“Many people spend more time planning vacations than they do planning their finances,” Bonnie Kirchner told me in a recent phone interview.
Kirchner is a Certified Financial Planner — and the ex-wife of Ponzi schemer Brad Bleidt. She, like the rest of the country, was shocked to find out about the dishonesty of her then-husband. Her experience led her to write the book Who Can You Trust with Your Money?, a look at how you can find a good financial advisor and/or manager. And the red flags that may indicate you are about to be bilked.
“When you are finding a financial advisor or wealth manager, it is like interviewing for a job,” Kirchner said. “You’re the boss. You should look at your situation and try to understand what you need. Talk with some of your existing advisors, such as your tax preparer, attorney or accountant. Find names from friends and relatives. Once you have three people in your community, arrange to meet with them.”
Kirchner suggested that you find out the following information about the financial planner during the interview:
- The experience he or she has.
- How similar the planner is to you in financial philosophy and values.
- Whether he or she is interested in understanding your particular situation.
- How the planner gets paid.
“There isn’t something wrong with how an advisor gets paid,” Kirchner said. “But what works best for you depends on your situation. Find out whether there is a commission situation, whether your advisor’s payment is based on hours, or based on the assets they manage for you. What you choose depends on what you think will work best for you.”
Kirchner also pointed out that it is important to use this interview as a time to look for red flags. “We all like to think that returns will be constant,” she conceded. “However, this is a big red flag. A track record of consistent, regular returns even during times when the market is not doing well is a pretty big red flag. It’s why people wanted to work with my ex-husband and with Bernie Madoff. But the reality is that such clockwork returns are not realistic.”
Finally, Kirchner said, it is vital that you understand custodial arrangements. “Know where the money is going to be held, and find out about insurance and other protections if the firm fails.”
Here is an excerpt from Chapter 14 of Bonnie Kirchner’s book, Who Can You Trust with Your Money?:
Advisors to Avoid
Up to this point, if you’ve done the leg work and all of your homework, it is time to narrow the choices by removing candidates who could be problematic. This could include those who:
- Have a disturbing disciplinary history with FINRA, the SEC, or any other professional organization to which they belong or once belonged.
- Cannot adequately show you where your assets will be held and in what ways they will or will not be protected. Keep in mind that SIPC and similar insurances do not protect your assets against market fluctuation. These coverages are available to protect customers from the failure of a covered brokerage firm. Thus, any advisor who “over promises” in regard to what these types of insurances offer investors is someone to steer clear of. They are either untrained or manipulative. Neither are qualities you want in a financial advisor.
- Are unable to communicate with you effectively. This is not necessarily an indication that a candidate is incompetent or dishonest. However, the relationship you have with your financial advisor is incredibly important. People have different communication styles, and sometimes they just don’t mesh. You do not want to find yourself in this situation with your financial advisor. They can’t help you if you don’t feel comfortable opening up to them. They also can’t help you if they are unable to communicate their ideas, advice, and recommendations to you in a way that you can absorb and implement them.
- Provide ambiguous explanations about potential investment strategies. The advisor should be able to give you reasonable guidance about the strategies he or she is intending to employ and be willing to educate you about them.
- Avoid providing you with a reasonable explanation about how they get paid and applicable costs affecting your situation. Again, you should understand the advisor’s compensation structure and how it affects you and potentially your investments for the long term.
- Don’t measure up in the eyes of their referrals especially if a lack of satisfaction is consistent over a number of contacts. If the advisor is unaware of problems existing with those clients he or she has chosen to endorse them, there probably is trouble in paradise.
- Furnish information verbally or through brochures or other sales materials that is inconsistent or in conflict with other available information, such as what is published on the websites of the SEC and FINRA. For example, is the advisor claiming that he is a CFP? practitioner when he has not yet, in fact, finished all of his requirements? If so, this is the type of grave inconsistency that should not be overlooked.
- Disclose any confidential information about existing or former clients without permission from them. Confidentiality is imperative to the advisor-client relationship, not to mention required by regulatory and professional organizations.
Identifying whether or not any of the red flag conditions exist can help you narrow down your list of potential candidates and hopefully keep you out of harm’s way at the same time. Utilize the rest of the information you gathered throughout your fact finding mission to help you pinpoint the candidate who is going to be best for you. In the event that relationship does not work out for some reason, you’ve probably created a decent back-up list through the process, so hold on to those names in case you need them.