After eleven years of a rising U.S. stock market, things have changed on the
investing front. Between the unprecedented COVID-19 lockdowns and recent
market events, much about the near future remains uncertain. But one thing
seems clear: volatility is here to stay, at least for a while.
Is your money positioned properly to weather the storm?
Do you have a financial advisor helping you through this time, and helping you
take advantage of any opportunities that the bear market brings?
With your busy life, it’s easy to just assume things will be okay. However, your
money is critical to your future well-being, so that’s not always best. Instead, if
you’re not sure, it may be a good time to get some input on your investments.
Think of it as you would your physical health. If you need surgery, you get a
second opinion. Why not do the same for your financial health?
There’s one caveat however. You need to make sure you get advice from a
financial advisor who’s capable of helping you succeed in challenging markets.
Look for Industry Best Practices
In every industry, there are usually “best practices” that you can look for to help
you make a smart choice of a professional. If you need surgery, for example,
you’d probably look for a doctor who is board certified and has performed the
operation you need many times with good outcomes.
But in the financial industry, information is not always easy to find. For example,
a financial advisor’s investing track record should be critical information. After all,
you want to entrust management of your money to someone who has
demonstrated the ability to help clients navigate markets well, right?
It seems like common sense that you should be able to find that data.
Surprisingly, that information is not released by most advisors, even though it is
not difficult to measure.
By looking for advisors who report their results in a transparent manner,
however, you can find those willing to put their results out there for clients to see.
Skills and Experience are Critical in Volatile Times
In addition, you need someone experienced enough to help you make sound
decisions. During bull markets when everything rises, most advisors look good.
But when it comes to difficult times, and your nest egg is on the line, you need to
demand a higher level of competence. There’s just too much at stake to be part
of someone’s learning curve.
Advisors with less experience may not have the discipline necessary to navigate
difficult market environments. According to a study that appeared in the Journal
of Financial Therapy, 93% of financial advisors experienced post-traumatic stress
disorder after the 2008 global financial crisis. While these major market events
are very stressful, the bottom line is that someone paid to manage money needs
the experience and skills to stay on track when the going gets tough.
So read on for five steps to find a high-quality advisor to help you navigate
Step 1: Look for firms that report independently verified investment results
Investment performance reporting is commonplace in the institutional world,
where large investors and corporations demand it. Strangely, however, it is rare
for financial advisors who work with individual investors to practice this same
Without accurate reporting, how do you know if your investment manager is good
at their job?
Fortunately, you can find those who do agree to follow best practices so you can
evaluate the work they do for you. Just look for firms that are Global Investment
Performance Standards (GIPS®) compliant. These standards are maintained by
the nonprofit Chartered Financial Analyst Institute, a global association for
And, make sure to evaluate their performance over more than just a year or two.
Look for advisors with a decade or more of reporting, so you can see exactly how
they’ve helped clients over a longer time period.
You can learn more about GIPS® in this short video:
Step 2: Only consider firms that act as your legal fiduciary
Along with making sure someone is skilled, it is also critical to make sure they
are required to provide you with true advice. It sounds strange, but not all
financial advisors have business models that require them to put your interests
first. In fact, a 2015 report by the White House’s Council of Economic Advisors
estimated that American retirement savers lose $17 billion every year due to this
To avoid these conflicts of interest, insist on an advisor who acts as your
fiduciary. So always ask a prospective advisor if they act as your fiduciary at all
times, then ask them to put it in writing. If there’s any hesitation, consider it a
valuable red flag and look elsewhere.
Step 3: Look for use of an independent custodian
When you use a financial advisor, their role is to normally help direct your
investments. However, they don’t normally hold your assets. Combining those
roles could make you vulnerable to fraud.
It’s usually safest to select a financial advisory firm that partners with a large
third-party independent custodian. This provides you with an extremely valuable
extra layer of protection. First, you’ll receive separate reporting from your advisor
and your custodian, so you can always double-check that you’re getting accurate
pricing from your advisor (which is an important determinant of fraud). Second,
your assets will be held by a large organization that has the technology and
experience to properly safeguard investor assets.
Step 4: Look for firms with CERTIFIED FINANCIAL PLANNER™
Investments are only part of your financial life. So it’s important to make sure the
person you work with also can help you with financial planning.
Not all investment managers are equally accomplished financial planners. One
way to help ensure the right knowledge and experience is to look for someone
who has earned the CERTIFIED FINANCIAL PLANNER™ designation. This
requires the professional to meet an initial experience requirement, complete two
years of coursework, pass a rigorous exam, and commit to following a code of
These individuals who have earned the use of the CFP® mark will be able to
help you with other needs such as retirement planning, estate planning,
insurance and debt management.
Financial advisors with deep planning expertise can help you take advantage of
opportunities. For example, when markets drop, that’s an ideal time to
implement a tax-loss harvesting strategy. That’s a way to allow you to take tax
losses on positions that have fallen, but redeploy that money into similar
investments. That way you can realize a taxable loss, which can help reduce
your tax bill, but also participate in the recovery. Strategies such as these can
help you take advantage of both bull and bear markets.
Step 5: Look for firms with consumer-friendly fee structures
In the financial advice world, you’ll usually pay your advisor one of two ways:
either with fees or with commissions. If your advisor gets paid on commission,
however, that implies they are selling you something. How do you know if what
they are recommending is right for you? Unfortunately, you don’t.
How can you make sure you’re getting true advice and not a sales pitch? You
can look for advisors who charge fees, which is similar to how you pay your
accountant or lawyer. Even better, look for “fee-only” advisors who only charge
fees, since some “fee-based” advisors may charge commissions when selling
insurance or other products. By sticking with fee-only, you can minimize conflicts
of interest altogether.
What’s most important is that you understand the fees and that you know what to
expect. Ideally, look for advisors that offer both investment management and
financial planning for one fee, so you can use them to help you manage all of
your financial needs. That can help you avoid mistakes by letting you get an
objective opinion before you make any big financial decisions.
Step 6: Always do a background check
Since you’re putting your money on the line, there’s one last step that is critical.
There’s a website maintained by regulators that allows you to check the
background of any investment professional: https://brokercheck.finra.org/. Always
take a minute to check it before hiring anyone.
When reviewing an advisor’s history on this site, you want to see a clean record.
Avoid advisors who have marks or client complaints on their records. While there
might be a reasonable explanation for something, it’s just not worth the risk when
your money is at stake.
Succeeding in Volatile Markets
In volatile times, it’s important to remember that there is no crystal ball. Nobody
out there, no matter what they claim, knows exactly how the future will unfold.
Finding the best financial advisor for volatile markets isn’t about finding someone
who can predict the future. It’s about finding someone who has been through
turbulence before and has the discipline and systems to help you navigate it
successfully. And that can pay dividends in helping you reach your goals and
sleep more soundly at night.
John Odell, CFP® is CEO of Arroyo Investment Group, a fee-only financial planning
and investment management firm based in Pasadena, California but serving investors
nationwide. As a GIPS®-compliant firm, Arroyo delivers institutional quality investment
management and comprehensive financial planning to individuals.