There are lots of questions you should ask when looking for a financial planner. If you
ask these three critical questions you should be able to narrow the field significantly from
the thousands of people to call themselves financial planners/advisors (Note: there is no
regulation of the use of these terms in the United States) This is by no means an
exhaustive list and doesn't guarantee you will find a good or even honest advisor, but it
can help reduce many of the conflicts of interest and provide you with a key consumer
protection when looking for financial advice.
1. Do you adhere to a fiduciary standard? You should make sure that anyone
you hire to provide you with unbiased financial advice adheres to the fiduciary standard.
The fiduciary standard is the highest legal standard for consumer protection. It requires
the planner to put the clients’ interests ahead of his own, to provide prudent advice, to
minimize conflicts of interest and to disclose all meaningful facts and conflicts of interest
that cannot be avoided. When interviewing prospective financial planners simply ask if
they adhere to a fiduciary standard. If they don’t, don’t hire them. See the Committee of
the Fiduciary Standard for more details. You may also want to check this paper put out by
the Consumer Federation of America, The Need for a Fiduciary Duty Standard for All
Financial Advisers.
2. Are you affiliated with a broker/dealer? Next you should make sure that
your planner is not affiliated with a broker/dealer. What most people don’t understand
about broker/dealer representatives is that they are sales people. Their job is to sell you
the products their broker/dealer offers. With many competent financial planners to
choose from who are free from the broker/dealer conflicts and sales culture, why even
consider one who is? If they are affiliated with a broker/dealer don’t hire them to provide
you with financial advice.
Caveat emptor. Still confused about investment advisors, brokers, and financial
planners? Here's a brochure put out by the Coalition for Investor Education, Cutting
through the Confusion.
3. Do you try to beat the market? If you have found a planner who adheres to a
fiduciary standard and is not affiliated with a broker/dealer you are halfway home. Now
comes the tricky part. While many advisors say they adhere to a fiduciary standard, if
they are using “active management” and trying to beat the market, they are going against
a huge body of evidence from academic research and some rather simple arithmetic that
shows active managers in aggregate cannot beat the market rate of return. In “The
Arithmetic of Active Management”, William F Sharpe, Nobel Laureate, proves the
exceedingly simple, yet often ignored truth that “after costs, the return on the average
actively managed dollar will be less than the return on the average passively managed
dollar”. All this assertion relies on for proof is simple arithmetic and the fact that “the
costs of actively managing a given number of dollars will exceed those of passive
management.” ( see http://www.stanford.edu/~wfsharpe/art/active/active.htm for the
whole paper) Instead of trying to pick stocks or managers in an effort to beat the market,
your planner should be helping you build a well diversified portfolio using low costs
vehicles to give you the best chance of meeting your goals.
ask these three critical questions you should be able to narrow the field significantly from
the thousands of people to call themselves financial planners/advisors (Note: there is no
regulation of the use of these terms in the United States) This is by no means an
exhaustive list and doesn't guarantee you will find a good or even honest advisor, but it
can help reduce many of the conflicts of interest and provide you with a key consumer
protection when looking for financial advice.
1. Do you adhere to a fiduciary standard? You should make sure that anyone
you hire to provide you with unbiased financial advice adheres to the fiduciary standard.
The fiduciary standard is the highest legal standard for consumer protection. It requires
the planner to put the clients’ interests ahead of his own, to provide prudent advice, to
minimize conflicts of interest and to disclose all meaningful facts and conflicts of interest
that cannot be avoided. When interviewing prospective financial planners simply ask if
they adhere to a fiduciary standard. If they don’t, don’t hire them. See the Committee of
the Fiduciary Standard for more details. You may also want to check this paper put out by
the Consumer Federation of America, The Need for a Fiduciary Duty Standard for All
Financial Advisers.
2. Are you affiliated with a broker/dealer? Next you should make sure that
your planner is not affiliated with a broker/dealer. What most people don’t understand
about broker/dealer representatives is that they are sales people. Their job is to sell you
the products their broker/dealer offers. With many competent financial planners to
choose from who are free from the broker/dealer conflicts and sales culture, why even
consider one who is? If they are affiliated with a broker/dealer don’t hire them to provide
you with financial advice.
Caveat emptor. Still confused about investment advisors, brokers, and financial
planners? Here's a brochure put out by the Coalition for Investor Education, Cutting
through the Confusion.
3. Do you try to beat the market? If you have found a planner who adheres to a
fiduciary standard and is not affiliated with a broker/dealer you are halfway home. Now
comes the tricky part. While many advisors say they adhere to a fiduciary standard, if
they are using “active management” and trying to beat the market, they are going against
a huge body of evidence from academic research and some rather simple arithmetic that
shows active managers in aggregate cannot beat the market rate of return. In “The
Arithmetic of Active Management”, William F Sharpe, Nobel Laureate, proves the
exceedingly simple, yet often ignored truth that “after costs, the return on the average
actively managed dollar will be less than the return on the average passively managed
dollar”. All this assertion relies on for proof is simple arithmetic and the fact that “the
costs of actively managing a given number of dollars will exceed those of passive
management.” ( see http://www.stanford.edu/~wfsharpe/art/active/active.htm for the
whole paper) Instead of trying to pick stocks or managers in an effort to beat the market,
your planner should be helping you build a well diversified portfolio using low costs
vehicles to give you the best chance of meeting your goals.
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| Copyright © 2009 Honu Wealth Management |
3 Questions to Ask When Choosing a Financial Planner
11/10/2010
11/10/2010
