Wouldn’t it be fantastic if there were a magic mirror that could lead us to the perfect advisor, even if it was ourselves?  If this magic mirror existed the world would certainly be a more abundant place.  Alas, it is a fairy tale.  Finding the right advisor is difficult and whether recognized or not ranks high on the list of the most important decisions a person will make in their lifetime.  It’s a binary decision.  They either hire themselves or they outsource.  Those are the choices.  Most importantly, remember that even if you hire someone else—you are still responsible.  You cannot abdicate responsibility.

What makes the decision so difficult is that most people aren’t experts in the field and they are asked to select someone that is.  The expert selection task is difficult regardless of what expertise one seeks but is exacerbated when it comes to the financial services industry.  I believe one of the main reasons for this difficulty is the lack of an industry designation that consumers can rely on as a mark of true expertise.  The advice industry has lots of ways for advisors to seem expert but most are just slick marketing and self-aggrandizement propaganda in my opinion.  Granted, some credentials are harder to achieve than others, but even the most recognized are self-taught and like my graduate school finance professor would say, most of the designations can be earned with as little effort as “A book, a beer and a weekend.”  I will concede, this is an exaggeration, but when it comes to managing your money you need expertise not “almost” expertise.  Almost does not cut it.  If you want to know the difference I refer you to An Expert Tale.

We learned in A Tale of Accountability that when my Cuban immigrant father in 1968 decided that he needed to hire an investment advisor that he was surprised to find that there was no advisor equivalent designation or degree that had the academic and case study rigor of the MD degree.  It was a surprise since it was his natural inclination to seek expertise.  Instead our system has a Wizard of Oz mentality where the powerful wizard can miraculously give your advisor courage, wisdom or strength they already possessed just didn’t know they had.  A firm can take a top copier machine salesman and in 6 weeks transform him into an expert investment advisor.  What a joke.  A few correspondence classes later they are bestowed a wizardly medal and they are dubbed expert.  Don’t be fooled.  True expertise is learned in the trenches after many years, many mistakes, many dead ends and true passion for your profession.  Unfortunately, 40 plus years later this hasn’t changed and it still isn’t even close.  So if we were to measure an advisor’s expertise and training to that of a physician they would fall far short.  In fact financial expertise falls far short of almost any professional designation that we recognize.

But surely there are financial experts?  There must be people capable of rendering competent advice?  The answer is yes.  However, one thing needs to be cleared up or defined before we can proceed.  What exactly is competent advice?  My advice is you should not go looking for someone that will make you wealthy quickly.  Acquiring wealth quickly is your job.  The best advisors, the ones I call FABS which is my acronym for fee-based advisors will help you acquire wealth slowly and keep the wealth you have acquired.  Unfortunately, unless you can compensate a top advisor for the hours they must devote to you, you are not likely to find one or be able to hire one.

Almost every expert advisor that I know views their function as a facilitator and quite frankly because they are experts have such high minimum dollar requirements before they will accept a new client that most new clients are already wealthy.  This effectively means that expert advisors are really in the business of wealth preservation.  They are in the business of making sure that wealthy people stay wealthy.  They espouse diversification and the appropriate asset allocation.  They rebalance when necessary and make sure that you are well situated when it comes to your taxes, charitable inclinations and estate planning requirements.  Unfortunately, the vast majority of people or what is the masses can’t access expert advisors since most people are in the wealth building stage of their life not the wealth retention or wealth transfer stage.  Read A Cyclical Tale to understand the 4 stages of the wealth cycle.

The inability to access expert advisors poses a problem for the person looking to build wealth.  While I know they are on their own, they are constantly bombarded with advertisements that try to induce behavior that tells them otherwise.  Soon they come to believe they have a partner and even worse that they have a competent partner.   Effectively, the individual is looking to hire an expert advisor, when he doesn’t know what one looks like.  Furthermore, most expert advisors are out of their wealth cycle or price range and those that remain are probably not expert advisors.  It reminds me of a Groucho Marx saying “Any club that would have me as a member I wouldn’t want to join.”  There’s tremendous wisdom in his saying and translates to the reader saying “Most advisors that would have me as a client I wouldn’t want to have as my advisor.”  There’s no good solution to this problem other than financial literacy which is of course why I write these tales.  You must learn about money.  It will make you a better judge of who’s good and who’s not.  There is no alternative.

As an expert I recognize other experts.  However, when I pose a theoretical question to colleagues to explain how they would advise a loved one on how to hire an expert advisor they are as stumped as I am.  We’ve all read personal finance columns that tell us their version of how to hire an advisor.  They give you a checklist of questions and theoretically you are set.  If it were that simple everyone would be healthy, wealth and wise.  But we’re not.  To reiterate neither I, nor any of my colleagues can come up with a bulletproof method to hire an expert advisor.  However, there is unanimity in eight areas of what one should not do.  The following is my checklist and I thank those that helped me create it. I hope it helps.

1)    Only work with advisors that have a full-time passion for the business.  If your advisor has other business interests that are not related to managing money they will never excel.  The investment advice business is lucrative.  One of the most lucrative I know.  The time your advisor may spend devoted to running a restaurant, a moving company, a mortgage company or whatever other endeavor they designate potentially more profitable or enjoyable is time they are not getting better at their profession.  Avoid the half-steppers and multi-taskers in the industry.

