Financial Advisor Due Diligence: Part I

It’s time to address a challenging subject: In selecting or retaining a financial advisor, how do you know if you’re making a wise choice?

It’s a challenging subject for us, anyway, and one that we take very seriously as we develop and expand on our firm’s own best practices. We believe it is even more challenging for investors. First, the stakes are high. The quality of the selection, or lack thereof, can literally make or break your family’s fortune. Second, the choices are bewildering in number and complexity. With the glut of confusing jargon and conflicting views clamoring for your consideration, it’s hard to know who to trust.

A Wise Source for Intelligent Investors
A good place to start is with author, commentator and Wall Street Journal finance columnist Jason Zweig. Like us, he is a strong proponent of investing guided by rational evidence over reactionary emotions –which seems advisable no matter who may be helping you take care of the rest. We and many other evidence-based advisors respect Zweig for telling it like it is, with his mission (and ours) to serve as a “Safe haven for intelligent investors.”

What does Zweig have to say about the challenge of selecting an advisor relationship that is right for you? In “Full Disclosure: Is Your Advisor Hiding Something,” he observed: “So how can you make sure you know everything you need to know about a financial adviser before you hire him? You can’t. While most advisers are undoubtedly honest, the few who aren’t can always find clever ways to hide another skeleton in an already bulging closet.”

And there’s the crux of the challenge. We know that we are fully committed in principle and practice to serving your highest financial interests, even ahead of our own … but how in the world do we prove it? And how do you, the investor, believe it?

Zweig’s objective column offers some helpful tips on the due diligence that you can and should do when considering a new advisor relationship or reviewing an existing one. He advises you to:

Google It – Use your favorite search engine to periodically check up on what the virtual world has to say about your advisor or would-be advisor. Search on both the individual and firm names. Make sure you’ve got the right person or firm in your hits, especially if the name is a relatively common one, and remember that some resources will be of higher quality than others.

Check the Reports (Form ADV) – Advisors in the U.S. are required to disclose a number of important details worth knowing about themselves. Whether registered with their state or the Securities Exchange Commission (SEC), Registered Investment Advisor firms must file a Form ADV that is typically available on the SEC’s Investment Adviser Public Disclosure website. ADV “Part 2 Brochures” are meant to serve as the closer-to-plain-English version of the adviser’s full report, so you may want to start there. (Here’s a link to our own Form ADV Part 2 Brochure.) Most current and former brokers and advisors should also be listed in FINRA’s BrokerCheck system, where additional details and disclosures may be found.

Just Ask – Last but certainly not least, any reputable advisor should relish your candid inquiries, no matter how detailed, direct or seemingly delicate they may be. If the response underwhelms – if it’s incomplete, confusing, defensive or otherwise lacking – this may indicate an ill-fitting relationship, even if everything else checks out fine. Remember, it’s not only what an advisor knows, but how comfortable you will be working with the individual and his or her team over the long haul. If responses to your important questions feel stilted or incomplete – with either or both of you, if you are a couple – it’s unlikely you’ll end up living happily ever after in the relationship. 

Next Up: Doing Your Due Diligence
In conducting your due diligence described above, the next logical question is: What should you be looking for? What are the qualities that anyone seeking to advise you about your wealth should be able to show and tell? What are the warning flags that warrant either closer inspection or immediate rejection? We’ll take a closer look at these questions next.