Questions to ask a financial adviser
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If you were a smart saver during your working years, you may be daunted by the task of reversing course and figuring out how to spend during retirement. Or maybe you need help understanding whether you need long-term care insurance, extensive estate planning or how best to fund your grandchildren's educations.
If these questions are percolating through your mind, you may want to seek professional guidance. Choosing a financial adviser can be a head-scratching journey, as you navigate all the different types of advice givers with their alphabet soup of professional designations. To help, here are the eight questions to ask any potential financial adviser, stockbroker or insurance salesperson before you retain them:
1. Are you registered as an investment adviser?
If yes, then the adviser owes you a fiduciary duty, which is a fancy way of saying that he or she must put your needs first. Investment professionals who aren't fiduciaries are held to a lesser standard, called "suitability," which means that anything they sell you has to be appropriate for you, though not necessarily in your best interest.
2. How will I pay for your services?
The adviser should clearly state in writing how he or she will be paid for the services provided. The three basic methods of payment are: fees based on an hourly or flat rate; fees based on a percentage of your portfolio value, often called "Assets Under Management" (AUM); or commissions paid per transaction. How often you expect to trade and how proactively you want your money managed will help determine which model works best for you.
3. What experience do you have?
Find out how long the adviser has been in practice and where. Also ask if he or she has any professional certifications, licenses or designations, such as Certified Financial Planner (CFP), Certified Public Accountant-Personal Financial Specialist (CPA-PFS) or Chartered Financial Consultant (ChFC). While these are signals of credibility, they don't guarantee a successful relationship.
4. What services do you offer?
The services offered can depend on a number of factors including credentials, licenses and areas of expertise. Some offer advice on a range of topics but do not sell financial products. Others may provide advice only in specific areas such as estate planning or tax matters.
5. What is your approach to financial planning and investing?
Some advisers prefer to develop a holistic plan that brings together all of your financial goals. Others provide advice on specific areas, as needed. Make sure the adviser's viewpoint on investing is neither too cautious nor overly aggressive for your risk tolerance. Also ask whether the planner makes investment decisions alone, or depends on others in the firm to do so. What was the adviser's performance in both good and bad markets, and ask yourself whether it's more important to you to make money in a rising market or prevent losses in a down market. A great follow-up question: What were the three worst investment decisions you made over the past five years, and how did you correct them?
6. Can you provide three references?
Ask for two current clients whose goals and finances match your own, as well as a professional reference, like an accountant or estate attorney.
7. Do you have a financial interest in the entity that houses my account?
This is your Madoff-prevention question. When interviewing advisers not associated with large brokerage or insurance companies, ask if they use an independent, third-party custodian or clearing firm (this is the entity that produces your statements), which prevents the adviser from having direct custody of your assets and adds another level of security for your account. In the Bernie Madoff example, he was the investment adviser, broker-dealer, clearing agent and custodian for all of his client accounts.
8. How often will we interact?
What should you expect in terms of frequency of verbal, written and in-person communication? Also ask whether the adviser will remain your primary contact.
Choosing your adviser is one of the more important financial decisions you will make, so make sure you do your homework and find one that's right for you. These questions are a great place to start.
Jill Schlesinger is the editor at large for CBSMoneyWatch.com and writes this column for Tribune Media Services.
