How to find a financial adviser you can trust

Be willing to ask the tough questions, about fees and fiduciary duty

By Bloomberg News

Oct 13, 2014 @ 11:18 pm EST

At 57, several years from retirement, Don Schaefer wanted more stocks in his portfolio. His advisers at a major brokerage firm wouldn't listen to him. They also seemed to be trading almost every week with “no rhyme or reason,” to generate fees, he figured. At one point, he counted 65 products in one account. It all seemed so expensive and complex.

So he and his $2 million walked.

Schaefer manages his own money now, and the odds he will outperform his old advisers are good. Accounts run by advisers often do worse than self-managed accounts, researchers find. Advisers trigger too many trading fees and tend to steer clients toward higher-cost funds that pay them a commission. “Their advice is costly, generic and occasionally self-serving,” a forthcoming Journal of Finance paper concludes.

Despite those drawbacks, some investors are as eager to manage their own money as they are to do their own dentistry. The key for them is finding advisers who deserve their trust.

Investors need to be willing to ask an adviser tough questions, preferably face to face. A crucial one: How are you being paid, and what are your potential conflicts of interest? Almost anyone can call himself or herself a financial adviser, and many are little more than glorified salespeople getting commissions for selling pricey products.

Only some advisers are fiduciaries, with a legal obligation to put their clients' interests first. Investors can find fiduciary advisers through the Financial Planning Association or the National Association of Personal Financial Advisors, or they can ask potential advisers to agree to the CFA Institute's Statement of Investor Rights.

While advisers deserve to be compensated fairly, large, ongoing fees will kneecap portfolios by cutting into returns. They can also lead advisers to take on more risk to earn a return that covers their fees.

When asking about conflicts of interest, keep in mind that some may not be obvious. Fee-only advisers won't take commissions, for example, but may have other incentives that put them at odds with clients. If they're getting paid a percentage of the assets they manage, their bias may be to keep as much money as possible in an account by, say, discouraging clients to pay down debts.

Personality also matters. Clients shouldn't put up with advisers who don't listen, who talk down to them or who can't explain strategies in plain language. An adviser who says “yes” to everything you suggest isn't ideal, either. The economics of financial advice encourage advisers to pander to clients, warns University of Chicago business professor Robert Vishny. If a client has a “crazy notion,” like loading up on young tech stocks, an adviser might go along with it, Mr. Vishny says. That way, the adviser would both keep the client happy and collect a commission on an expensive tech fund.

Mr. Schaefer finds managing his own money stressful. It's cutting into his free time and he freely admits he's a “novice.” But, he says, “at least I have my own best interests in mind.”

Join the Discussion

Most Popular

Affluence Influencers