in personal finance news back in 1991, I worked for about 10 years as a stockbroker, also known as a “financial adviser.” So this week’s question is right up my alley. Here it is:

How do you choose a good, reliable stockbroker? — Anonymous

Here’s your answer, Anonymous:

How to pick a stockbroker? Carefully.

Stockbrokers serve two functions. Technically a stockbroker acts as a registered agent to buy or sell securities on behalf of a client. (Hence the term “broker.”)

But the type of stockbroker Anonymous is asking about is probably the one offering a second service: investment advice. And the question is a good one, because the quality of advice you receive can mean the difference between creating a fortune and destroying one.

I did a story about choosing an adviser several years ago. Check it out, then meet me on the other side for more.

What’s in a name?

While I called myself a stockbroker back in my day, those in the advice business these days rarely do. Instead, they use titles they presumably hope will convey trust, like financial analyst, financial adviser, financial consultant, financial planner, investment consultant and wealth manager, among others.

When it comes to quality advice, these are all interchangeable labels. None require any specific education, skill or certification. In fact, your barber probably has more strict licensure requirements than is required to call yourself almost any kind of financial adviser or consultant.

More important than titles? Compensation

While I left the financial advisory business decades ago, the problem for consumers today is the same as it was then. Namely, most advisers make money from commissions. And anyone who does that can never be completely trusted.

Overly harsh? Maybe. There are undoubtedly many commission-based advisers who are both sharp as a tack and honest as the day is long. But they’re working within a rotten system — one that requires them to move your money around to get paid, when often that’s not in your best interests.

Furthermore, the typical stockbroker isn’t required to act as a fiduciary, meaning they must place your financial interests ahead of their own. Instead, they adhere to a lesser standard of conduct, known as suitability. Suitability requires only that they suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.

An example to illustrate the distinction: Suppose your goals and risk tolerance suggest that a stock mutual fund is right for you. There are two similar funds available. One charges a 5 percent commission and the other 2 percent. A fiduciary would be honor-bound to suggest the fund with the lower cost, because that’s obviously in your best interests. The suitability standard, on the other hand, allows the adviser to suggest the fund that pays them the higher commission, because either fund is suitable.

The bottom line is this: A system built on commissions and without fiduciary standards invites abuse. That was true when I started as a stockbroker 33 years ago and it’s true today.

Who can you trust?

To receive objective advice, you’ve got to take commissions out of the equation. There are two ways to do this. The first is to replace commissions with a simple, annual fee based on the amount being managed. I explained the pluses and minuses of that setup a few weeks ago in the post, “Ask Stacy: Why Is My Investment Adviser Charging a Fee on Idle Cash?

The other way to take commissions off the table — and the better option, in my opinion — is to pay for your financial advice by the hour, the same way you do with an accountant or lawyer.

A third option, of course, is to learn the ropes yourself, then make your own decisions. Unlike taxes or law, investing doesn’t require massive training or an advanced degree. Check out “Ask Stacy: How Do I Invest in the Stock Market?

How to pick an adviser

Here’s how to go about picking the right adviser, however they get paid. These rules also apply to picking an accountant, lawyer, doctor or plumber.

  • Ask your friends or co-workers for referrals. But the most useful will be those sharing a situation somewhat similar to yours.
  • Check out credentials. You don’t have to be a genius to pass the exams required to obtain securities licenses. Look beyond that and check out educational background and other professional credentials. The Certified Financial Planner (CFP) designation is a good one.
  • Ask about experience. Credentials and education are nice, but as with most things in life, experience is often the best teacher. If two professionals charge the same price, you’d certainly rather have one with 20 years of experience vs. 20 months.
  • Ask them for referrals. Any professional in any field should be happy to provide them. Of course, only an idiot would provide referrals who would bad-mouth them, so don’t put too much weight on this one.
  • Talk to several before you decide. This is easily the single most important thing before hiring any service professional. Only after you talk with several possible candidates for the position will the positive attributes you’re seeking surface in one of them.
  • Ask how they get paid. If you read what I wrote above, this one should be obvious.

Got a money-related question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here. The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer. Got any words of wisdom you can offer for this week’s question? Share your knowledge and experiences on our Facebook page.

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Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

  • Carole Jovan

    Why has the $32,000 test for taxing Social Security benefits not been adjusted to keep up with inflation? Since the cost of living has doubled over the 25 years it was enacted, more and more seniors are affected each year. Where is AARP – where is Congress? Stacy, any ideas? Both the dependent exemption and standard exemption increase once in a while.

    • Bob K

      One of the political objectives of the GOP for the past ~40 years has been to reduce the influence of certain groups, such as the working poor (their income is ~10 to 20% less, relative to inflation, than it was ~35 years ago), the middle class (their income has been stagnant with essentially no increases relative to inflation for ~35 years), and educators (with raises similar to the middle class, barely even with inflation), since the majority in those groups vote democrat. The GOP has focused on two methods, one is demonizing the group (which has worked well for the working poor and educators/public employees) and another is to limit income for these groups. The decisions of the republican selected majority of the Supreme Court has strengthened this – money is now equivalent to free speech and corporations are considered individuals, with the same rights and protections as individuals. Since these entities (corporations) are now essentially uninhibited from buying political commercials and because they can hide behind innocent sounding political organization names, this has resulted in an large increase in their influence and greatly increased the effect of money on elections. Reducing SS benefits is one technique to limit income; eliminating/minimizing increases in the minimum wage is another; reducing salary and retirement benefits for public employees is yet another. Rather than demonize the large middle class, they have demonized SS (it is a tax; an, at best, partially earned entitlement skimmed from those currently paying SS tax; certainly nothing at all like 401k that one has earned on their own). While I think the chances of social security benefits being eliminated is near zero, these benefits will be under constant attack and they will be constantly reduced, thanks to the GOP.

      • Carole Jovan

        Pretty frustrating when you could probably has done pretty well on your own just saving for retirement as some people are talking about now. Compounding and stock growth over 40-50 years should do it. (And the government couldn’t dip into it whenever the mood strikes) I’m just really frustrated about the figure that should be adjusted and will try with senators-maybe the President! I found some examples in the 6/24/13 issue of Forbes Magazine and again 1/2014 issue of people with huge assets &, income including SS who pay less in taxes than we will.Thanks for your comment.

  • hotstock

    Wow, the author never even addressed Chartered Financial Analysts (CFA), the specialist in investments. Many investment advisors have earned the CFA designation, which is recognized worldwide. The CFP is a generalist in the financial planning area while the CFA focuses on investments; the accountant, taxes; and the lawyer, estate planning. The one who actually reads the investment prospectus is the CFA.