Luke Delorme: Trustworthy is not enough

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I read a lot of books on personal finance. Finance books can be an amazing resource, but they usually end with a suggestion to seek out the help of a professional adviser. Entire chapters are sometimes dedicated to selecting the right adviser. The most common advice seems to be to "work with a trustworthy adviser."

I think this recommendation falls short.

Trustworthiness is critically important, but an adviser or planner wouldn't stay in business very long if he or she couldn't at least pass as trustworthy. Unfortunately, trustworthiness can be faked — Bernie Madoff comes to mind. I think there are more important characteristics to seek out.

First, does an adviser have the knowledge, skill and expertise that you need? If you're looking primarily for someone to help you with college planning, does the potential adviser have that expertise? If you're planning for retirement, does the adviser have expertise in retirement planning? Do they have knowledge of Social Security claiming and retirement withdrawal strategies?

If you're just looking for someone to help with investments, you should interview any potential adviser regarding their investment approach and knowledge of markets. Not all advisers have comprehensive expertise, so, if you're looking for something in particular, you should ask outright.

There are other good indicators of expertise, including past experience, undergraduate and graduate college degrees and designations such as CFP, ChFC and CFA.

Once you've narrowed down your search to advisers who are both trustworthy and competent, you'll want to find someone who can communicate well with you. This can mean different things for different people.

Some people want an adviser who can talk at a simple level about the investments and strategies they use. Others might want a deeper conversation about investment strategy or tax planning. Some people prefer to avoid verbal communication and want someone who can communicate effectively in writing. The important thing is to find someone who can meet your communication needs.

You also want to establish guidelines for the frequency of communication. Do you prefer someone hands off, who only contacts you once a year to have a quick review, or do you expect quarterly check-ins to make you comfortable?

Finally, you want to know how your adviser will get paid. Is he compensated through commission on financial products, or does he take a percentage of your assets periodically? This determination will affect the relationship. There is no right way to do it, but if you select an adviser who gets paid on commissions, you should expect a different type of relationship. An adviser who is compensated through commissions is more apt to sell annuities and similar fee-based products.

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You'll also want to know how much those fees and/or commissions might be. You should ask directly, "How do you get paid," and "How much do you charge?"

Be aware, fees are often hidden or indirect, so, insist on a complete summary of all investment-related costs, as well as an accounting for any compensation the adviser might receive for selling you a product. Tell them you need a "plain English" accounting, not just the boilerplate documentation that might meet regulatory disclosure requirements. You are the customer, so, take control. If you can't get a direct answer, you may not have a trustworthy adviser — go back to step 1.

Selecting an adviser is an opportunity to interview lots of types of people and find one right for you. You wouldn't buy the first dishwasher you saw at the store, and you shouldn't necessarily pick the first adviser you meet. This is someone that you might pay thousands of dollars a year to for the rest of your life. So, make sure the fit is right.

A few direct questions that will help you find someone more than trustworthy:

- What is your education and business background/expertise/specialty?

- Do you have any professional designations?

- Can you help me with college planning/retirement planning/investing/et cetera?

- How often do you communicate with clients?

- Please explain your approach to investing.

- How do you get paid? How much do you charge?

Luke Delorme is director of financial planning at American Investment Services in Great Barrington. He can be reached at luked@americaninvestment.com.


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