Americans are expert shoppers. They know how to compare prices, look for bargains and what to look for in a quality product. Whether it’s a car or a smart phone, they know what features are important and how much they are willing to pay. They’ve done their research and are savvy consumers.
What many Americans do not know how to do is to ‘shop’ for the financial advisor who would be best-suited to help them achieve their financial goals. This is significantly more important than purchasing a new car, yet seldom receives the same amount of time and attention. The car or smart phone will be long-forgotten twenty years from now, but a well-thought-out and –executed financial strategy will still be supporting the financial well-being of the investor and family.
Choosing the right financial advisor means spending the time to do due diligence and asking some pointed questions. However, investors are not always sure what those questions should be. Advisors may give vague or meaningless answers. To assist you in this very important task, below are some of these important questions as well as the answers you should receive.
If you do not get straight, to-the-point answers to these questions, consider looking for another financial advisor.
- How does the financial advisor get paid?
Are the fees easily understood and transparent? Is the fee the same for each investment that is recommended or does the advisor get paid more for some than for others? Does the advisor get paid commissions on some products or investments? Do some investment companies or mutual funds make payments to the advisor? In addition to the fees paid to the advisor, will there be any other costs for the investor?
The fee structure should be fully transparent to the investor. In particular, it should be clear how the fee is divided between the firm and the advisor.
Commissions must be understood. Some advisors charge on a tiered rate system, while others receive commissions when investments are made. If the advisor’s commissions are higher on one financial product than on another, the investor should be aware of this before deciding to invest in that product. Similarly, if the advisor receives payments from investment companies or mutual funds, that should be disclosed.
- Is the financial advisor fiduciary?
This question is critical. You need to know that the firm has safeguards in place to protect your assets from fraud. How does the firm ensure that it remains compliant with legal and regulatory controls? Ask the financial advisor if he or she has ever been charged with disciplinary infractions for any unethical or unlawful actions.
The answer should always be, “Yes, I am a fiduciary.” Investors’ assets should be held with responsible third-party custodians for safeguarding. Hopefully, the advisor has not been disciplined for any ethical or legal infractions. If this is not the case, an explanation should be forthcoming.
Become familiar with the client bill of rights as well as the code of ethics that the advisor should adhere to. In addition, the advisor is required to comply with regulations issued by the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA) and other state and regulatory agencies.
- How experienced is the financial advisor?
There are a number of certifications, licenses and other credentials that a financial advisor might possess. The top advisors will have earned any of the following designations.
CPA: Certified Public Accountant, an accountant who has passed the Uniform Certified Public Accountant Examination and has met any special requirements;
CFS: Certified Fund Specialist indicates the advisor has received further education in mutual funds, etc.;
ChFC: Chartered Financial Consultant has passed at least 9 college-level courses on financial planning;
CFA: Chartered Financial Analyst has passed extremely difficult exams and received this professional certification;
CLU: Chartered Life Underwriter has passed examinations on life insurance and estate planning;
JD: Juris Doctor has a law degree;
Financial advisors could also have insurance licenses and Series 7, 24, 51, 63, 65 and/or 66 licenses.
- Will your financial advisor leave you in the dark?
One complaint some clients have about their financial advisors is that they don’t hear from them very often. In particular, a client should receive a rationale for the recommendation of either a buy or sell decision. You worked hard for the money and deserve to know what is happening to it.
Your advisor should communicate clearly and frequently with clients, anticipating market trends and not simply reacting to them. Clients might be kept informed with a weekly market commentary, an investment outlook every month and a quarterly video on the outlook for the market. Other educational material could include other educational videos, fact sheets on investing strategy, industry updates and statistics and informational whitepapers.
The intent of sending all of this information is to help to educate clients and create informed investors.
- You shouldn’t be ‘just a number’ to your financial advisor.
Your financial advisor should be able to discuss your top holdings and the investment strategies related to them. He/she should be able to proactively explain how any proposed investment change fits into your overall investment strategy. You should have a clear picture of how stable the investment is and how this fits into the strategy. If your advisor is not able to discuss your account at this level, it might be time to reevaluate the relationship.
Trade notifications should be received for all actively managed strategies so that the rationale for making these moves is clear. The advisor should be only a phone call away when there are questions.
- Will the advisor be the primary point of contact?
Advisors generally have assistants who will be available to answer simple questions of fact (how many shares were traded at ‘x’ price, etc.), but the advisor should be the primary contact. He or she should be heavily involved in all of the decisions that will affect your financial future. A phone call should receive a timely reply.
Annual review meetings are customary. It’s advisable to prepare a list of questions beforehand to bring to the meeting so that it will be as productive as possible. Financial plans need to adjust to market conditions and changed life circumstances and expectations (marriage, divorce, children, new business, etc.).
There is more to financial management than just portfolio management. Other services that might be offered are insurance services, tax planning, wealth planning, risk management and estate planning. It is beneficial to have all of these services so that they fit into the overall investment strategy.
- What is the financial advisor’s investment philosophy?
In simple terms, how does he or she regard investing and appropriate strategies? The foundation of wealth is a disciplined investment approach. Your Family Index Number (the average annual return needed to realize investment goals) is the foundation on which the portfolio rests. All strategies should be tied to this.
The investment philosophy of the advisor and the firm should be simple and make sense. It should be a time-tested approach to investing that is driven by process and managed by experienced professionals.
- Who would be the financial advisor’s ideal client?
This question gives further insight into the advisor’s thinking. Does he prefer an active participant or someone who relies on the advisor to conduct his affairs? Does the advisor have a stable client base? How many new clients does he handle each year?
A limited number of clients will allow the advisor to offer more personalized service. The answers to this question should help to determine if there is a good ‘fit’ that would permit a productive relationship.
- How does the financial advisor ensure that each client receives personal, professional service?
The advisor must have a process in place to support this and should be able to explain this process and how it will ensure responsive, personalized service. This process should include timely communications as often as necessary.
10. Planning for what happens if…
A plan needs to be in place for what happens to the money if something happens to you. Should the firm continue to manage the money in this eventuality?
There should be a detailed succession solution ready to be activated if the unexpected happens. The high level of service should not change.
Succession planning in reverse should also be built into the plan. If something should happen to the financial advisor, should the firm continue to manage the family’s wealth?
11. Can I have it in writing?
Obviously, the answer must be, “Yes!”
Choosing the best financial advisor for you and your investment goals is extremely important. Do your homework. The advisor must be able to fully answer all questions, have proof of fees in writing, maintain fiduciary standards and hold to the client bill of rights and the code of ethics. There should be a succession solution.
It can be uncomfortable to ask these questions, but it’s more than worth it in the long run. The client ultimately holds the power and deserves a professional, knowledgeable and disciplined financial advisor. If the potential advisor cannot demonstrate the value that will be brought to your investment account, then continue to search for someone who can.