Author offers tips on how to find competent financial adviser

January 12, 2016 12:00 AM

By Tim Grant / Pittsburgh Post-Gazette

The No. 1 red flag that an investor may be dealing with a bogus financial adviser, according to money coach Liz Davidson, is if he or she guarantees a high percentage return with no risk. This type of investment simply does not exist, and investors should run out of that office as if the building were on fire.

"It's just not realistic to expect someone can provide you with a consistent return regardless of what the stock market is doing," Ms. Davidson said. She said Bernie Madoff, who ran a Ponzi scheme that ripped his clients off for billions of dollars, is a prime example. "Regardless of what the market was doing, his returns were very steady."

Another big red flag, she said, is when an adviser is fixated on selling a specific product instead of getting to know you and your specific needs.

For today's unstable financial times, Ms. Davidson has authored a book titled "What Your Financial Advisor Isn't Telling You: The 10 Essential Truths You Need to Know About Your Money," which offers tips on how to find a competent adviser; how to evaluate that adviser's effectiveness; and advice on navigating a 21st-century climate where pension plans have died out and doubts remain about the future of Social Security.

"I'm a believer that you should look for an adviser with 10 or more years of experience and ideally have a certified financial planner designation," she said. "Only a small fraction of a percentage of advisers are fraudulent. However, there are varying levels of competence among advisers."

Even large well-known brokerage firms are not completely above suspicion.

The Securities and Exchange Commission announced earlier this month that J.P Morgan's brokerage business agreed to pay $4 million to settle charges that it falsely stated on its private banking website and in marketing materials that advisers are compensated "based on our clients' performance; no one is paid a commission."

"JPMS misled customers into believing their brokers had skin in the game and were being compensated based on the success of customer portfolios," said Andrew J. Ceresney, director of the SEC enforcement division in a prepared statement. "But none of the factors JPMS used to determine broker compensation was tied to portfolio performance."

According to the SEC's order, JPMS made false and misleading statements about broker compensation from 2009 to 2012. JP Morgan did not admit wrongdoing in the settlement.

Your worst financial enemy?

Ms. Davidson, the founder and CEO of Financial Finesse, is a provider of workplace financial wellness programs. She works with employees on all aspects of their financial lives. That approach, she said, allows her to understand the full financial picture employees face.

She has run the Los Angeles-based company for 17 years. Prior to that, she was an investment banker and hedge fund manager.

She said many of the most important financial issues people are coping with are things a financial adviser cannot help them with, such as choosing the person you spend your life with. That will matter more for your financial security than anything a financial adviser can do.

"You can recover from investment losses, or even job losses, but a partner who ruins your credit, raids your accounts or leaves you with a mountain of debts when he or she dies is much more devastating — and it can take much longer to recover both emotionally and financially," she wrote in the book.

Ms. Davidson said she chose to include a chapter on life partners because most financial advisers will not work to teach couples how to manage money together.

"They are not marriage therapists," she said. "They won't pop up in in your living room to settle disputes about how you are saving, spending and investing your money."

That's the investor's job. "You have to take responsibility for making sure you and your partner are on the same page financially," Ms. Davidson said.

A safe bet

She said the safest and most profitable investment is one that no adviser can make for you — pay off your "bad debt." Bad debt includes any debt on items that do not appreciate in value, such as car loans and credit card balances.

Financial advisers, for the most part, are focused on what is available to invest, not on what people owe.

"We talk to a lot of people who have high-interest credit card debt, and they are working with an adviser," Ms. Davidson said. "They are losing money that way.

"The high interest rate credit card debt is typically at 15 percent to 25 percent. That is the same rate of return you get by paying off that debt, and no adviser can guarantee a return that size."

Tim Grant: tgrant@post-gazette.com or 412-263-1591.

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