Seven Big Mistakes People Make When Hiring a Financial Advisor

by Chuck Jaffe
Friday, June 18, 2010

How to choose the right steward of your money.

I have given countless talks over the last 15 years to groups of people interested in hiring financial advisers or working better with the helpers they have, and I typically poll my audience to learn about their experiences.

I ask that people who are working with an adviser — or who have had one they stopped using — raise their hands. Then I ask them to keep them up if they hired the first financial adviser they met with or if they hired someone recommended by family or friends. Virtually all hands stay up.

Next, I ask them to keep their hands up if they did a background check on the adviser — and talked to an independent reference — before they agreed to work together. I have never had a single hand stay in the air.

Plenty of people do everything wrong in the hiring process and still wind up happy with the outcome, but you should still try to avoid the common mistakes. If you do, your chances of living happily ever after — or at least until the adviser retires and you have to hire a replacement — are infinitely higher than if you leave it up to fate to bring you someone you can work with.

Big Mistake #1: Interviewing Just One Candidate

You have come to a point in your life where you know you need help. Emotionally, that makes you like a man dying of thirst, unable to tell a mirage from reality and willing to drink sand if he can be convinced it will make him feel better.

The first adviser you meet could be a complete idiot, but almost certainly will sound great to you. That’s because his spiel makes it sound like he can solve your problems, and you lack the know-how to tell if he can’t and the comparison to any other adviser to establish how you truly feel about him. You have no clue if he is selling you a bill of goods, a one-size-fits-all plan that maximizes his take and minimizes your service, or if he truly is a cut above the other helpers in your area.

Another reason why investors hire the first person they meet is that they got the adviser’s name from a friend or relative whom they trust. That colors their judgment, because of the way they feel about the person making the referral, or the way they envision this adviser helping them live the lifestyle they see their friend or relative enjoying.

Years ago, a leading financial planner in Boston told me her life was so busy with books and her radio show that she had stopped taking on new clients, and that when people inquired about her services she gave them the names of two young “up-and-coming financial planners” in the area. Alas, she had never worked with these men, had done no background checks, and had simply picked them because they were “bright, energetic, and asked good questions at the [Certified Financial Planners] group meetings.” I’m sure the people she referred to them took her word as gospel; four years later, one of those advisers was under indictment for fraud.

Need financial advice? Just ask.

Big Mistake #2: No Background or Reference Check

“He’s got a fancy office, drives a nice car, and has a lot of rich clients,” is not a background check; it’s a fitting description of almost every financial adviser charged with fraud in the United States over the last two decades.

Your retirement nest egg, college savings, and more are the biggest, most important assets you will ever accumulate and try to grow, and yet most people spend more time trying to figure out which vacuum cleaner or microwave oven is the best value for their money than they do trying to determine if an adviser is safe to work with.

Moreover, they rely on shallow logic as a reason to avoid a few phone calls or a search online. The adviser is on the radio, so he must be good. He’s been quoted in the newspaper by that columnist I like, so he’s qualified. He works with someone I know, and she has a nice house.

Now I’ll let you in on a few secrets that may change your opinion of the advisers you see in the media.

For starters, most journalists will call anyone to be a source when they are on deadline. They haven’t done background checks or vetted the so-called expert; they just got someone who seemed right, and who could talk about the subject at hand.

The radio fallacy is another good one. Most financial advisers on the radio have paid for the time, meaning they bought their own show to use as a personal advertising vehicle. The information they give may be fine and dandy, but the radio station didn’t vet their credentials or make sure they’re solid advisers; it simply cashed their check and gave them access to the airwaves.

Background checks can’t protect you completely. In 2007, I ran an adviser named Gregg Rennie of Quincy, Mass., through the full test and found everything on the up-and-up; Rennie was becoming a primary sponsor for my radio show, and I wanted to know if he was bad news. Alas, at some point over the next few months, Rennie’s personal financial picture changed, and he wound up selling fraudulent investments, basically starting down the road of a Ponzi scheme in order to stay afloat himself, according to the Securities and Exchange Commission.

Big Mistake #3: Focusing the Search on Cost or Payment Style

Cost is an object, but it’s not THE object.

The same goes for payment style, the various methods of working and compensating an adviser discussed in the last chapter.

Cheap advice is, well, cheaper, but not necessarily better, appropriate, or the elusive “right for you.” If you save a few hundred dollars in fees to the adviser, but wind up with someone who is incompetent and whose decisions cost you thousands of dollars down the line, you did not get a bargain. Likewise, if you go for more expensive counsel but can’t get the quality of service you desire, you’ll be unhappy no matter how respected the adviser and how sound his advice.

Look at what you are getting for your money and determine a reasonable balance between services, costs, and method of compensation.

If all you are looking to do is add a mutual fund or two that you can throw some money into every month and hold for years, you shouldn’t be paying a big fat fee for an overall asset-allocation plan. But if you require a needs analysis and a plan of action to get you from where you are now to your financial goals, you don’t necessarily want to make your lifetime decision based on “I hate paying commissions” or “This planner charges less by the hour.”

