Get Answers to Important Questions from Prospective Advisors
FINRA and the SEC provide resources for identifying and evaluating prospective financial advisors. I recommend that you visit these sites. In addition to useful information, you will also find instructions for reporting questionable behavior on the part of advisors with whom you interact. Reporting rule-breakers serves an important function in removing the bad apples from the marketplace. It also protects other investors from being victimized.
Before you even set up a meeting ask the following question, presumably by phone or perhaps by email:
Will you serve as a fiduciary? A yes means you will at all times have my best interests at heart. Are there exceptions to your fiduciary duty? Do you provide services for which you are not a fiduciary? For me this is a go: no go answer. I strive to only do business with fiduciaries. If the answer is that the advisor is not a fiduciary I move on to someone else on my list.
Questions for Prospective Financial Advisors (download this list here):
- Please confirm that you function as a fiduciary. (You likely won’t have the conversation if the advisor indicated earlier that she is not a fiduciary.)
- Will we sign a formal contract outlining terms of service, fees, etc.?
- Which specific services do you, or does your firm, offer? (investment planning, retirement planning, estate planning, tax planning, insurance planning, education planning, budgeting, other)?
- Do you adhere to a particular planning or investing philosophy?
- Will I receive a comprehensive written financial plan from you?
- Will you execute the plan (buy and sell securities and other instruments, such as insurance products) or will I do that myself?
- With whom will I work on a day-to-day basis? Will it be you, or colleagues of yours with less or more experience?
- What is the turnover rate of employees at you firm? (If you find frequent replacement of advisors, this can be a warning sign that it’s not a good place to work. A firm that can’t retain staff often has other problems that could hurt you and your interests. Consider it a red flag.)
- How will I pay? (For example, agreed-upon set fee, commissions, loads, percentage of AUM.)
- What are your hourly rates, AUM fee percentages, flat-fee ranges, commission rates?
- Do you have a minimum fee?
- Are there annual fees for maintaining an account with your firm?
- How frequently will we review my plan?
- How frequently will we meet?
- Who will be in control (have custody over) my assets? Who will have authority to initiate trades in my account?
- If you are for any reason unavailable or incapacitated, or no longer with this firm, with whom will I end up working? (If the answer is unknown when you ask, ask who will make the decision and how it will be made.)
- How many clients do you have?
- Are you affiliated with a particular broker/dealer?
- Does your practice represent certain providers of financial products or does it function independently?
- Do you receive any financial incentives for recommending certain products?
- Does anyone other than me gain any benefit from the recommendations you provide or the assets I purchase?
- Are you affiliated in any way with firms whose products or services you recommend?
- If you refer me to other professionals, do you receive any financial or non-financial benefits?
- Do you or anyone else at your firm receive referral fees from other professionals such as insurance professionals or mortgage brokers?
- Is there a minimum investment required?
- Are there any noteworthy implications in the event I wish to liquidate or reverse an investment, or if I close my account? Will I be charged any fees/penalties if I sell a fund or instrument?
- How do you ensure you stay current on new products, rules, regulations, tools, etc.? What personal development initiatives do you pursue?
- Have you ever been convicted, sanctioned, or disciplined by a government or professional regulatory organization?
- What can you tell me about the proven quality of your advice? Do investors who work with you benefit from superior returns?
- What relevant education do you have? (Do not hesitate to ask for and confirm academic institution(s) attended and year(s) of graduation as well as continuing education and certification courses.)
- What relevant certifications, designations, and licenses do you hold?
- How many years of experience do you have in the various advisory areas in which you have qualifications? What other work experience do you have?
- If you switched to financial advisory from a different field, what did you do before and why did you make the switch?
- Will you provide references?
- Are you registered with the SEC or equivalent state regulatory agency?
- Are you licensed by FINRA?
- Is your firm a member of the Securities Investor Protection Corporation (SIPC)?
- Do you need to have discretionary decision-making power over my assets? That is, will you make and execute buy and sell decisions on my behalf?
- Do you personally invest in assets you recommend to clients?
Note: whenever possible, get the answers to your questions in writing. A good way to document the answers is through an email exchange. The advisor will likely have some ready-made documents incorporating answers to your questions, including regulatory registration or licensing forms.
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