How to Choose a Financial Advisor

Last Updated Jun 10, 2009 1:48 PM EDT

Jonathan Chevreau, who writes the blog Wealthy Boomer, recently asked the question: Can you trust your financial advisor? His post was in response to a CBC News story about the "buyer beware" world of investment advising. He wrote: "The relationship between a client and a financial advisor is similar to a marriage -- if there' s no trust, you're just not going to go the distance and you may as well pull the plug now."

The recent financial crisis may have many of you wondering about your relationship with your investment advisor. In October (during the height of the crisis), research from Russ Alan Prince of Prince & Associates found that 81 percent of investors with more than $1 million planned to pull assets away from their advisor or change advisors completely.

Those of you looking for advice on finding an advisor may have trouble getting it from your friends. In the same survey, 86 percent of those surveyed said they were actively telling their friends to avoid their advisor.

On the other hand, here's some advice that should help you if you're looking for an advisor or to change advisors. (And you don't have to be worth $1 million to use it.) Make sure you ask the following questions to anyone you are considering as your advisor:
  • How are you paid? Advisors who are paid on commission have an incentive to promote specific products, even if they might not be the best products for you.
  • Will you guarantee in writing to always act in my best interest? It's one thing to have an advisor tell you he or she is always looking out for you. It's another thing when your advisor puts it down on paper.
  • How do you decide what assets I should hold? It's important to know how your advisor chooses his or her investment recommendations, which includes the academic research that went in to deciding the investments' appropriateness.
Just remember that good advice doesn't have to be expensive. However, bad advice will almost always cost you dearly. A careful due diligence will go a long way in helping you find an advisor you can trust.
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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