Before you hire a financial advisor to help you with your financial planning and investments, give some thought to what you are really looking for. Perhaps you need assistance in creating a comprehensive financial plan in order to meet your present and future goals. Or maybe you are seeking investment advice. Possibly it’s some combination of both.
Whatever your reasons, we have created a list of questions to ask as well as some reference information that will assist you in making an informed decision. When selecting an advisor, plan on interviewing at least three different candidates face to face.
These questions will help you to assess the candidates’ skill levels and experiences and determine if they are the right fit for you. In addition to how the candidate answers the following, factor into the decision your gut instincts about the advisor’s integrity, and the personal chemistry and comfort level between the two of you (and your spouse, if applicable).
Can you walk me through your professional background? Where have you worked and when?
Ideally, you should select someone who has spent at least three years serving clients.
What training have you received and what are your qualifications?
Ask to see his credentials and have him explain what they mean. Then you can check with the appropriate organization to confirm that what he is telling you is correct (see sidebar) and that his designations and certifications are currently valid.
Do you routinely work with investors like me?
Asking this question will ensure that the advisor will be able to provide the services and guidance you are seeking. For some advisors, financial planning may not be their forte. Others may be specialists in certain areas like income taxes or estate planning. It is also possible that this candidate may only choose to work with certain individuals like, for example, high-net-worth clients (having assets of $1 million or more) or senior executives.
Have you taken a fiduciary oath to put your clients’ interests above your own (or anyone else’s)?
Registered Investment Advisors (RIAs) have a fiduciary responsibility, by law, to always act in your best interest. (See “Advisor Qualifications and Designations.”)
What services can you provide me with? As a client, what can I expect in terms of services?
Some advisors “do it all” while others stick to a few basic services. Some concentrate on the investment side and can buy and sell stocks, bonds, and mutual funds on your behalf. Others focus solely on creating current and future financial plans or addressing a specific objective like retirement or funding a child’s education. Minimizing your income and estate taxes is another potential area of expertise. Determine what you need and be sure that the candidate has experience providing it.
Can I have a copy of the services you provide in writing?
Most firms and practitioners will do this as a matter of course, but you should ask nonetheless. Keep this documentation in your files.
Who will manage my account?
Although there may be a central point person, or relationship manager, as it’s referred to in many places, there could be several individuals working on different aspects of your account. Ask the advisor to provide a quick summary and introduce you to everyone that will be responsible for handling your matters and managing your money.
How do you make your money?
If you know how your advisor gets paid, this will help you assess her objectivity when she recommends an investment or offers advice. It’s also a good idea to get this in writing and file it as well.
Has a client ever taken legal action against you? Have you ever been cited or disciplined for unprofessional behavior?
Ask your candidate point blank about this. Then go beyond his word and check with the licensing and regulatory organizations that oversee his certifications (see “Advisor Qualifications and Designations”) as well as your local Better Business Bureau.
How many clients do each of your employees deal with?
Many firms are quite large and you may never get to know all of the employees that have input about your financial plans or investments. Knowing the general client-to-employee ratio will help you determine how big a firm you are comfortable with. If you are looking for a firm with a
high level of “personal touch,” a smaller firm is probably better for you.
How did your clients’ portfolios fare during the most recent down market?
Her answer will clue you in to how successful the advisor will be in applying defensive strategies to your portfolio when market conditions warrant it. Investment skill when the market is down is actually more important than when it is up.
Can you explain your firm’s investment philosophy and approach?
Ask the advisor to describe how the firm invests. They could be firmly rooted in long-term asset allocation, or could make decisions primarily by stock picking or market timing. Is their approach ad hoc and based on the decisions of a couple of investment gurus at the firm, or more systematic and institutionalized? Don’t be shy about asking for specifics
so you can thoroughly understand their methodology and determine your comfort level with it.
When selecting investments for my portfolio, do you take the potential tax consequences into consideration?
Many advisors are indifferent to this issue as they feel their job is to get you a good pre-tax return, period. The ideal advisor, however, is a professional who sees and understands the big picture and integrates tax planning into the investment selection process.
Do you steer your clients toward certain investments? What do you generally invest in for your clients?
Some may prefer recommending only certain types of stocks or bonds. Others may solely offer mutual funds and/or exchange traded funds (ETFs). Investing with an advisor that offers several different options will give you maximum flexibility.
Where will my assets be held and is there any protection in place?
Many firms have large financial institutions take custody of their clients’ assets. Ideally, the advisor’s custodian is a member of the Securities Investor Protection Corporation (SIPC). SIPC provides limited protection for consumers if the custodian goes under. The firm and its custodian may also carry additional insurance — ask what other forms of protection may be
available. Be sure that the advisor and custodian are separate entities — this is a key protection feature.
Can I contact a few of your current clients for references?
Ask the advisor for the names and contact numbers of clients who are similar to you in terms of your financial planning and/or investment needs.
Once I am a client, can I easily terminate our professional relationship? Do I have the freedom to sever our relationship and have any prepaid fees prorated and returned?
An advisor that requires an upfront commitment — and payment — requiring that you stay with him a minimum amount of time, is generally not advisable. You want to be able to fire him and move on at your whim, with no negative consequences.
Choosing a financial advisor is a decision with ramifications, so it’s important to take special care in the selection process. Even if you are satisfied with your current advisor, it doesn’t hurt to get a second opinion from another professional. Your future financial security — and that of your loved ones — could benefit significantly from it.
Robert J. DiQuollo, CFP, CPA, is chief executive officer and senior financial advisor at Brinton Eaton, an SEC-registered investment advisory firm in Madison, N.J., serving individuals and institutions throughout the U.S. Mr. DiQuollo is a member of the MD Preferred Financial Advisor Network. He can be reached at email@example.com. For more information, read Asset Allocation For Dummies®, (Wiley 2009) for which this material was originally produced.