By: Jennifer Bloom

You have worked hard and saved money and for whatever reason you now want to engage the services of a professional financial advisor. It could be a life circumstance that prompts you to seek help like marriage, divorce, a job change, retirement or perhaps you feel as though you are making investment decisions on your own that are not helping you reach your financial goals. For whatever reason, the decision to look for professional help can be very beneficial. However, there are a few key things to know about hiring an advisor and today I want to explore some of the most important.

 

This may surprise you but not all financial advisors are created equal. In fact, it can be quite confusing to navigate through all the jargon, credentials and services! As my Uncle Rick has long said, “money looks better in your pocket than anywhere else” and there is nothing more personal than your finances. So let’s dive in and make sure you are equipped to ask the right questions when considering who to hire.

 

Q: How are you compensated?

This is a pretty simple and straightforward question but you would be surprised at just how complex this answer can be. There are three main sources of compensation for financial advisors and not all are created equal.

 

Commissions
Some advisors work on a commission basis which means that for any fund, annuity or investment product they recommend there’s a sales charge that comes right out of your pocket. Sometimes the company whose product the advisor is recommending pays the broker’s commission, a kick back for the advisor making the sale. As you can imagine, I am not a big fan of commissions since they create a major conflict of interest for the advisor. Instead of working for you, the client, these advisors have a huge incentive to recommend the option that pays them the most, not the investments that are best for you.

 

Fee-Only
Fee-only registered investment advisors (RIAs) don’t sell products, they don’t accept commissions and they operate as fiduciaries. Fee-only advisors cannot sell life insurance, annuities or any other investment for commission. These advisors work for their clients and only get paid either by an hourly rate, a fixed annual retainer or a percentage of the investment assets they manage for their clients. What is important about Fee-only advisors is that the advice they give is independent of the products recommended. They are neither incentivized nor disincentived to put you into any investment other than the one that is best for you.

 

Fee-based
Fee- based advisors blend the commission-only and fee-only models that I mentioned above. They can sell you an investment and get a commission from that transaction or charge you a fee calculated as a percentage of assets to manage your portfolio, or they may do both. If you are confused, you are not alone! Fee-based advisors have the ability to change their compensation structure based on the type of transaction. They may sell insurance and take a commission on that product but invest your money in a fee-only manner. With fee-based advisors it can be difficult to keep track of the compensation structure, so make sure you are taking extra time to ask the question.

 

Bottom Line: Any great financial advisor will be happy to talk about their fee structure in a transparent manner! If they are not, steer clear and take your money elsewhere. Transparency should be first and foremost when it comes to something as important as your money.

 

Q: Are you a fiduciary?

Fiduciary advisors must by law always work in their client’s best interest and avoid all conflicts of interest. If an advisor is not a fiduciary it means they are held to the suitability standard. Advisors who operate under a suitability standard have to choose investments that are appropriate based on the client’s circumstances, but do not have to put the clients’ best interests first. As I mentioned in the previous question, advisors who are fee-based are able to wear their fiduciary hat some of the time and take it off when selling commission based products. In my opinion you want to work with someone who is always working in your best interest, not just some of the time, but all of the time!

 

Q: What kind of services do you provide?

There are all kinds of financial firms out there and it’s important to know what kinds of services they offer. Some firms focus mostly on the financial planning aspect but not the actual investing of the money. Others take a more holistic approach and can help you create a long-term investment plan, weigh the pros and cons of different account types, invest your assets, re-balance your portfolio and provide advisory services for things like retirement and tax planning. Some firms charge for these services a la carte while others bake them into the management fee, so it’s very important to understand what value you are receiving. There is no right answer in terms of what you may want and need, but it’s important to understand all of the services they provide so you can make the most of your relationship.

 

Q: What are your qualifications?

Financial services as a profession is highly regulated, but use of the term “financial advisor” or “financial planner” is hardly regulated. In fact, almost anyone can use these titles without training and education and financial professionals can have a confusing list of initials behind their names. The Financial Industry Regulatory Authority’s (FINRA) professional designations database will tell you what they mean. You can use this site as a resource to decode the letters that sometimes follow a financial professional’s name. You can also see whether the issuing organization requires continuing education, takes complaints or has a way for you to confirm who holds the credential. I also recommend taking a look at your advisors ADV which holds the key to lots of useful information. Think of an ADV as a business profile, resume and rap sheet all in one! Form ADV is the key disclosure document that investment advisors must file with the U.S. Securities and Exchange Commission and state securities authorities. On it you will find information such as:

  • A description of services offered the types and number of clients served, and the amount of assets managed.
  • An explanation of fees and billing practices.
  • A rundown of the company’s history and principal players’ certifications, education and work history.
  • Any disciplinary actions (regulatory or judicial) taken due to misconduct.

 

Most people never bother to look at their advisors Form ADV, but it’s a very worthwhile use of your time. Many advisors have their updated ADV’s on their website, but you can also look on the SEC website to obtain a copy.

 

 

Q: What is your investment philosophy? How will my money be invested?

I think it’s really important to understand what kind of investment vehicles your advisors use since there are such a wide array and not all are created equal or fit within your risk tolerance. The investment advisor you work with should have an investment plan for your money that you understand and believe. After an advisor has taken the time to get to know you and your goals make sure they are able to explain their approach. .Does your advisor invest the money themselves or use a third party? Do they invest in mutual funds, REIT’s, private equity funds, single stocks? How do they evaluate the funds they choose? Don’t be afraid to ask these questions and more!

 

Q: Who is you custodian?

Make sure you are working with an advisor who has an independent custodian, such as a brokerage like Fidelity or Charles Schwab, to hold your investments, rather than act as his or her own custodian. You may recall Bernie Madoff, the notorious financial advisor who defrauded clients through a multibillion-dollar Ponzi scheme. He was able to maintain his fraud for years because he acted as his own custodian and thus, clients relied on his firm to produce statements. Having an independent custodian provides an important safety check since you, the client, are able to check in on your investments directly at any time.

 

In summary, investing your money with a professional can be incredibly beneficial however it is critical to do your homework before trusting anyone with your financial well-being. Ask the hard questions and make sure you are really comfortable with the answers being given. After all, the right advisor will be glad to spend the time talking though things like fees and services and speak to you, not above you. Remember, this is your hard earned money and a financial advisor should always work for you!

 

For more on this topic be sure to check out Rick’s podcast this week which goes into more detail about many of these question and more! To find the episode click here or look for Rick Bloom Talks Money wherever you get your podcasts.