7 questions to ask a financial adviser
October 1, 2009 · Tagged with Retirement
No 1. Are there any skeletons in the closet?
As investors look for guidance in these troubled markets, one question looms above all others: Whom can you trust?
During boom times, it was easy to hire a financial adviser and put your money on autopilot. Now the market is in chaos and thousands of investors have been devastated by fraud, with Madoffed threatening to become an all-too-common verb.
Small wonder that many investors are getting reluctant to put their faith in experts. More than three-quarters of individuals with at least $1 million to invest intend to move money away from their financial advisers, and more than half intend to leave their advisers altogether, according to Prince & Associates Inc., a market-research firm.
The trouble is, many investors don’t have the time or expertise to make all of their own investment decisions. So, having a professional on your side is crucial. But how can you guarantee that your expert is reliable?
The short answer is that you can’t. There are no guarantees. But you can be a lot more sure than many investors are today.
The first step is to realize that you’re ultimately responsible for your family’s money — you’re the chief executive of your own investment company. Your financial adviser, mutual-fund manager, wealth manager and anyone else who handles your investments should report directly to you. Even if you don’t understand the ins and outs of investing as well as they do, you’re responsible for ensuring that they handle your money properly.
“Being a CEO doesn’t mean you make every trade, but you do have to be able to manage a team of people with quality expertise, realizing that not everyone in the profession knows what they are doing,” says Michael Sonnenfeldt, co-founder of Tiger 21, a peer group for wealthy investors based in New York.
Once you recognize that you’re in charge, you can approach your advisers like a boss — not just a client. That means putting them through a tough vetting process to make sure they’re competent, trustworthy and looking after your best interests. Here are some big questions to keep in mind as you review your candidates:
1. What’s in the adviser’s background?
“Think like an employer,” looking at a potential adviser’s criminal and regulatory record, as well as references from past employers, says Wayne Cooper, founder of Wealth Management Exchange, a social-networking site for high-net-worth investors.
You can find regulatory records for stockbrokers, investment advisers, insurance agents and their firms online, starting at Finra.org, the Financial Industry Regulatory Agency’s Web site. Finra’s BrokerCheck will tell you which states and regulatory organizations that brokers and their firms are registered with, along with the licenses they hold, the exams they’ve passed, and their employment history.
The site also lists any formal investigations and disciplinary actions initiated by regulators, along with customer disputes, certain criminal charges and financial disclosures, including bankruptcies.
For investment advisers with firms regulated by the Securities and Exchange Commission — usually those managing more than $25 million — go to adviserinfo.sec.gov and click on “Investment Adviser Search” to see part of the “Form ADV,” a document the SEC requires all investment advisers to fill out when registering.
The online portion of the form will give you information about an adviser’s clients, fees, business and disciplinary history within the past 10 years. The second part of the form — which isn’t online — contains information on an adviser’s services, fees, code of ethics and investment strategies. To see a copy, ask the adviser’s firm, your state regulator or the SEC.