Work & Finance

The Best Life Guide to Choosing a Financial Advisor

The market’s mood swings are getting worse, your expenses keep going up, and your retirement plan is DIY. Where can you find advice you can trust? Here’s how to pluck an expert from a crowd of empty suits.

Bill Metzger needed some solid advice. After decades of hard work, the then 46-year-old Kansas software-support specialist had managed to stash away more than $2 million in savings. He had a dream of being financially set for life, so much so that if he ever felt trapped in a stifling job, he could just give notice and walk away. Then he could buy his dream home in a rugged American terrain such as Colorado or the Pacific Northwest, enjoy the mountains, lakes, and hiking trails, and not have to worry a single day about his next paycheck.

The year was 2000, and the long bull market was starting to look a little wobbly, so Metzger hired a prominent national brokerage to oversee his investments. The firm put his cash in a program supposedly steered by top brokers, the best and the brightest. So how did those experts handle his life savings? They loaded him up on then-frothy tech stocks such as Worldcom and Agilent Technologies, despite his relatively conservative investment orientation. For the honor of their oversight, they also dinged him for an annual “wrap fee” of 1.25 percent to 1.5 percent, according to lawyer Diane Nygaard.

When the market began tanking, “No one said anything to me,” recalls Metzger. When he called up in a panic as his savings were vanishing before his eyes, he was assured everything was still on track. Once, to his astonishment, he was even informed that his broker had left the firm a while ago. “Here’s your new guy,” he says, remembering what they told him. “It was unbelievable.” Within two years, Metzger had lost $900,000.

“The brokers were billed as the best of the best,” says Metzger, now 53, “but things were going down and down, and they did nothing. They were charging too much and not acting in my best interest.” Metzger sued, alleging that the brokers unsuitably managed his account, and an arbitrator ruled in his favor.

But as is typical in these cases, it was a victory in name only: He recovered just $10,000. He did, however, discover a valuable secret about money management. As the arbitration process unfolded, and the legal duties of his brokers were spelled out, Metzger was shocked to learn that some of his financial advisors, to whom he had entrusted his life savings, had no legal obligation to act in his best interest.

You read that correctly. While a broker is required to offer “suitable” investments, he is perfectly within his rights to ignore the investments that would be best for you. If faced with the opportunity to put your money in, say, a spectacular, low-fee mutual fund or a middling fund that will pay him a big, fat commission, there’s no law preventing him from selling you the lemon. Indeed, the way many brokerage accounts are structured, investors don’t ever have access to commission-free funds. As for Metzger, he’s still not back to even on his investments, despite the market’s run-up in recent years.

If you need financial advice, you obviously want to find someone who is both completely trustworthy and highly skilled. You probably ought to hire a planner who can help you with all aspects of your financial life, not just buying and selling stocks. And personality is important: You’re less likely to understand, much less act on, advice from someone who’s not simpatico. So how do you find such an advisor? The first step is to understand the distinctions that Metzger didn’t find out about until it was too late.