Five Questions to Ask When Choosing a Financial Advisor

By Thomas R. Blackwood, Ph.D.

So you’ve decided that your portfolio is sick, and your 401K looks more like a 201k.  You need a financial advisor, but where do you go to get help? Whom can you trust? Even I, a typical male, when it comes to asking directions or how to find something at Home Depot know when I need advice from an expert. After all, I’m the expert people call on in my field. I have respect for earned expertise. That doesn’t mean that I follow what they say blindly. I still have to be involved in the process.

If you’re looking for someone to pick the right stocks and make a killing in the market, this is not what a financial advisor can do.  Following “hot tips” is foolish, since by the time a stock or a type of industry has become desirable, most of the gain is gone.  Most professionals will be the first to admit that out-guessing the stock market is not a science.  However, various types of investments are predictable over the long run.  Most financial advisors strive to put together a plan that involves a mix of investments that balance risk with return.  By taking a lower return, risk can be reduced.  An advisor is just that, an advisor.  He/she is not your mother and cannot tell you what to do.  There are some basic questions that will help you choose the right financial advisor and reduce the chances of getting bad advice.

1. How do you get paid? Most advisors have affiliations with a brokerage or fund management company.  They can get a commission or a “spread” on an investment.  Some companies provide financial planning services as part of the company benefits plan.  Keep in mind that the agent may have a limit on what can be performed.  This may restrict the depth of the analysis.

Some agents are “independent” and will expect a fee for service.  However, they are still eligible for commissions on some products.  It is good to know when and how much you are being charged for each service. Ask what products have the highest margin at their firm (or in their office).  Watch for a cringe.

2. Are you a Certified Financial Planner? A certified financial planner has taken a rigorous exam covering 10 topics in a wide variety of fields.  Only half of the exam takers pass.

A member of the National Association of Personal Financial Advisors has pledged to accept pay only from their customers – for instance, 1% of assets or an hourly rate for specific tasks. If the person is an independent advisor, get his/her Form ADV at www.advisorinfo.sec.gov. (Form ADV contains information about an investment adviser and its business operations as well as any disciplinary events involving the adviser and its key personnel.)

3. Are you a registered broker, and in what states are you registered? We are a mobile society and may find that the grass is greener in another part of the country.  Having an agent that is registered in more than one state can help in understanding the differences in a particular state’s treatment of a security or assets.  While a lawyer would be required to get details, a registered agent can provide reliable resources and what questions to ask.

Check each state’s securities administrator for his/her record and performance.  A good resource is the North American Securities Administrators Association at www.nasaa.org.

4. What resources do you have available? As part of a fund management company, brokerage, or insurance firm, the agent will be able to have your situation analyzed by more than one person.  Having a second opinion is good for your financial health.

Computers and their programs are great, but does the agent understand the basis for the computer analysis?  Challenge if she/he could do it on their own, even though you would not want them to do it on their own. What national organizations do they rely on for advice?  Even an advisor has to get suggestions on the state of the economy.  While Market timing is not a solid way to invest, overall market direction should be used in allocation of assets.

5. How long have you been doing this? Ask to see a copy of a plan devised for someone else.  Check that the recommendations are specific to the individual and not based on a computer program.  Pick a couple of investments and ask why those were recommended for that person.  Look at the options suggested.  Are there recommendations of investments outside the planners firm?  Do they spell out the costs or commissions that are involved?  Are fees spelled out in writing?

Most planners were trained in a handful of industries: banking, insurance, accounting, law, or a brokerage.  If they work for a brokerage, they will probably steer you toward stocks.  An insurance expert would probably suggest things like annuities.  Once you have a feel for your risk tolerance, you can ask yourself how comfortable you are with the person’s background. If they are with a firm, how long have they been there? Finally, do you feel that your opinions are being respected?  Don’t work with an advisor that takes decisions out of your hands.  It is your money.

“Five Questions to Ask When Choosing a Financial Advisor” is excerpted from Tom and Mary Jo’s book in progress: Blazing Boomers: The Complete Guide to Awesome Aging. You can contact them at www.healthsiteassociates.com