How To Pick A Financial Advisor

I've seen that people only allow you to manage their money if they trust you.

One of the quickest ways to establish trust is to have a fancy title, work in an impressive-looking office and use colossal words no one understands.

But none of that really matters.

Even if you, like most, understand very little about finance, there is only one term you must know. Everything else depends on it.

This most important term is "fiduciary." A fiduciary is a person who is legally required to act in your best interests at all times. Fiduciaries come in many forms, but as you navigate the world of finance, be sure that every person providing you with financial advice is a fiduciary.

According to the Law Dictionary, "There is no legal standard of care higher than fiduciary duty."

Sadly, many money managers, brokers and salespeople are not fiduciaries. They have no legal obligation to act in your best interests or provide you with the best advice possible.

You can guess whose best interest they have in mind as they sell products, funds and services that make themselves rich and you poor.

Or, as explained in the book, Where Are the Customers' Yachts? by Fred Schwed, the Wall Street game is rigged to make brokers and sellers of stocks wealthy, allowing them to have yachts while their clients don't.

If they were great at their jobs, shouldn't it be the other way around?

You'd think that everyone providing financial advice would be a fiduciary, just as doctors take the Hippocratic Oath, vowing to put patients' well-being first. Sadly, that isn't the case.

Fiduciaries want to make money, just like everyone. But unlike other advisers, fiduciaries must be transparent in the fees they charge and make sure they have no conflicts of interest when providing you with advice. You pay them upfront on a fee-only basis for their hard work and service to you. Almost everything else is a con job.

While fee-only services are important, so is independence.

For example, if a financial planner or advisor works for Hogwarts Financial Services and only recommends Hogwarts Mutual Funds, Hogwarts Annuities and Hogwarts Insurance, they are not independent. They will push you into (OK, here is a complex term) proprietary products.

Proprietary products are created by the firm an advisor works for. Advisers should be independent and offer the best products, not only the ones with which they are affiliated.

Independent, fee-only advisors who are fiduciaries are legally obligated to provide you, the customer, with the most prudent, low-cost investment vehicles to suit your needs. They don't take a commission or "cut" from embedded fees.

Next, like dating, you want some chemistry between you and your adviser. You don't need to be best pals, but you do need to be able to listen and communicate effectively on both sides. Friendliness is great; competency is better. Find both and you have a keeper.

Does everyone need a financial adviser? Absolutely not. But it's a solid idea. Your adviser is one-third financial expert, one-third therapist and one-third battle buddy who can save you from the poor financial decisions you are likely to make.

Remember the proverb, "A man who is his own lawyer has a fool for a client." No decent lawyer represents themselves in court, just as no doctor performs surgery on themselves. Likewise, few people should manage their money all alone. A good financial adviser keeps you honest with yourself and on track with your goals.

While anyone can manage their own money, most people who try mess it up. And they mess it up in catastrophic ways. Why? Because our brains get hijacked by our emotions, fears and anxieties. They also get derailed by investment news porn, market crashes and speculative bubbles.

If you need assistance with money management, plenty of good, kind, decent people are ready to help. To avoid the financial predators, ensure everyone you work with is a fiduciary.

The information contained in this column is for educational purposes only and should not be construed as personalized investment, tax, or legal advice.