7 questions to ask a financial adviser
October 1, 2009 · Tagged with Retirement
Investors can find more information about advisers, including education and work history, at the Web sites of organizations such as the Certified Financial Planner Board of Standards Inc. (www.cfp.net) and the Financial Planning Association (www.fpanet.org).
But all of that leaves an important question open: What exactly constitutes a red flag in an adviser’s history?
“A discriminating person wouldn’t just look at the fact the adviser had a complaint,” says George Brunelle, a New York securities lawyer. He suggests looking for complaints related to customer disputes, fraud or excessive buying and selling of securities, called churning. Investors should zero in on disputes that led to a substantial arbitration award.
On the other hand, some technical infractions — such as failure to comply with continuing-education requirements on time are more common and may be permissible. Either way, there are lots of advisers out there, so “it is best to comparison-shop,” Mr. Brunelle says.
2. What do the adviser’s clients say?
Don’t wholly depend on the reputation of a big firm or recommendations from friends, family or members of your country club. After all, Bernard Madoff would likely have gotten glowing recommendations from many noted people, says David Kudla, chief executive of Mainstay Capital Management in Grand Blanc, Mich.
People who refer you to an adviser may also have different goals than you. For instance, your golf buddy may want to retire before age 40 and doesn’t have any kids to think about. But you may be planning to retire at age 75 with money left over for your three kids. Thus, your financial plans and needs will vary drastically.
So, it can be helpful to ask for references from past and current clients in life situations similar to yours. When talking to the clients, get specific about their experiences. How often did the adviser communicate with them? Has the adviser ever admitted to making a mistake? How often do they evaluate their goals with the adviser? Has anything about their relationship surprised or disappointed them? Has the adviser performed well in bull and bear markets? Is the adviser ethical?
Then ask them for additional references from people the adviser hasn’t solicited, says Greg Rogers, founder and president of RayLign Advisory LLC in Greenwich, Conn. “Try to find six degrees of separation from the adviser,” he says. “You’ll get better information if you get indirect references.”
3. How does the adviser get paid?
Knowing how advisers get paid will help you tell if they’re working in your best interest. “It’s no different than going into a clothing store — when a salesperson says you look great, you know they have a bias to sell you clothes,” says Mr. Sonnenfeldt, the Tiger 21 co-founder.
Advisers use a bunch of compensation structures. They may get a commission on the securities they sell; charge fees, either flat or a percentage of the assets they manage for you; work at an hourly rate; or a combination of all of them. Ask advisers to detail exactly how they work and the total compensation picture from managing your portfolio. Be wary of anyone who shies away from answering these questions in a transparent way, Mr. Sonnenfeldt says.
Also ask about conflicts of interest. For example, if advisers work on commission, ask for their firm’s commission schedule and find out if there are a limited number of products or services they can recommend and why. If they can’t justify the limited choice, that’s a red flag. Meanwhile, if advisers take a percentage of assets as a fee, remember that they may be inclined to advise you to avoid moves that may reduce those assets, including charitable giving or buying a new house. Also be wary of an adviser who charges more than 1% or 2% of assets.