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How to Find the Right Financial Adviser: The Keys to Success

The regulation of financial advisers is inconsistent or nonexistent, which means that many who label themselves as such don’t have to explain their credentials. Don’t expect federal regulators to mend that problem anytime soon.

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Age Fotostock

Today’s stagnant salaries, rising debt levels and volatile stock market make a challenging and intimidating process—safeguarding and growing your nest egg—even more difficult. Many people turn to an outsider for guidance. In today’s financial environment, understanding the limitations of various types of financial advisers is more important than ever before.

We spoke with 23 government, financial-industry and consumer-advocacy sources and learned that just about anyone can call himself/herself a “financial adviser” or a “financial planner”—the labels are widely interchangeable. What’s worse, few regulatory standards ensure that your best interests are the priority. Federal rules that would change that seem to be stalled amid politics.

Financial Industry Regulatory Authority (FINRA) says professionals who call themselves financial advisers could be brokers, investment advisers, insurance agents or accountants, or they could have at least two specialties—or none at all. These so-called advisers might lack any financial credentials, such as certification by a professional organization or Securities and Exchange Commission. (FINRA is a nonprofit organization that’s authorized by Congress to ensure that the securities industry operates fairly through writing and enforcing rules that cover 4,059 securities companies.)

Given the lack of oversight and a loose definition of what is a financial adviser, what questions should you ask to find the right one for you?

POLITICAL RULES. Seven experts whom we interviewed agree that the most important question to ask any prospective financial adviser is whether he/she will sign an agreement to act in a fiduciary capacity. Having a fiduciary standard means that the financial adviser must act in the client’s best interest, not the financial adviser’s or his/her company’s best interest. SEC defines “fiduciary standard” to mean that the financial adviser agrees to act in good faith, disclose conflicts of interest and not accept any referral fees or compensation contingent on the purchase or sale of a financial product.

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Experts tell us that any financial adviser whom you hire should sign such a fiduciary agreement. FINRA “has explicitly supported a fiduciary standard,” spokesperson George Smaragdis says.
National Association of Personal Financial Advisors (NAPFA), which is a trade organization, requires all of its 2,400 members to sign a fiduciary agreement. A registered investment adviser (RIA), who earns that designation by passing an advanced SEC exam, is required by law to act in a fiduciary capacity. Certified financial planners (CFPs) agree to do so voluntarily, and other financial advisers might as well.

A proposed rule change that broadens who must adhere to the fiduciary standard when giving financial advice received backing from President Barack Obama in February 2015, but don’t hold your breath as to when such a rule might take effect. Department of Labor, which governs employee retirement plans, originally proposed in 2010 to apply the fiduciary standard to financial advisers who handle employer-based retirement plans and individual retirement accounts (IRAs). This would include one-time transactions, such as a 401(k) rollover or the purchase of an IRA. These transactions are prime targets of commission-based financial advisers who, essentially, are salespeople, experts tell us.

After strong opposition by the financial industry, Department of Labor’s effort was shelved in September 2011 and remained so until Obama called for the agency to move it forward. Department of Labor wasn’t able to give us a timeline as to when a fiduciary rule might be enacted.

Sheryl Garrett, whom Obama commended for her strong support of the fiduciary rule, believes that movement won’t happen soon. Garrett owns Garrett Planning Network, which requires its independent financial-adviser members to sign a fiduciary agreement. She says internal reviews and a public-comment period—and Department of Labor’s reaction to those—could mean that the rule won’t be finalized until “as early as mid-2016 or as late as right before Inauguration Day in January 2017.” Then, it could be another 2 years before the rule takes effect, she says, because regulators “will give more time rather than less” to accommodate whatever the new version entails.

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