The Value Of A Professional Financial Advisor by Dr. Robert Johnson, CFA, CAIA
A recent study by professors from the University of Minnesota and the University of Chicago found that roughly seven percent of financial advisors operating in the financial services industry have misconduct records. The most alarming finding was that 44 percent are reemployed in the industry within a year.
The unfortunate consequence of the publication of this study is that fewer individual investors may seek financial advice — and that would have disastrous effects on the already anemic financial security of Americans, as individuals who fail to seek investment advice end up underperforming those who do.
Prior to the publication of this study, financial services was already low in terms of trustworthiness. A recent Gallup poll found that stockbrokers – an imperfect and generic proxy for financial advisers – was the sixth least trusted group, only surpassing advertising practitioners, car salespeople, telemarketers, members of Congress and lobbyists. The high profile financial scandals and TV shows such as American Greed are contributing to the poor reputation of the field.
We all know the cost of bad financial advice – people can be swindled out of their life savings and find their financial security taken from them. But, what is the benefit of good financial advice?
A recent study by Vanguard finds that a financial advisor can add approximately three percentage points to a client’s investment returns per year. Advisors add value by, among other things: helping design a holistic financial plan that incorporates a client’s ability and willingness to bear risk; reviewing and adjusting the holdings during different life stages and changing life circumstances; counseling clients through bear markets; and advising on retirement income strategies — for instance, when to claim social security.
Clients don’t need to hire just any financial advisor, they need to hire a professional. Specifically, consumers should seek out individuals who have the three qualities displayed by any true professional whether it be a doctor, lawyer or architect: education, experience, and, perhaps most importantly, a commitment to ethics and professional standards.
When we get sick we go to the doctor, when we get in a legal bind we seek advice from a lawyer, but somehow many people feel qualified to navigate the increasingly complicated financial waters alone.
In the financial planning arena, it is fairly easy for clients to identify true professionals. Look for individuals with the prestigious CFP® (Certified Financial PlannerTM) certification. Look for those who have other professional designations such as the PFS, the Chartered Financial Consultant® (ChFC®), and the Retirement Income Certified Professional® (RICP®). These professionals have mastered a complex body of knowledge, are committed to stay current with that knowledge through continuing education, and agree to abide by an ethical code of conduct. Clients should ask their professional advisor how she is compensated for her services, and make sure the answer is clear.
Consumers should do themselves a favor and seek out the services of a true financial services professional. They will be glad they did.
