When you walk into the doctor’s office, it’s implied that they went to medical school, have some level of experience, or maybe even specialize in a certain area of practice. Imagine going to a doctor’s appointment, asking the doctor what their experience level is, and the response being: “I passed a 100-200 question exam, and now I call myself a doctor.” You’d probably not feel very comfortable.
One thing that is frustrating about the financial planning world is that people without college degrees literally can pass an insurance exam and call themselves financial advisors/planners. No wonder consumers inherently don’t trust the financial industry. Financial advisors generally represent themselves as people giving professional advice (like lawyers, doctors, and dentists). The problem is: the barrier to entry is too low for financial planners. What's worse is that the everyday consumer generally lumps together all financial advisors as one group when that isn't the case at all. Unfortunately, like many other things in life, a few bad apples spoil the bunch.
Maybe you've been pitched a specific stock, fund, or insurance product before. Maybe you've been told you're supposed to work with an advisor to beat the market. Maybe you blame all financial people for the Great Recession. Who knows. What's clear is that financial "professionals" are not equal, and frankly, they should be held to a higher standard before being allowed to give advice or keep giving advice - something equivalent to medical, dental, or law school.
The good news is, there are a couple of different ways for consumers to gain knowledge on their potential planner's background.
1. The CFP® designation is the gold-standard in financial planning.
It's recognized as the highest standard in personal financial planning and is considered one of the top marks that financial planners can earn. CFP® practitioners must complete a rigorous education requirement, pass an exam that contains the application of material learned during the education requirement (i.e. not a simple memorization exam), have 6,000 hours of experience (i.e. 3 years), and maintain a clean history in regards to ethics. Not to mention the requirement that CFP® practitioners must hold a bachelor's degree from an accredited college or university.
2. It's a mistake to think of all financial advisors as the same.
Over the 2018 Christmas holiday, I was told that all advisors scam old people no matter what - in every situation. Obviously, I don't believe that to be true, since I've seen first hand how financial advice has helped my clients greatly over the years, but I still couldn't believe what I was being told. Some people simply distrust everything and everyone (maybe they can't be helped), however, there are ways to do research on specific advisors. BrokerCheck allows anyone to look up individuals and the SEC's website allows you to look up investment adviser firms to see their firm documents. Most importantly, before hiring a financial advisor, make sure to know how they're compensated and whether or not they're obligated to work in your best interest (fiduciary). It sounds dumb as you might be thinking, "wait, aren't all of them required to work in the client's best interest?" Sadly, that answer is no. It doesn't necessarily mean that all non-fiduciary advisors are making bad recommendations. It simply means that there are products that pay different percentages of commissions. Let me put it into perspective - let's say there are two products the client is considering buying. Both products look very similar, however the payout to the advisor is $1,000 on product A and $10,000 on product B. Which product do you think the advisor would rather sell? It's human nature. Yes, I believe everyone should be compensated for their work, but shouldn't it be about what is the best fit for the client regardless of what the commission is?
3. Some of the most well-known "gurus" in the industry can say whatever they want because they're NOT licensed.
I'm sure you've heard radio shows/podcasts or seen Facebook ads for people advertising that their trading strategy makes XX% per month or that every single type of debt is terrible to have. Interestingly, most of the time, the people making those claims are great at marketing and not great at being financial planners. Probably because they're not financial planners. They try to give blanket advice to the masses and often times it's not good advice for people that don't fit a specific mold. In fact, it adds to the financial industry's bad rap rather than helps it. It makes people think that day trading and market timing is the way to build wealth when that couldn't be further from the truth.
4. Some firms are simply owning up to the fact they're not obligated to work in the clients' best interest...
Since I started writing this, there have been multiple states (Nevada, New Jersey, Maryland) that have had a push to pass a bill that mandates all advisors must act in their client's best interests. Because of this, multiple firms have simply said that they would just stop offering services to clients in those states...wait, what?! Yes - because they would have to put the client's interest ahead of their own, they would rather just not do business in those states at all.
The CFP® designation is important.
There are ways to look up the experience level of your advisor.
Not all advisors are the same. Do your research. Websites are different. Content is different.
Trust your gut. If you think a recommendation is wrong, ask for clarification.
If you're at the doctor's office or financial planner's office and they tell you they passed a 100 question exam and now they're legit - leave immediately.