In my Aug. 4 column, I provided a five-question quiz to act as an initial screen when selecting a financial adviser. If the candidate – or current adviser – can’t correctly answer all five of those questions, he or she is not qualified to provide guidance or your financial plan or investment portfolio. But, passing the exam does not automatically qualify a person to be your adviser. It’s only one small piece of the puzzle. In order to select a qualified adviser, you’ll have to do more work.

There are four major factors to consider when selecting a financial adviser:

  • Expertise. The quiz addresses an adviser’s investment expertise, which is the easiest of the four areas to assess. Anyone you would trust with your financial future must have the knowledge and skills to get the job done right. The quiz is a good starting point to find that person. In addition to investments, a qualified adviser should have good working knowledge covering retirement, insurance, estates, taxes and, of course, federal benefits planning. Many advisers can demonstrate impressive knowledge or skill of some kind. Your job is to make sure that knowledge or skill is directly relevant and applied properly to your needs. Unfortunately, all too often, an adviser’s knowledge is focused on techniques for selling products or otherwise generating revenue for his firm – revenue that comes from your pocket.
  • A sound method. In addition to expertise, your adviser should have and strictly follow a method to apply this expertise in ways that further your interests. It’s not enough to have sufficient knowledge. A good adviser must use that knowledge in ways that further, and certainly don’t sacrifice, your ability to achieve your goals. A brilliant investment analyst, for example, is of little benefit to you if he uses his knowledge to swindle you. The adviser’s method should start with your goals and resources and then be aimed directly at managing those resources to achieve the goals. I find it disturbing that so many people are willing to offer, and so many are willing to accept, investment advice formulated with no knowledge of the investor’s goals or resources. The motive for offering this kind of “advice” is clear – profit. Why anyone would accept, let alone pay for it is beyond me. The adviser should be able to clearly explain the process he uses, how one step flows logically from the last, and how the process is designed to meet your needs.
  • Integrity. Anyone you trust with your financial life should be worthy of that trust. He should be committed to doing what is in your best interests at all times and in all areas of a relationship with you. An adviser’s means of compensation is a hot topic in the financial planning industry right now. It also provides important clues about an adviser’s integrity. All the expertise and practical ability in the world can be spoiled by conflict with the client’s interests. One of the most frequent sources of this conflict is compensation. Compensation from the producers of financial products is like a bounty on your head. It’s not that an adviser can’t ignore it, but he probably won’t. An adviser’s relationships and sources of compensation should be clearly disclosed and designed to avoid conflict with your interests.
  • Value. Ultimately, all of the attributes above should be present and offered at a reasonable and affordable price. You should clearly understand what the adviser will do for you and exactly what it will cost. The financial services business is built on hidden fees. It’s not unusual to find clients paying 2 percent or more from their investment portfolios each year for little more than boilerplate investment recommendations. That’s $2,000 per year for each $100,000 invested. Considering what this will cost in retirement income someday, few people can afford that kind of relationship.

A good adviser must represent the total package – competent, dedicated, trustworthy and affordable – a combination that is, unfortunately, not easy to find. But good advisers are out there. You just have to be diligent in your search.

Written by Mike Miles
For the Federal Times
Publication October 18, 2008