By Philip Piedt, CFP®
Managing your finances can be difficult. From Uncle Harry to the financial professional who was recommended by a colleague, it’s difficult to know whether you’re getting sound advice from anyone. Some people choose to manage their own investments, not realizing the opportunity lost by not having a professional lend a second pair of eyes – not to mention time lost on handling their money. Others turn to online resources and suffer from “analysis paralysis” due to the overwhelming amount of information at their fingertips. Still others choose to work with a financial professional for investment advice and want to make sure they’re getting their money’s worth.
Whether you are fresh out of school and looking for professional help or have been around the block before but need a more hands-on approach as retirement nears, hiring a financial advisor is a crucial component to the success of your financial plan. In fact, according to a recent study by The Investment Funds Institute of Canada (IFIC), those investors who’ve been with an advisor for 15 years or more accumulate 173 percent (2.73 times) more in assets than those who do not seek professional advice. (Source: New Evidence on the Value of Financial Advice)
So, how do you know what to look for in a financial advisor? How can you be sure you’re working with a trustworthy advisor and that you’re getting your money’s worth?
Here are seven simple questions to ask when interviewing potential advisors:
- How are you compensated? This is perhaps the most important question when speaking with a potential financial advisor. If they become squeamish or don’t know how to answer this question, stand up and head for the door as quickly as possible. Are you going to pay commissions for the products the advisor recommends? Do they charge a fee for service, a percent of the assets under management or a combination of some sort? Whatever the fee structure, you should always work with someone who is transparent with the advice provided and fees charged. You, as the client, should be aware of all costs involved. Some people avoid this question because it feels uncomfortable. Little do they realize, not knowing the answer can be detrimental to their financial success.
- Are you a fiduciary? Is the advisor you’re interviewing a fiduciary? A fiduciary has a legal obligation to act in your best interest in the advice they provide and recommendations they offer. As defined by the CFP board, a fiduciary is “one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.” (Source:
CFP Board). CFP® practitioners must understand the client’s goals, needs and current financial situation before making any type of recommendation, and when they do, they must exercise professional judgment by offering suitable solutions. Additionally, CERTIFIED FINANCIAL PLANNERs™ must disclose all fees and any potential conflict of interests before engaging with you. This relates back to transparency and is the conduct you want your advisor to exhibit.
- Why did you recommend that investment? Does your financial advisor’s employer have an agreement with mutual fund or insurance companies? Chances are that they do. The question then is whether the advisor receives reimbursements or incentives from the companies they represent and whether he is heavily enticed to sell a certain investment product over another. If so, are they really working in your best interest? One way to alleviate the doubts of working with someone who is pushed to sell a certain product or fund family is to consider hiring an independent advisor who has an open architecture platform. They should have the ability to choose from many products and fund families so you can be confident their investment advice is truly objective.
- What’s your investment philosophy? Are you a stock junky looking for the thrill of the ups and downs in the market or a long-term buy-and-hold investor? Asking and knowing your advisor’s investment philosophy sets the expectation for performance returns and how they should factor in your risk tolerance and financial planning goals in how they design your portfolio. Investment strategies can change over time with market conditions and your time horizon and life goals. Make sure the investment strategy created for you is not cookie-cutter, but rather flexible and customized when life changes occur. Having on-going dialogue with your advisor is crucial so that they are privy to your full financial picture and can adjust your portfolio accordingly.
- Where are your assets held? This is a big one. Remember Bernie Madoff? His clients’ money was stolen because their assets were held by his own clearing firm, Madoff Securities. This was the equivalent of Madoff writing himself a check with their money. A custodian or clearing firm simply houses your assets, executes the trades and provides monthly statements. Make sure you are working with an advisor who has your money held at a large institution that is a member of the SIPC, such as TD Ameritrade, Charles Schwab, Fidelity, Pershing or the like. If you’ve never heard of the custodian, ask for information or do your research online.
- What are your credentials? Certifications and credentials are good indicators of expertise and understanding of the financial industry. Financial and investment professionals can have many titles (e.g. investment advisor, financial consultant, financial planner, etc.), so it’s useful to see what credentials they have beyond the standard industry licenses. The most recognized in the industry is CERTIFIED FINANCIAL PLANNER™ (CFP®). Others included Chartered Financial Consultant (ChFC®) and Chartered Financial Analyst (CFA®). Licenses, such as the Series 7 and Series 65 registrations, are required of professionals to make trades and offer investment advice on securities. Advisors with certifications have gone the extra mile to further their education and are held to a higher standard of conduct when offering their services.
- What level of service will you give me? Knowing that this might depend on the type of client you are or how small or large your portfolio is, you want to be sure that your financial advisor won’t forget about you as soon as they get your money and get beyond the “honeymoon stage.” Find out what type of ongoing service you can expect and what kind of communication strategy they offer. How often do they schedule meetings for update and progress reports? Can you expect a phone call or an email back within 24 hours if you’ve tried to reach them? Outside of communication, is the advisor offering performance reporting, online web access, and other services, such as portfolio rebalancing, tax harvesting and cash management? If you’re not getting everything you ask for, demand it or look for someone else!
At the end of the day, you are ultimately responsible for your finances. It is up to you to do your homework before hiring a financial advisor by asking the right questions and doing background checks on them, the firm they represent and the custodian they use for their clients’ money. For additional questions you might find useful in speaking with a financial advisor, visit www.plannersearch.org, a website administered by the Financial Planning Association, a professional association for financial planners.
For questions, contact Philip Piedt, CFP® at firstname.lastname@example.org.
Securities offered through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services offered through PPS Advisors (PPS), an SEC Registered Investment Advisor. Benchmark Financial Group, LLC, APFS and PPS Advisors are separately owned entities.