NYT: In Search of Competent (and Honest) Advisers

AFTER all the turmoil in the markets, after Bernard L. Madoff and a bunch of other financial scandals, investors may well be questioning whether they’ve chosen the right financial adviser.

It may be someone you like and trust, but is it someone competent to manage your money?

– Intro to “In Search of Competent (and Honest) Advisers”, The New York Times, August 1, B1

Generally speaking, and this is true across all wealth levels, people are dissatisfied with their advisers, but they’re still incredibly loyal to them.  It’s been going on for years, but it’s been exacerbated recently.

– Bruce Holley, managing director at Boston Consulting Group, quoted in the article

DUE DILLIGENCE:

Mr. Holley said many people react by moving to a firm with a long-established brand.  But that offers no guarantee of better results.

The more rational approach is to do serious due diligence on your adviser.  This is not easy.  It requires a lot of work, like checking an adviser’s regulatory record through the Financial Industry Regulatory Authority, the Securities and Exchange Commission and state regulators, and contacting many references.

TRANSPARENCY:

But perhaps the most important test of your adviser’s competence is in the area of what is being called “transparency.”  Mr. Crosby said the survey found that transparency was becoming more important to investors than an adviser’s brand, performance and pedigree.

But while an adviser may talk about transparency, investors need to figure out what it means.  Where does an adviser keep your money — at the firm or with third-party custodian who serves as a check?  Does the firm have reputable auditors and lawyers?  What is being outsourced and where is it outsourced to?  This should be of particular concern, depending on how your personal financial data is encrypted.