By Christopher Van Slyke
Working with a professional financial advisor can be key to achieving your goals for the future, but it can also derail your plans—if you’re not working with the right person. There’s no one-size-fits-all recipe for choosing an advisor, but there’s some important due diligence you should undertake before making a decision.
Step 1 of the selection process is acknowledging that significant benefits can result from working with a professional financial advisor. Some people never get there, choosing to invest the considerable time and energy required to do the heavy lifting themselves—and they seldom realize the ROI that’s possible by partnering with a financial professional.
Step 2 is figuring out which advisor is most qualified to give you advice. This can take a while if you do it right, but since your assets are involved, it’s time well spent.
Before I unveil the questions you need to ask potential advisors, let me get something out of the way: I don’t advocate asking your friends and family for recommendations. Frequently, people don’t know if they’re getting good financial advice or not until it’s too late. This is how Bernie Madoff swindled so many people. You had to get to him via your friends and that implied trust. Had anyone done any independent research on Madoff’s operation, they wouldn’t have been able to verify the existence of client assets for his firm.
When you meet with someone who wants to be your advisor, here’s what you need to find out:
- How does the advisor get paid? Is he/she commission based or fee-only? Fee-only advisors don’t accept commissions based on product sales, which allows them to provide advice that’s conflict-free and generally more comprehensive.
- Does the advisor have independent custodians? When advisors take custody (holding assets in their name) of client funds or securities, the risk to the client increases dramatically. Independent custodians play an integral role in helping guard against fraud and misappropriation by advisors.
- Who is the advisor’s typical client? Does the advisor have any sort of expertise that’s relevant to your situation? Are his/her clients in similar situations to yours?
- How does the advisor work? Do clients work directly with one advisor or is there team coverage?
- What certifications does the advisor have? In my opinion, the only legitimate ones are the CFP and CPA/PFS designations; both require a rigorous exam.
- What is the advisor’s investment philosophy and investment process?
- Does the advisor provide investment management and financial planning services? Why not have financial planning?
- Is the firm registered with the SEC or the state? Bigger firms are registered with the SEC.
- How much does the firm manage in assets? Is it large enough to be stable but small enough to provide you with personalized client service?
- What fees do the underlying investment products incur and how does the advisor manage cost-effectiveness?
- Are you comfortable asking the advisor difficult financial questions and willing to take his/her advice?
- Does the advisor act as a fiduciary? If the answer is no, this is a deal killer. That fact must be put in writing for you.
Yes, that’s a lot of questions—but a lot is at stake. Additionally, you need to do some research: use the SEC website (http://www.sec.gov/investor/brokers.htm) to ensure the advisor doesn’t have any SEC filings or conduct issues against him/her; visit BrokerCheck (http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/), a free tool to help people research the backgrounds of current and former FINRA-registered firms and advisors; see if the advisor is part of FPA and/or NAPFA; and check his/her credentials, e.g. verify a CFP® designation by going to the CFP Board website (http://www.cfp.net/for-employers-of-cfp-professionals/verify-cfp-certification-status).
Finally, there are some things that can serve as red flags during your advisor search.
Buyer beware if an advisor:
- Promises to outperform the market, claims there are “secrets” to accumulating wealth or says you can get high returns with low risk—as anything that sounds too good to be true is likely not true
- Pressures you to make a commitment to him/her, buy a product or sign a contract under a time deadline
- Promises you a specific return (that isn’t a pure fixed annuity/CD)
- Asks you to recruit other investors (i.e., Ponzi scheme)
- Fails to explain a specific concept in a clear manner
- Fails to discuss your financial goals and instead makes sweeping promises on what he/she can do for you
In addition, if you’re considering an advisor who works for a large company, ask for a sample portfolio and try to determine if he/she always recommends the firm’s funds. Also ask about costs, including bid ask spreads, market impact costs, 12b1 fees, commissions, advisor fees, etc. It’s a lot of work—but when you have an advisor you trust, you’ll be able to sleep soundly knowing that your assets are in good hands.
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