A jealous spouse spots his wife at lunch with an attractive person. Later that day, he could ask the obvious question: “Who were you with at lunch?” Or he could hide what he knows and ask a subtler question: “What did you have for lunch?” If the lunch was an innocent outing with a new co-worker, she might casually mention that. If she's cheating, she might be led into an obvious lie: "I ate a salad at my desk."
Strategic use of evidence can be deployed by investors to spot liars, or even those who merely shade the truth. If you know a fund manager had abysmal results in 2008 but good results in 2009, you might ask: “How did you do in the financial crisis?” It's a red flag if they talk only about 2009.
Check Their Credentials
Doctors have medical licenses. Lawyers belong to bar associations. These professional affiliations mean practitioners must meet certain standards.
The business of financial advice isn’t a profession, yet. Many who call themselves advisors are really more like salespeople, with no professional or regulatory obligation to act in their clients’ best interests.
Clients can ask their advisors if they’re fiduciaries, who do have that obligation. They can also seek out advisors with professional bona fides. Members of the National Association of Personal Finance Advisors, or NAPFA, for example, are both fiduciaries and fee-only advisors. That means they promise never to take commissions from financial firms as a payback for steering investors into certain products.
Potential clients can also look for – and ask about – professional certifications, like the Certified Financial Planner (CFP) and the Chartered Financial Analyst (CFA) designations. The acronyms mark an agreement to adhere to ethical standards and participate in special training in financial planning or finance.
That’s important because, as O’Neill, the philosopher, points out, it isn't enough to find an advisor who's trustworthy. It's also nice to get one who's competent.