How to Select an Investment Professional?

This question has rattled in my brain for many years. It surfaced again recently when my wife needed surgery. It was daunting for a non-medical layperson, which we are, to know which surgeon was most qualified and which procedure was in her best interest. As we labored through the selection of a doctor I developed greater empathy for those who are looking for an investment professional.  I use the word “professional” instead of advisor because of the what the term professional means as defined by Wikipedia. 

“The term professional describes the standards of education and training that prepare members of the profession with the particular knowledge and skills necessary to perform their specific role within that profession. In addition, most professionals are subject to strict codes of conduct, enshrining rigorous ethical and moral obligations”.

My objective with this article is to assist individuals who are looking for help in the area of financial planning find an advisor who is a professional. A professional has a much higher likelihood of delivering an experience that would be defined as fulfilling and successful. Unfortunately, the financial planning or investment field has a low bar for entry for investment advisors and not all advisors are professionals. I have created a short checklist to help you determine if the advisor you are talking with is a professional.

Interview Check List
Integrity and Ethics
The starting point for all professional relationships is integrity and ethics. Unfortunately, there is no test which will provide us with certainty the individual we are interviewing has the ethical standards we expect. However, before you interview an advisor you should visit the FINRA website and SEC website to inquire if there is a history of unethical behavior. You can also use your preferred search engine by typing in the firm and advisor’s name. I recently ran a search of two local advisors that have been around for more than a decade.  One individual was guilty of forging a client’s signature and intentionally misrepresenting the clients age. Another advisor from a different firm was sued for incurring $465,000 of investment losses.  They settled the case for $65,000. It is startling both of them continue practicing today with such information so easy to find publicly.  After you have done your own due diligence and assuming you find no negative or concerning information from the web, I would schedule an interview. However, if there are ANY past indiscretions or sanctions I encourage you to move on.  Yes, it could be an innocent or unintentional act; however, there are too many other advisors that are of a professional caliber to take a chance. In the interview I would encourage you to also ask the advisor if they have filed bankruptcy or been disciplined by their firm or any regulatory agency. 

Education
I am unaware of any educational requirements other than a high school diploma to be an investment advisor. The tests or exams to be an investment advisor or securities license are more terminology or compliance focused than knowledge in finance and economics. Here is my recommendation. Continue with the interview only if the advisor has a degree in one of three fields; finance, accounting or economics. If they have an MBA that is a qualifier as well. Next, if they have a CFP, CPA or CFA behind their name your odds of finding a professional are far greater than hiring one without these educational credentials. In my opinion these three certifications are our industries most respected designations.

Experience
There is no substitute for experience. I would encourage you to find an advisor that has at least 5 years and preferably more than 10 years of experience. The exception would be if an inexperienced advisor were part of a firm or team that met the suggested experience standards.

Compensation
The industry has evolved over the last 40 years. In the beginning the primary means of advisor compensation was through commissions. Today, professionals work for fees. I am sure there are ethical, educated and experienced advisors that work for commissions. However, I strongly encourage you to select an advisor that is a fiduciary 100% of the time. I would avoid commission only or commission and fee advisors. Why?  Professionals don’t accept commissions. The worst investment portfolios I have seen over my 34 years are portfolios put together by commissioned advisors. The motivation for a commission blinds many advisors into making poor choices or at best making the 2^nd or 3^rd best selection for their client. How can you tell if someone works for commissions?  If you find disclosures on their website, business card or letterhead that references a broker-dealer the advisor can or does receive commissions. If they are insurance licensed, they can or will receive commissions.

Summary
If everyone used this process to select an investment professional, the odds of having a bad or poor experience in my humble opinion is highly unlikely. The questions and requirements I have outlined are by no means the only questions you should ask. A relationship with a financial professional is usually a long-term relationship and a personal fit or likability factor is important as well. Hobbies, values and many other personal traits can be important for a fulfilling partnership. However, do not substitute likability for a lack of qualifications and standards. Remember, the difference between selecting a bad hairstylist and a bad investment advisor is a bad haircut grows back.

Ty Haberling is CEO of HFG Trust and a Certified Financial Planner in Kennewick, WA. Ty has practiced financial planning since 1983 and holds degrees in accounting and finance from Central Washington University. He is the founder of HFG Trust, a one-half billion-dollar trust company in Kennewick, WA.