Financial Planning


8 Questions to Help Assess a Financial Adviser

Your aim: To find an adviser who shares your values. Use the questions below as a starting point to assess potential advisers. They should ask you some questions, too, about your family, your goals and your risk tolerance. Consider meeting with advisers from a variety of firms—say, a fee-only financial planner, a rep from a national brokerage firm and, if you can afford it, a bank adviser—before settling on one.

See Also: Pick the Right Money Manager

1. How will you make money from this relationship? You want a fee-based or fee-only adviser who isn’t going to make money by selling you specific products. If an adviser stands to earn a commission by, for example, selling you an insurance product, “there is a conflict of interest,” says Gifford Lehman, a Monterey, Cal., fee-only adviser. That doesn’t make a broker, who may get paid on trades you make, a bad adviser—you may save money with a commission-based arrangement. And it doesn’t mean a fee-only adviser has no conflicts. The key is to ask the question and make sure you feel comfortable with the answer. A reasonable annual fee: 1% of assets or less. But that doesn’t include fees on underlying investments, such as mutual fund expenses.

2. What standard do you work under: fiduciary or suitability? Advisers who work under the fiduciary standard (typically fee-only financial planners) must act in their clients’ best interests at all times. Those who work under a suitability standard (typically brokers who earn commissions) have a lower legal standard to fulfill: They must steer you toward investments that are deemed “suitable.” Ask every prospective adviser this question, no matter the type of firm. Vanguard advisers, for instance, work under the fiduciary standard. But at Charles Schwab, you may come across some representatives who work under the suitability standard and others who work under the fiduciary standard.

3.What’s your investment philosophy? How do you manage risk? How do you make buy and sell decisions? No matter how little you know about investing, if an adviser can’t explain his process to you in a way that you understand, don’t hire him. And he should be able to explain what he’s doing so that you can decide if you feel comfortable about it. Will he invest your money in individual securities or in funds? What kinds of moves is he considering now, given today’s environment, and how will that affect the portfolio?

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4. What’s your ten-year track record, after fees? What risks did you take to get that return? What added to and detracted from returns in each calendar year, especially in 2008? These are fair questions, but be prepared: Some advisers won’t answer them. They’ll tell you that the Securities and Exchange Commission has rules about how an adviser can discuss performance. That’s true. Some may aggregate account returns. That’s what Altfest Personal Wealth Management, in New York City, does for prospective clients. It shows combined results for all accounts, after fees, for every calendar year since 2000 and compares those results with Standard & Poor’s 500-stock index and a blended benchmark with 65% in stocks and 35% in bonds.

If a potential adviser balks at giving you an answer, ask for a sample of investments she might put you in today, given your risk tolerance, goals and time horizon. Looking back over the past decade, year by year, how would that portfolio have performed? Past performance is no guarantee of future results, but seeing how the model performed during strong and weak markets will give you an idea of how comfortable you might be with the adviser’s investment strategy.

5. Where’s my money kept? Who’s your accountant? A good manager won’t actually touch your money—he will ask you to send it to another financial firm, such as Charles Schwab, for safekeeping. For instance, Burke Financial Strategies, in Iselin, N.J., uses Raymond James as its custodian. As for the adviser’s auditor, if you don’t recognize the firm’s name, ask why, says Elliot Weissbluth, of HighTower Advisors, a financial-services firm in Chicago.

6. Who’s on your team? I’d like to meet them. Some advisers have a team of associates. In some cases, those associates will spend more time with you than the adviser, so it’s important to meet them. “If they’re not hard-driving people, I would walk,” says Edmond Walters, a former adviser in Conshohocken, Pa. You want a staff that’s been around for years, too. The reason: continuity, for you and your financial plan. The team may provide the research and analysis behind investment decisions, so frequent changes in personnel could hamper your portfolio.

7. What happens if you retire or pass away unexpectedly? Don’t dance around this topic. A good planner will have a ready answer. Ask Barry Glassman, a McLean, Va., adviser, and he’ll say: “We have two other client advisers and a robust research team. Moving forward, we will add resources to boost the firm’s presence without me.”

8. Who’s your typical client? You don’t want to be the smallest account with any adviser. “You’re not going to get enough attention,” says John Burke, of Burke Financial Strategies. You also don’t want to be the only retiree among a host of young savers. “Matching the client with the right team is important,” says Charlie Mueller, of Northern Trust. Some advisers have experience working with business owners; a 35-year-old might relate better to an adviser who’s digitally savvy.

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