How to Find a Financial Advisor You Can Trust

By Jeff Desjardin

More and more people are using financial advisors to help them navigate the complex journey to financial freedom.

But although more Americans are seeking advice on matters of personal finance, they are also less sure that the advice they are getting is trustworthy.

Unfortunately, a growing amount of Americans see advisors as serving their companies’ best interests rather than their own best interests. According to a survey by The National Association of Retirement Plan Participants (NARPP), 60% of Americans now feel this way compared to just 25% of respondents in 2010.

Who Can Be Trusted?

Today’s infographic is from Tony Robbins, and it covers key points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

The book dissects the investment advisor landscape to show the value of a relationship with an advisor, the legal distinctions between different advisor types, and how advisors are incentivized.

Ultimately, it helps give you the ammo you need to find an investment advisor that will provide you with better service than the rest.

The Value of the Right Advisor

The right financial advisor can help you make better decisions, address your cognitive biases, and use their expertise to save you massive amounts of money.

A recent Vanguard study helps quantify the value a good advisor can bring:

Lowering expense ratios: 0.45%

Rebalancing portfolio: 0.35%

Asset allocation: 0.75%

Withdrawing the right investments in retirement: 0.70%

Behavioral coaching: 1.50%

Total: 3.75% of added value!

That’s more than 3x what a sophisticated advisor might charge, and doesn’t include the benefits of reducing taxes or other areas.

Advisors vs. Brokers

There are roughly 310,000 people in the U.S. who call themselves financial advisors – but they actually fall under two different legal frameworks.

About 90% of this group are brokers, while 10% are registered investment advisors. Confusingly, there is also a significant portion who are dual-registered as both brokers and registered advisors, as well.

What’s the difference?

The two have different legal obligations, as well as differing ways of receiving compensation from clients:

Investment Advisor (RIA)

RIAs are registered with the SEC and with the state they are working in

Like doctors or lawyers, investment advisors have a fiduciary duty and legal obligation to their clients

In other words, they must serve your best interest at all times

They also must disclose any conflicts of interest

They don’t accept commission from third-parties for their products

How they get paid: They charge a % based on assets managed, or a flat fee for financial advice

Brokers

Brokers are usually employed by banks, brokerage houses, or insurance companies

The products they recommend have to pass a suitability standard, based on your personal circumstances

However, they do not have to necessarily recommend the best product for you

How they get paid: They get commissions for selling certain products to you. They may also charge based on assets under management, as well.

Picking the Right Advisor

Remember, the right advisor can add 3.75% of added value to a portfolio, and that’s before taxes and other areas! With the stakes so high, how can Americans pick the right advisor for them?

Here are the 7 questions Tony Robbins would ask a potential advisor to work with:

1. Are you a Registered Investment Advisor?

If the answer is yes, he or she is required by law to be a fiduciary.

2. Are you (or your firm) affiliated with a Broker-Dealer?

If yes, he or she can act as a broker and receive commissions for guiding you into specific investments.

3. Does your firm offer proprietary mutual funds or separately managed accounts?

These products will likely compensate them with additional revenues, at your expense.

4. Do you or your firm receive any third-party compensation for recommending particular investments?

This is the ultimate question you want answered. You want products to be recommended because they are right for you, not because they give the best kickbacks.

5. What’s your philosophy when it comes to investing?

This will help you understand whether your advisor believes he/she can beat the market.

6. What financial planning services do you offer beyond investment strategy and portfolio management?

Financial planning is much bigger than just investing – it also involves planning for your child’s education, handling vested stock options, estate planning, and tax advice. You want someone that can help you in all stages of your life.

7. Where will my money be held?

Having your money held by a trusted third-party custodian will mean your money is in a secure environment.

Like most financial endeavors, picking an advisor is an area lined with potential pitfalls.

But choosing the right investment advisor can be a difference maker – it can even possibly even set you up with many years of extra retirement savings.

 

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