When Bernie Madoff was exposed as the operator of a Ponzi scheme in 2008, millions of people started to take a closer look at the professionals they hired to manage their money. If you’re on the hunt for a new financial advisor, you’re probably wondering: how do I make sure this person is reputable? Beyond that, how do I make sure this is someone who can understand my situation, and has the requisite expertise to help my financial life?
While bad apples can be hard to spot, below are five tips to help you find a trustworthy financial advisor. For more help, check out our Ask an Advisor platform.
1. Check credentials with the organization that issued them.
The initials after financial advisors names, such as CFP®, RIA, or AIF®, can often feel like little more than alphabet soup. Before you meet with an advisor, look up their designations, and find out which organization issued the designation. Then verify the individual you’re meeting currently holds the certifications. That will tell more about their training and abilities.
2. Understand fee structures.
Similarly, be sure to understand an advisor’s fee structure—when you’re trying to find a financial advisor, “how do you get paid?” is not a rude question to ask.
3. Ask them for references.
Remember, this is a job interview, and you’re the hiring manager. Ask your potential advisor for three references, and then get in touch with these references to follow up. The references may be former clients, or other professionals, such as accountants or lawyers, who work with the advisor in the course of serving clients.
4. Watch out for red flags.
Be on your guard and cautious when initially approaching an advisor. A few danger signals include: promises to “beat the market” or offering guarantees of investments’ performance, and unwillingness to divulge details about fee structure or their background. One big factor that should have caused alarm for Bernie Madoff’s clients is the fact that their statements came from Madoff’s firm directly – not from a third party custodian firm. A third party custodian is often a brokerage or large bank. The oversight of the custodial firm protects advisors from Ponzi scheme-type operations. Ask potential advisors if they use a third party custodian, and if they say they do, call the firm to verify the relationship.
5. Pick someone you like.
Do you picture a financial advisor as an uptight old man in a suit, who will drone dull and impossible-to-follow financial advice at you? That person is definitely out there, but he isn’t your best option. While working with someone you like certainly doesn’t equate to trustworthiness on its own, it does help establish open communication, which, paired with professional qualifications and high ethical standards, makes for a successful advisor-advisee relationship.