How to Select a Financial Adviser

I mentioned in a recent blog post about confirmation bias that many financial advisers often make unrealistic claims about their own abilities. This begs the question: How should you go about picking a financial adviser? What characteristics should you look for? Fair warning– the end result is going to be me saying that Luther Wealth Management is what you’re looking for.

I think investors should look at five things in a Financial Adviser, in order of importance:

  1. Strong ethical foundation
  2. Investment Expertise
  3. A (low) fee structure that aligns their incentives with yours
  4. No conflicts of interest
  5. A legal responsibility to act in your best interest (a fiduciary relationship)

I’ll go through these criteria individually, explaining where I believe most financial advisers fall short, and why I believe Luther Wealth excels in each.

Strong ethics are the most important thing to look for in a financial adviser

This is the most important factor, and it’s also the most difficult to judge. Many advisers have adopted some form of a written ethical code. But its hard to tell if someone actually follows their own rules. They do have a use though.

Most codes of ethics, including the CFA Code of Ethics and Standards of Professional Conduct which Luther Wealth has adopted, include some detailed guidelines on how to handle gray-area situations where conflicts of interest might not be immediately obvious. These codes are important in these cases because even a very ethical person might not have considered all these possibilities in advance, so it’s good to have an external source to refer to. Overall, the fact that an adviser has a written code doesn’t mean they are trustworthy, but if an adviser lacks an official written code of ethics, its a sign that he or she may not take their ethical responsibilities seriously.

Beyond codes though, it’s important to get to know your adviser well before you invest with him/her, and make sure they are someone you trust and are comfortable sharing your personal information with.

financial adviser session at Luther Wealth

You need an expert

Expertise is important. If your adviser isn’t an expert in a wide range of investing topics, what are you paying them for? And yet the majority of professional investment advisers lack expertise in basic areas such as economics, portfolio optimization, equity and fixed income markets, and taxation.

An example of a TERRIBLE adviser training program at a bad adviser shop:

Let’s look at an example. I googled “Financial Adviser Training Program” and clicked on one of the first links for the “Careers” page at an industry-leading financial adviser group. There’s a good chance you walk or drive by one of their branch offices in your town every day. Their training program looks like this*:

  • Onboarding
    • Financial Industry Regulatory Authority (FINRA) Series 7 Exam Prep
    • FINRA Series 66 Exam Prep
    • I went through this same process and exams at my former job– if I remember correctly this takes 2-3 weeks
  • Build Your Practice
    • Client acquisition training
    • Develop a business plan
  • Optimize Your Practice
    • Something called a “Profitability Development Program”
    • Soft skills
    • Client relationship management

Why is a training program like this such a problem?

Look at this mess! This is a training program for a sales professional, NOT a financial professional. And this is one of the BIGGEST names in the industry. This stuff makes me sick. This adviser firm appears to be training “advisers” that have a few weeks of classroom instruction on how to pass a multiple choice securities exam and a boatload of training on how to sell stuff. Think about what this firm is telling people interested in entering the industry. To this firm, you don’t really need to know anything about stocks, bonds, diversification, taxes, etc. You just need to know how to SELL SELL SELL.

I kept clicking around their “Careers” and “Training” sections of their public site and I simply couldn’t find a section anywhere that said “this is the part of training where we tell you how to actually give good advice.” I’m not going to directly link to their site because 1) I don’t want to be responsible for leading anyone to such a crappy adviser, and 2) most big advisers are set up the same way so it would be unfair to pick on this particular one.

So how can you find an adviser that’s an actual expert?

I think there’s a simple answer here– select a financial adviser that has earned either the Chartered Financial Analyst (CFA) or Certified Financial Planner (CFP) designation. Both of these programs have curricula that are far broader and deeper than what is required by the FINRA exams. I have earned the CFA designation so that’s what I’m most familiar with.

The CFA curriculum consists of 3 exams, taken over a period of 18 months to 3 years. The average candidate spends 318 hours per exam studying and preparing. The program covers a vast array of topics focused on ten areas: ethical and professional standards, quantitative methods, economics, financial reporting and analysis, corporate finance, equity investments, fixed income, derivatives, alternative investments, and portfolio management.

It’s not a guarantee that your adviser will give great advice, but at the very least its a signal that your adviser takes the knowledge part of the profession seriously and has devoted a meaningful amount of time to improving their own knowledge of investing.

Keep those fees low

Price! You should be looking for two things here. Fees should be low, and they should be structured in a way that aligns your adviser’s incentives with your own. Let’s talk structure first. Most advisers use one or several of the following fees:

  • Flat fees for individual services
  • Per-hour fees
  • Annual retainers
  • “Percentage of Total Assets” fees
  • Performance Fees

Performance fees are the ones to watch out for. An adviser that charges performance-based fees will justify them by pointing out that the adviser wins when you win. So there you go, you have aligned incentives, right??

Misaligned performance fees

Not so. Consider the case where it’s close to the end of the year, and I’m your performance-fee based adviser, but I haven’t done very well this year. In fact, your account hasn’t gained at all over the year. So right now I’m not going to make any money on your account this year.

Now I’m looking at two investment alternatives: one is an appropriately diversified, slow-growth investment that fits well with your investment objectives. The other is me taking your whole account to the casino and putting it all on red at the Roulette wheel. If I choose the first, I will make a few pennies, maybe, on the little bit of growth your account gains in the last month of the year. If I choose the second, I either get nothing, which is roughly the spot I’m in right now, or, I get a huge performance-based fee if red hits. So I have a massive incentive to get insanely risky with your money. In fact, my incentives are horribly misaligned with yours. So don’t use any financial adviser that takes performance fees.

So, how about the actual level of fees? A consultation should be a few hundred dollars up to maybe $1,500, depending on the complexity of your situation. Typical asset-based fees are 1% to 2% of assets under management, annually. 2% is too high though, you should be targeting 1% or lower. And Luther Wealth Management fees are indeed quite a bit lower, even for small accounts.

Make sure your adviser is only working for clients

Its surprisingly common for financial advisers to boost revenue through non-client based income. Financial advisers may get referral fees from other advisers, tax specialists, accountants, etc. They might receive compensation for trades directed to certain brokers. The list goes on. Make sure to ask a potential adviser to describe all the ways that they earn money. Double check what they tell you against their SEC Form ADV, which should be readily available on their website.

Luther Wealth Management only makes money through client fees. We provide referrals to other specialists but these referrals simply reflect our judgment, and are not compensated in any way.

Make sure your adviser has a fiduciary responsibility to you

Make sure your investment adviser is actually an investment adviser, and not a securities broker who also provides advice along with brokerage services. Investment Advisers in the United States are called Registered Investment Advisers (RIA) and Registered Investment Adviser Representatives. Luther Wealth is an RIA and I am an RIA Representative.

RIAs are legally held to a fiduciary standard. This means that RIAs must act in the best interest of their clients. In contrast, securities brokers are allowed to provide financial advice in conjunction with their brokerage services, but they are only held to a standard of suitability. In practice this means that brokers can get away with giving you bogus advice intended to trick you into buying something they want to sell, or vice-versa, as long as the thing you are buying or selling is broadly “suitable” to your investment objectives.

However, take warning! The fiduciary standard is not perfect by any means. Fiduciaries can still charge you exorbitant fees. Fiduciaries can still be stupid. And in practice, fiduciaries can still take advantage of clients with bad trades as long as they take the time to document some appropriate justifications for each bad trade.


*Edward Jones,, accessed 27 May 2019.