If you're an investor who relies on the competence and integrity of investment advisors to help you achieve your financial goals, maybe it's time to start taking a little more control. And to get you started, let me tell you about some free tools that can help you select the best advisors -- and thereby reduce your risk of financial losses.
As I've told you before, the financial service industry is a major special interest group -- one that offers politicians hundreds of millions of dollars per year in exchange for regulations that favor them more than you. Consider, for example, just how much financial service firms spend to fight mandatory disclosure requirements for their sales representatives.
What is mandatory disclosure? At your first meeting with financial advisors, they should provide documents that disclose their education, experience, certifications, compliance record, method of compensation, and services. The disclosure provides the minimum amount of information you need to identify advisors with the best credentials, ethics, and business practices.
However, this document does not exist because there are no disclosure requirements. Wall Street has made it your responsibility to determine the quality of advisors before you select them. This is a very big deal because it creates risk that affects the achievement of your financial goals.
Wall Street knows you do not have a structured process for gathering, evaluating, and comparing advisor data. Wall Street also knows, in the absence of a process, there is a high probability you will select the advisor with the best personality and sales skills. This creates a fertile environment for Wall Street's sophisticated marketing machine.
Later this month, my Website Investor Watchdog will begin providing free tools you can use to select financial advisors based on their qualifications and not their sales skills. The first is a Request for Information (RFI) that gathers data from advisors concerning their credentials, ethics, business practices, and services. You can use this tool to obtain data from any advisor at any US financial services firm.
Here's how it works: Advisors are sent a link to your user account on the Watchdog Website. Once they submit their information, you receive a message that the data is available for viewing. You retain the data in your free Watchdog account so you have a permanent record of advisor responses.
Your next step is to compare the RFI responses of multiple advisors to each other. Your purpose is to screen advisors and select the ones you want to interview. RFI data is automatically uploaded to Watchdog's Advisor Scorecard, a tool that arrays key advisor information side-by-side so it is easier for you to identify the best advisors.
The site also provides a Guide for Evaluating Financial Advisors that describes the relative importance of the information you are looking at. It helps you identify good answers that benefit you from bad ones that create unnecessary risk. For example, why select advisors who are RIAs or IARs, acknowledged fiduciaries, and are compensated with fees? (Answer: These are a few of the characteristics that are shared by the best advisors in the financial services industry.)
They say information is power. These tools empower you with the data you need to make informed decisions when you screen, evaluate, select, retain, and terminate financial advisors. And that helps reduce your risk of financial losses due to bad investment advice.
— Jack Waymire spent 28 years in the financial services industry, and for 21 of those years, he was the president of a registered investment advisory firm. He left the industry in 2004 for a career as an author and blogger. You can reach him at Jack@InvestorWatchdog.com.