Do feelings of trust in someone automatically make them trustworthy? When it comes to selecting a financial advisor or advisory team, making that distinction is crucial to your financial well-being.
“Feeling” that a person is trustworthy or “listening to your gut” is not a safe way to select someone with whom to trust your financial future. One of the reasons con artists succeed is their skill at getting people to trust them.
4800 people collectively invested $64.8 billion with Bernie Madoff, as they felt they could trust him. Many lost their life savings as a result.
Li Huang and Keith Murnighan of Northwestern’s Kellogg School of Management completed a study to determine why so many trusted Madoff. You can find the Forbes article discussing their study here. Two of the primary take-aways from the research were that others whom investors respected and trusted were investing with Madoff, and that they relied on their “gut instinct”.
These two trust components aren’t negative or bad, in and of themselves. There is certainly a case for trusting others’ positive experience, and a place for discernment.
“Trust but verify” is a maxim which has stood the test of time for a reason.
How do you “verify”?
For the married men reading this, we urge you to capitalize on your wife’s intuitive gifts. Make sure that, as you are making a decision, your wife meets the advisory team. Ask for, and listen to, her advice and input. If she is uncomfortable with the advisor/team, walk away.
Do your research. Does the advisor or the team of advisory professionals have a record of ongoing regulatory violations? You can learn more here. A regulatory event shouldn’t necessarily disqualify an advisor, though you are owed an explanation, and they should volunteer the information.
Do they lead by example? Whatever their financial advice, do they live by the advice they are offering you? And yes, it is not only okay to ask these questions, it is imperative that you ask and know.
Is the advisory team willing to offer references to whom you can talk?
Do they push you for a decision to do business with them, or buy whatever product they are selling, because the opportunity will soon be gone? Do you get the sense they simply want to open accounts and close deals? These are red flags.
Do they say both verbally, and in writing, that they serve as fiduciaries? If they will not put this in writing, we deem this a red flag.
A Few More Good Questions
Are they willing to invest the time necessary to have a deep understanding of you, your situation, your preferences, your plans, and your needs? Quality financial decisions take time and shouldn’t be rushed.
Are they willing to ask questions, and discuss both the costs and the benefits of any particular course of action?
Are they willing to work with the other professionals on your team? The wisdom of the ancient philosophers comes to mind in this regard, and two phrases stand out. “Come now and let us reason together”, and “there is both wisdom and safety in an abundance of advisors”.
Does the advisory team make it clear that they aren’t custodians? This means that you should never make a check for investment payable to the person who is the advisor, or to their local firm. Unlike attorneys, who have escrow accounts, financial advisors and their local firms have no such protocol or provision. And in fact, funds received from a client for investment, payable to the advisor or his/her local firm, must be returned to the client. “Comingling” of funds is expressly prohibited by regulation. Checks for investment in marketable securities should only be made payable to a recognized bank, brokerage firm, or insurance company.
Does the advisory firm offer just investment management, or a more comprehensive suite of services? And do they have the technical expertise you are looking for? What are you looking for in the way of assistance and professional guidance? You may not know the answers to these questions as you begin the process of identifying an advisory team to work with. By the time you work your way through these questions though, you should have a much clearer understanding of what you are looking for, and whether this team is right for you and your family.
Finally, is there values alignment regarding philosophy of life, business, and money?
We believe the choice of an advisor or advisory team is a critical decision for you. It is not something to be taken lightly. We further believe that it requires your initial and ongoing engagement, and that a best-case scenario is that of a partnership with your financial advisory team and allied professionals. As you may have learned, the larger your income, and the larger your asset base, the greater and the more complex are the decisions required.
Until we see you again, our warmest regards,