August 31, 2012 / 2:31 PM / 7 years ago

Column: Shakeup complicates finding a good financial adviser

(The author is a Reuters columnist. The opinions expressed are his own.)

By Mark Miller

CHICAGO (Reuters) - Good financial advice is hard to find — and it’s getting harder.

The ranks of financial advisers are shrinking as the profession goes through a rocky transition brought on by difficult financial markets and tougher regulation.

We should wind up with a more professional industry a few years from now, but current problems underscore the importance of shopping carefully when you’re looking for help with your retirement plan.

First, the big picture: There are two types of advisers available to help retirement savers. Many people get assistance from planners at brokerage firms, banks, and insurance companies - but that’s mainly investment advice about how to manage your portfolio. To get the bigger picture, you need a fee-only expert who will examine your full financial picture—insurance, debt, estate planning and taxes, as well as saving and investing.

Fee-only planners deliver another key advantage: As registered investment advisers (RIAs), they are required to meet the so-called fiduciary standard, which makes them legally responsible for putting the best interest of their clients ahead of all else. Just as importantly, RIAs are compensated by fees that clients pay rather than by commission - which means they have no vested interest in the financial products they recommend.

The total number of financial advisers in the U.S. fell 2.3 percent last year, according to research firm Cerulli Associates. Their ranks are expected to continue shrinking over the next five years. The biggest decline is among independent broker-dealers, who trade on behalf of clients as well as their own accounts. Their numbers fell 14 percent in 2011. Cerulli chalks it up to rocky financial market conditions that make it especially difficult for new entrants to find clients, and also to retirements among older advisers.

But the ranks of registered investment advisers are growing - up 4.4 percent in 2011 from the year earlier, if you include advisers who are dually-registered both as an RIA and as a broker-dealer. A key factor driving this shift is the Dodd-Frank Wall Street reform law, which directs the U.S. Securities and Exchange Commission to create a fiduciary standard covering all advisers, brokers included. That initiative is stuck in the regulatory mud right now, but Cerulli’s numbers suggest the industry is headed that way anyway, in anticipation of the future fiduciary rule.

Dodd-Frank is responsible for another key trend in the financial advice profession: a major crackdown against bad practice. Enforcement actions by state regulators brought against RIA firms nearly doubled in 2011, according to an annual study by the North American Securities Administrators Association (NASAA). And for the first time, “inappropriate advice or practices from investment advisors” made NASAA’s annual list of the top 10 threats to investors.

The increased enforcement activity stems, in part, from a provision in Dodd-Frank that aims to boost oversight of mid-sized investment advisory firms by shifting regulatory responsibility to states. And it points toward a much-needed clean-up of the industry over the next several years.

Before Dodd-Frank, states had regulatory responsibility only for firms with $25 million or less in assets under management; under the new law, states will have primary responsibility for examining and auditing firms with up to $100 million in assets, starting this year.

The shift moves 2,400 firms to state oversight, says Matt Kitzi, Missouri’s securities commissioner and chair of NASAA’s enforcement section. That means firms that haven’t been audited in years could be checked far more frequently.

Even though those firms are just now coming under the purview of state securities regulators, Kitzi thinks the doubling of enforcement actions last year reflects a ramping up in advance of the change.

“We’ve all known for two years that we’d be getting a new group of advisors to supervise, and we’ve been paying more attention,” Kitzi says. The pace of enforcement can only pick up as the new state regulatory regime gets underway this year.

Among the most common problems reported to NASAA are outright fraud involving misleading sales pitches or diversion of funds; marketing of investments by individual advisers that aren’t approved by their firms, such as real estate deals; and abusive sales practices such as free lunches targeting seniors that turn into hard sells for financial products that may or may not be appropriate for an investor.

Enforcement officials are also seeing a rising number of schemes perpetrated by sales people who aren’t licensed to sell securities. Especially high on the radar screen are pitches by insurance companies or agents aimed at convincing seniors to liquidate securities in order to fund purchase of insurance products, such as annuities.

If you’re in the market for an adviser, it’s best to get recommendations and character references of several candidates who are known and trusted by other professionals you’ve used - like an attorney, accountant or elder care specialist.

* You can find candidates by searching the National Association of Personal Financial Advisors online directory (here).

* There are similar searchable databases from The Certified Financial Planner Board of Standards (

* There is Brightscope, a company that monitors retirement plans and financial advisers (here).

Make sure that you are comfortable with the adviser’s approach to working with you - and their investment philosophy. It’s also critical to understand how the adviser will be paid. Most RIAs are compensated via a percentage of assets under management, although some receive retainer fees or hourly fees.

Finally, run a due diligence check on your finalist to see if they've been subject to any professional disciplinary action or other potentially disqualifying problems. If you're not sure whom to contact in your state, check NASAA's list of state regulators (here).

If you're considering someone at a large brokerage firm, check the SEC's online database (, which contains information about most brokers. For smaller firms, contact your state's regulatory agency, which can tell you if an adviser is registered to sell securities, if they have passed required examinations, or have been the subject of enforcement actions in the past.

Even with the decline in the total number of financial advisers, there’s still plenty of competent professionals with clean records. There’s no use going to someone who already has a spotty past.

Editing by Linda Stern and Andrew Hay

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