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How to Check out a Financial Adviser

Before you hand over your money to an investment adviser, make sure they have your best interests at heart.

Instructions

  • Step 1: Check the auditor Ask for the name of the accounting firm that audits your adviser, and call them to verify. Then, make sure the auditor is licensed. Your adviser can provide the name of the government agency that verifies this information; each state has its own database.
  • TIP: Be wary of an adviser who has recently switched auditors; it could be a sign that the last accounting firm found problems.
  • Step 2: Ask about referral fees Ask your adviser if they're getting any referral fees for investing your money. This is not abnormal, but should raise questions about whether or not the fee might cloud their judgment.
  • TIP: Consider asking your adviser to sign a fiduciary oath that prevents them from taking a referral fee for buying or selling an investment for you.
  • Step 3: Beware of affinity fraud Don't automatically trust someone because they're from the same ethnic or religious background as you. Some unscrupulous managers target victims from their own social circles, a con known as affinity fraud.
  • Step 4: Know where your money is going Never make out a check directly to the financial adviser directly; it should go to a third-party custodian, usually a brokerage firm.
  • TIP: Call the custodial firm and verify that they are doing business with your money manager.
  • Step 5: Be diversified Make sure your portfolio is diversified so that one bad investment can't ruin you.
  • Step 6: Read your statements Read your statements. If your returns are soaring while everyone else's are tanking, consider it a red flag.
  • FACT: In March 2009, 70 percent of financial advisers polled said their physical and/or emotional health has suffered because of the economic downturn.

You Will Need

  • Due diligence
  • A healthy skepticism

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