Another series of scandals -- headlined by the apparently rampant corruption at FIFA -- has many of us asking: does anyone deserve our trust? Trust is the foundation of any relationship, including with your financial advisor. Yet our industry has also been plagued by scandal. How can you protect yourself?
Before trusting any advisor, you should make three demands of him or her, and keep making those demands throughout your relationship. Only then do they deserve your trust.
First, demand transparency. Your advisor must be able to explain, clearly, the investments he/she recommends and the services he/she provides. If it's not 100% clear -- especially the risks and fees -- use different investments or a different advisor. It's no coincidence that "transparent" is the last adjective anyone would apply to FIFA.
Second, demand checks and balances. The optimal safeguard is an independent third party. For example, our custodian (where clients keep their investment accounts) and our mutual fund managers are each independent parties. The lack of checks and balances allowed the Madoff "Ponzi scheme" to go for years.
Third, demand frequent, personalized communication. At a minimum, expect quarterly reports that summarize how you are doing. Good communication can avoid misunderstandings ... or worse.
Then you must engage. Decide if what your advisor is doing makes sense. If it sounds illogical, insist on more explanation, ask a friend or discuss your concerns with another advisor. A Russian proverb says it best: "trust, but verify".