I hope I will continue to say that I am learning something 20 years from now. This past quarter, I learned how to refer different kinds of people to other professionals. This is my synopsis of the experience.
First, there is no right referral for every situation. Any referral depends upon who you (client, prospect, fellow advisor, colleague) are and what you are looking for. This is because there are different types of advisors (insurance, stocks, wealth management, personal financial, coach types, etc.) and services you can use.
I generally begin with the licenses they have, because this tells you what their duty is to you, the referee, the client.
1. The highest duty in the law is a "fiduciary duty." It is the duty a parent owes to their minor child. Only certain licenses carry a fiduciary: Lawyers owe a fiduciary duty to their clients and the case law generally holds them to the highest standard in the law. This is why our errors and omissions insurance is so expensive. You are treated like our child, even (or perhaps especially) when you behave like one.
Professional fiduciaries have a very high fiduciary duty, but are often not cross-licensed or trained in all the areas where we need expertise. But their duty is that of a trustee and is only limited by the governing document that appoints them (e.g., the trust or the Court).
Toggling down our list, a Registered Investment Adviser (RIA), or an Investment Advisory Representative (IAR) also have a fiduciary duty. Most Certified Financial Planners (CFP designation) ascribe to rules of practice that require them to put the interests of their clients ahead of their own, although their disclosure obligations are not as extensive as one would like to see.
Good investment advisers in my view are smaller groups, perhaps independent of, but who use “clearing brokers” (Schwab, JP Morgan and Fiserve are common clearing brokers) to handle their trades. An example would be Mosaic Financial Partners or Wetherby Asset Management in San Francisco.
2. Series 7 licensees are stockbrokers. They must be supervised by a single "broker dealer," and can get disciplined or sanctioned for "selling away" (selling something that broker has not authorized as an appropriate investment). The concept here is that someone is supposed to be watching them and making sure they don’t harm their customers. Beware the compliance officer watching them may not have your interest as highly in mind, so using a broker-dealer that has a decent compliance system in place is critical. Many Series 7 brokers are also licensed IARs. Some are also licensed insurance agents. Stockbrokers nowadays are not usually the advisor of choice the way they used to be. Nevertheless, I like some stockbrokers for some client profiles.
3. Insurance agents often call themselves "financial advisors." There is no requirement for a license to call yourself a "financial advisor" (or an estate planner, for that matter). This is why there is a lot of confusion about who is an estate planner and who is a financial advisor. Anyone can be either, so the result is a taint on the entire profession. Insurance agents are held to the lowest standard of care in the industry: the duty of reasonable care as determined by the standard of care of other insurance agents. They are not required to disclose commission, and they are not required to put their client's interest ahead of their own. Nevertheless, sometimes insurance agents can be great, but it would be up to them personally to hold themselves to that standard, because the law does not.
Annuities are often sold by persons licensed as insurance agents. Annuities can be great, but they are often very problematic because they come with very high commissions. The commissions are a drag on the performance of the contract, in most cases. And they often motivate a recommendation that is otherwise inappropriate.
4. Discount brokers (Schwab eTrade, Ameritrade, TD Waterhouse, etc.) are only appropriate for people who already have some feel for the financial industry. If you avidly read mutual fund prospectuses and like to evaluate performance of different money managers of different funds, with investable net worth of say $10,000 to $1 million, discount brokers may be your bag, Ideally, everyone with financial assets would educate themselves on the different types of investment products and services available, and then select the investments they need from a discount broker. However, this is not reality. Most people do not have the inclination (not always a matter of intelligence - they just don't really care to learn about this area) to learn about the financial world or their personal investment options and choices.
Getting Going:
Some CFPs and IARs (RIAs) charge two fees: one fee for doing the financial planning component itself (what you sock away, what you need in retirement, kids' college, how much do you make, when are you going to sell the house, buy the house, yada yada yada), and then a percentage of the assets they manage (sometimes just the financial assets, sometimes more (“assets under advisement”), particularly if they work for Trust Companies). This is, as I will discuss below, not necessarily a bad thing.
Sometimes "financial advisors" (check their license - they may be insurance agents with little or no additional expertise) offer to do this for free. I would be wary of anyone who offers to do anything for free, because you know there is something in it for them somewhere (perhaps the recommendation is "buy a deferred variable annuity," with enormous surrender charges and, not accidentally, enormous commissions). Nevertheless, that does not mean every complimentary report is a scam; it just means you have to assess the bias inherent in the information.
Good luck, grasshoppers. It is a minefield. Meet at least three people, and check references. FINRA maintains a database of infractors called the "CRD" (Central Record Depository), where you can determine whether they have blemishes on their "U4" (the form that lists their former customer complaints). A decent recommendation from, for example, your trusts and estates lawyer, would probably go a long way to getting you to the right fit for your situation. If you don’t have a trusts and estates lawyer, then feel free to call me (415-896-1500) and I will find a good one to whom to refer you. [insert shameless-looking smiley face here].