Big Mistake #4: Expecting Credentials and Designations to Make an Adviser “Good”

There are so many professional credentials and designations out there for financial advisers that you could drown in a sea of alphabet soup.

That said, every credential is different. Some are worthwhile, some are bogus. Within every credential, there are advisers who are good, and others who stink.

The real question about credentials boils down to “Does this adviser have the expertise I need?”

Credentials help to answer that but, on their own, they say nothing about the individual’s personality, manner, disposition, or ability to inspire your “emotional discipline.”

Your search for advisers is about finding “the right person,” not “the person with the right credential,” and there is a big difference. You don’t just want a skilled doctor, you want one with the right bedside manner. I know plenty of Certified Financial Planners whose personal style is so strange, different, or off-putting that the only way I could work with them personally is if I was in a coma.

Hire a person, not a credential; when times get tough, it’s going to be the human being –and not the letters after her name — that you rely on.

Big Mistake #5: Setting Expectations and Viewing Results Based Entirely on Returns

People hire advisers because they need help and want to get their finances in order. They fire advisers because they don’t earn a “big enough” return.

It’s a recipe for disaster.

If you are an average investor, you’re looking for a partner, someone who will help you develop strategies that enable you to reach your long-term goals. In most cases, achieving that success requires participating in stock market gains during good times without losing your shirt when the market sours. For most consumers, it’s more about avoiding surprises and losses than it is about getting rich quick.

And yet, when push comes to shove, advisers get dumped because they “failed to beat the market” each and every year.

What most people want from their adviser is long-term performance that allows them to ride the market rollercoaster and get off at the end with a big smile on their face.

Alas, too many financial-services customers want to jump off mid-ride. Despite what they said when they signed up to work with an adviser, they want to change the criteria for judging their counselor mid-stream, typically at just the wrong moment.

Big Mistake #6: Letting the Adviser Control Everything

You may be looking for hired guns to help with your finances, but there is one key phrase to remember in all this: “It’s my money.”

Advisers are partners in your financial success, but you have the most at stake and, therefore, you run the show. With that in mind, you are entitled from the very beginning of the relationship to ask about anything you want, from why a recommendation was made to why something cost more than you expected.

You need to be treated like “the boss,” too. Some advisers treat customers shabbily when the client doesn’t take their advice or make a suggested move. That reaction is an instant warning sign that the adviser respects his position more than yours and may have put his interests first.

Big Mistake #7: Hiring Friends and Relatives

In the mid-1980s, my wife Susan — the most patient and understanding woman in America — was convinced by a friend that we needed some financial planning help. The friend just happened to be a new financial adviser, and she wanted to be the one to advise us, fresh out of college and newly married, as we started building our lives together.

I didn’t think we needed help, but Susan sold me on the idea that Sandra, her friend, could help us find better financing options for our first new car. Sandra also could provide a second opinion to my judgment on mutual funds and asset allocation.

Best of all — and Sandra gave us this in writing — it was a money-back deal. If we weren’t satisfied or Sandra did not provide us with ideas and information we didn’t have on our own, we could get our money back.

So I signed the contract.

Obviously, the selection process was all wrong. No references, no background check, pretty much every mistake in the book (or at least this chapter).

The results were, sadly, predictable. The funds we owned were better; the bulk of her advice was about improving our cash flow so that we could purchase insurance products that, at the time, we had no need for and no real way to afford. Sandra advised us that the loan deal I had found was better than anything she could come up with.

We’re still waiting for our money back.

Despite telling Sandra that I was disappointed, I never got — nor did I pursue — my refund. With the financial relationship going nowhere, Susan and Sandra grew distant.

So we lost a friend and $250. Frankly, I’m bothered more by the lost money, because I came to realize that Sandra valued the friendship differently than I did, or she never would have jeopardized it with a business proposition.

For years, industry surveys have found that more than 40% of all people take financial advice from friends, family, and business associates, and an AARP Financial study from 2009 confirmed that more than half rely on people with close ties when they’re going through a life crisis.

Doing business with a friend or family member spells trouble for one big reason: You let your guard down.

Rogue advisers have no qualms about ripping off friends and relations. In the well-publicized case of Brad Bleidt, a Boston adviser/radio host who was busted in 2004 for running a longstanding Ponzi scheme, the victims included his mother and grandmother. Bleidt had sworn an oath that he would not “wrong, cheat, or defraud” his brother Masons or the lodge (ironically named the Golden Fleece Lodge) when he joined the group; it was there, however, that he started shearing his “brothers” of their life savings.

Likewise, many of Bernie Madoff’s victims were folks he met at his country club, on the golf course, at charity functions, or through some personal affinity; he counted on those ties raising trust and lowering resistance.

Working with friends adds emotions on all sides. Ask your best childhood friend to provide a written history of his business experience and credentials, and he may take offense; fail to ask a full set of questions, and you can’t be sure you have the right expert.

There is more than money at stake when you do business with friends and family. Factor the extra value of your friendship into your decision making; you’ll lose a lot more than just money if a financial relationship with a friend or relative goes bad.

Need financial advice? Just ask.

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