4 Questions to Ask Before Doing Business with “Friends”

By: Michael J. Searcy

When your children believe they are dealing with someone they know and trust, it can make them more vulnerable to undesirable situations. Did you know you can also fall victim to the “stranger danger” mentality of thinking that the only people who might cause you harm are people you don’t know?

Some Reasons Why People Do Business with Friends Include:
• Friendships are built on trust so you feel that trust would carry over to business
• Their verbal propositions seem caring and genuine
• You believe their knowledge of the industry is equal to others
• They offer you “extras” that non-friends wouldn’t receive

While many of us may have friends who might have the integrity and credentials to expertly manage finances, choosing to work with a friend based solely on their verbal proposition and your established relationship is not a sound business practice. The key is knowing what to look for when choosing a financial advisor. The following questions should be asked when you consider working with an advisor, friend or not. Telling a friend “no” may seem difficult, but if they don’t pass the test, it’s easy to show them what you’re looking for and explain why you’re not doing business with them.

  1. Are they a Registered Investment Advisor or do they have a Broker-Dealer relationship? An RIA can make independent decisions that are in your best interest. An RIA that does not have a Broker-Dealer relationship is required to serve your best interests, not that of their parent company.
  2. Do they have the experience? If an advisor is just getting started in the business, they might not have the experience to effectively navigate the extreme volatility of the market or deal with more complicated planning matters. If they are part of a team with established years in business, they may have a better knowledge base to manage your situation and provide knowledgeable counsel.
  3. Do they accept fiduciary duty—in writing? A fiduciary has a legal obligation to do what’s in your best interest all the time, where someone not accepting fiduciary responsibility must only do what is ‘suitable’ enough for you, not necessarily what’s in your best interest.
  4. Do they have the credentials that matter? For financial planning advice, a CERTIFIED FINANCIAL PLANNER®(CFP®) designation is important. For investment management, look for a Chartered Financial Analyst(CFA) or an Accredited Investment Fiduciary Analyst® (AIFA®). They have completed formal education and rigorous testing and agree to uphold a strict fiduciary standard. An alphabet soup of credentials means little unless you understand their importance and relevance.

Sometimes, it’s not personal, it really is business. Are you protecting yourself?

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on December 12, 2014 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.