2)    Don’t hire an advisor that hasn’t personally advised clients through at least one full stock market cycle.  This means one full bull and bear cycle of the stock market.  I say this because as a young advisor I was not immune to the same fear and greed my clients exhibited.  I made rookie mistakes.  No one is immune to error but expert advisors keep them to a minimum and avoid the big ones.  We learn in the Behavioral Tales section of these tales that many people fail because of their financial programming or behavior. The advisor’s primary function in this area is to remove the fear and greed component out of the investment equation.  Therefore, it seems logical to only deal with those advisors that have at least experienced this in the past and have corrected their own tendencies.  In order to correct these tendencies every expert advisor has developed an investment approach.  I So the next item on the checklist is;

3)    Don’t hire an advisor without an investment methodology.  In most cases the actual methodology is unimportant as long as the advisor knows exactly how they will behave in a given stress situation.  Get a sense of how they think.  For example, ask them what they would do if interest rates went up or down dramatically.  Ask them what they would do if the stock market dropped 25% from the day you started your relationship.  If you come up with questions, they should have answers and they need to make sense to you.  Market cycles repeat and the expert advisor recognizes that though they can’t predict the future, they know what it will approximately look like and more importantly how they and their clients will behave.  Look for clues.  For example, if the advisor tells you that he would avoid investing your money in the stock market during periods where the market goes down 25% find another advisor because he’s either lying to you or to himself.

4)    Don’t hire an advisor that provides conflicted advice.  These are advisors I call SADS or sales driven advisors.  No good can come from a situation where the advisor doesn’t have the client’s best interest at heart.  While some SADS do, there is no way for you to tell and unfortunately you must paint them all with a broad brush.  For example, it’s particularly difficult to deal with a SAD during times of market turbulence.  You are more likely to be overly fearful of losing money during turbulent times.  You will be turning to your SAD for advice and since the SAD is more than likely compensated on a transactional basis, they will sell you what you want, not what you need.   When they sense fear, they sell fear.  When they sense greed they sell greed.  The end result is that you typically end up buying high, selling low and achieving unsatisfactory results.  The fee-based advisor or FAB has no such conflict of interest and provides a higher probability of success in my opinion.  Please note this does not mean you will succeed if you hire a FAB.  You just have a better chance at success.  You must still find and hire the right one.  See A Tale of Incentive for a better understanding.  In a nutshell, if your advisor is compensated via commission–look elsewhere.

5)    Don’t hire advisors with a narrow focus.  They may be specialist in a particular area but when their area is out of favor your portfolio suffers.  They may be very good at their specialty but you want to work with an advisor that specializes in personal finance and not one particular area.  See An Unlucky Tale for what can happen when you hire a specialist.

6)    Don’t hire an advisor that is a one-stop shop.  This partially relates to the first item on the checklist above.  I don’t go to restaurants that specialize in Italian/Mexican/Greek cuisine and you should not hire a one-stop shop.  If they provide everything under one roof you are getting shortchanged.  I strongly believe that individuals should assemble an advisory team.  Read A Tale of Teamwork to see one of the hundreds of things that can go wrong if you don’t assemble a team.  Like our country’s founding fathers that believed in the separation of duties I believe that people should do the same thing with their finances.  People should hire an independent accountant, lawyer, insurance agent, mortgage banker and financial advisor.  This keeps everyone honest and encourages a beneficial interchange of ideas since the individual can get feedback from various perspectives.  Some of the most important insights I’ve gained have come from dealing with other professionals while serving our mutual client.

7)    Don’t hire an advisor that will invest less than 40% of your money in the stock market.  If they are overly conservative they will shortchange you in terms of rate of return.  I don’t manage one client that has as their target allocation less than 40% stocks.  Conservative advisors or Perma-Bears seldom do well.  They are forever afraid, produce low long- term results and charge way too much money for this service.  Stay away.  If you want your money managed conservatively you can do it much cheaper than with an advisor and there are lots of great bond managers to select.

8)    Don’t hire an advisor that can’t see you within 2 weeks of your initial appointment request.  Advisors must be available.  They don’t need to be on call like a physician since they don’t deal in life or death matters, but they do have to be available.  If they’re appointment calendar is so booked that they can’t meet you in the near future forget about them.  If they are too busy to speak with you when you are a virgin prospect you can be certain the treatment will only get worse once you become a client.  Advisors are there to work for you.

I apologize that this tale may not give you the answers you expected.  If I knew the answers I would tell you.  So take this as an incomplete checklist based on 30 years of studying markets and advisor/client behavior.  I’ve written two other tales that show what you should and shouldn’t do when hiring an advisor.  They are under the heading Cautionary TalesThey are fun to read.  The first is called A Tale of Committee and the other is called A Competitive Tale.  I hope you enjoy them.  I have also written a tale that shows what one very smart man did when hiring an expert.  I call it A Face Tale.

Lastly, let’s not lose sight of one last thing in this fairy tale.  We learned in A Basic Tale that you are responsible for your actions.  I purposely selected the subtitle to this fairy tale because like in the original Snow White fairy tale the queen expects to hear that she is the fairest of them all when she voices the familiar question.  When you look in that mirror always remember that though you bear the responsibility, there is someone out there that can probably do a better job advising you than you can.  You may not be able to afford or hire them at this time but you are better off doing it yourself than dealing with an incompetent.  So your responsibility is to learn as much as you can for the day you can find them and afford them.  It’s your job to find Snow White.  Until then, you are your own advisor so polish your mirror.

Carlos Sera

Carlos Sera Founder of Sera Capital Management, LLC Co-Founder of Chicago Wealth Management, Inc. Registered Investment Advisor Speaker on Financial/Investment Planning Fluent in Spanish – First Generation Cuban/American Author of Financial Tales Blog Education Johns Hopkins University – BA – Natural Science – 1980 University of Rochester – MBA – Finance and Applied Economics – Honors – 1982 Find me on:  LinkedIn | Twitter

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