Advised by John Odell, CFP of Arroyo Investment Group

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With the US stock market and other assets like crypto and real estate hitting record highs, many investors are getting nervous. What should you do now to avoid giving back your profits? And with rising inflation, how can you best protect your financial future?

We spoke with John Odell, CFP®, a financial advisor with over 33 years of experience in the field, to get some background.

Q: I am interested in getting the most out of my resources but also in avoiding mistakes. What should I do?

Most people do better with a financial advisor just because the stakes are too high. Bad financial decisions could be the difference between a successful retirement and a retirement where you are constantly feeling financial stress.

If you don’t manage the money for a living, it’s all too easy to overlook something important. So, for most people, having a trusted professional who helps you invest and plan for your financial future is vital.

But here’s the key: he has to be the right financial advisor. Too many people just hire the person who manages their parents ‘or friends’ money. But not all financial advisers are created equal. Some help clients build wealth and manage risk, but unfortunately others may be more concerned with achieving their goals than yours. Or they may have good intentions but not simply be qualified investors. Most people trust verbal promises to sell, but that’s not enough when your money is on the line. That’s why you need to do your research and choose wisely. Basically, you need to know if the financial advisor is doing their job well and make sure they can prove it.

Q: It makes sense. So how do you find the best advisors?

The first thing I recommend looking for is their track record. You want a company that discloses their investment history, so you can actually see how much they are investing clients’ money. And not just over a year or two, be sure to research at least ten years of history. You want someone who consistently hits or beats the cues, and who also helps you control the risks.

Most companies don’t even report their results, leaving you without the information you need to make a decision. So, most people end up making their choices blindly, just hoping that the advisor has the skills to manage their money in both good and bad markets. But hope is not enough… you need proof.

Q: So what exactly should we ask for?

Ask the potential advisor to see a copy of their background checked. If the advisor is serious about transparency, they will adhere to industry best practices called Global Investment Performance Standards or GIPS®.

GIPS® is a global benchmark for investment performance reporting. This report style accurately displays an advisor’s track record, after fees, against market indices. It also measures risk and shows something called “scatter”.

Dispersion is the range of investment returns that the advisor has achieved. For example, you could talk to an advisor with an average return of 10%, but the spread is plus or minus 10%. So, in reality, the average account earns 10% per annum, but some accounts may have a return of 20% or zero. This is not what you want to see. Instead, look for more consistent results for all of their clients, not just some of them.

Ideally, you want to find a financial advisor with good returns and low dispersion. While there are no guarantees, it can help put the odds in your favor.

Q: Why else is GIPS® beneficial to you as an investor?

With GIPS®, you know that each advisor uses the same methodology to calculate the results. Then these results should be independently verified.

This gives you reliable information to assess advisors and make the most informed selection. In other words, you can compare apples to apples.

Q: What else is important when hiring an advisor?

There is another essential aspect that you want to study: who owns your money when working with a particular financial advisor. This company is called the “custodian”. The custodian should never be the investment adviser or a company they control… this is what has helped Bernie Madoff deceive so many investors for so long.

So make sure that the custodian is independent. Usually, it should be a home brand that you’ve heard of. The important thing is that the company is financially sound and that its track record is unscathed. During the global financial crisis of 2008, many depositories had to be bailed out.

So be sure to choose an advisor who works with a strong, independent custodian, so that you don’t have to worry about someone stealing your money or going bankrupt when the market gets tough.

Q: This is really helpful because most of us have no idea to ask questions about it. Is there something else we should be looking for?

It is important to understand that a professional has few requirements to be called a “financial advisor”. But since you are going to be investing your savings with them, you want someone with the right knowledge and training.

So look for counselors who have obtained specialized certification. The best are the CERTIFIED FINANCIAL PLANNER® (CFP®), or the CHARTERED FINANCIAL ANALYST® (CFA®). Both of these certifications take years to obtain and require the advisor to complete a comprehensive study program and pass a rigorous exam. They also need to undergo continuing education, so you can be reasonably assured that their knowledge is up to date.

Q: Is there a difference between a broker and a financial advisor?

I know these terms can be confusing. Unfortunately, this is by design. In the past, large companies have lobbied to allow their brokers to call themselves financial advisers.

In reality, there is a big difference between the two. So, whatever the title is on their business card, you need to ask another question. Ask if the professional is your legal trustee at all times. A trustee is legally bound to put your interests before theirs. Believe it or not, not everyone has to be true advisers to you. Instead, brokers just need to recommend something that’s right for you, even if it earns them a higher commission. It just costs you more money, which over time can seriously erode your wealth.

Also, sometimes these commissioned brokers are so motivated to sell you things that earn them a commission that they ignore the basics of risk management. There are too many stories about unethical advisers ruining people’s financial futures, so this is an important point.

So always insist on working with a trustee. After asking the question—will you act as a trustee at all times? – get it in writing, too.

Additionally, you can search for paid advisors. By taking commissions out of the equation, you end up with a paid professional to give you advice. This is what you want, so you don’t have to worry about other motives.

Q: One last tip?

Yes. Learn about the financial advisor’s sales strategy. Look, we’ve been in a record high bull market so pretty much everything has gone up. So even those without investment skills can look great. But your financial advisor gets their fees when they help you manage volatility and bear markets.

There is no crystal ball, so they need a sales strategy. This way, they have a disciplined and systematic approach to help you minimize losses and take profits, so you can stay on track to achieve your goals.

I find that few financial advisers even have a sales strategy, so these advisers are likely to disappoint their clients sooner or later. So ask them how they handle it and listen carefully.

So here is my advice that can help you find a qualified professional. I understand it might seem awkward to ask these questions, but keep in mind that the best advisors welcome educated clients. If your questions cause hesitation, it can be a valuable red flag that this financial advisor is not a good fit to help you build wealth and protect your savings.

John Odell, CFP®, is the founder of Arroyo Investment Group, a GIPS® compliant wealth management company based in California but serving investors nationwide. John also oversees Capital Research + Consulting, a pension consulting firm that advises over $ 5 billion in assets.


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