Many industry brokers or financial advisors lack the training, knowledge, and sometimes even experience, to truly benefit their clients’ financial planning. Add to this that many of these financial advisors work in a system rife with conflicts of interest and you have a recipe for financial peril.
With the transparency that the internet offers, investors and financial consumers are becoming more aware of pricing and conflicts. Due to this openness, a new “fee only” model is emerging in the financial planning segment; one designed to avoid these conflicts of interest.
But how do you know what firm is right for you?
Most financial advisor firms offer a free introductory meeting. Here is a list of popular questions to ask a financial advisor that we feel will arm you through the process:
The Screening Stage – The “Big Three” Test
Three Initial Screening Questions to Ask a Financial Advisor to Help You Avoid Fraud
We believe that by asking the following three questions, you can significantly cut the amount of any potential “harm” caused by a financial advisor.
- Are you a fee only advisory firm?
- Firms that are fee only have no interest in volume based transactions (or churning accounts to generate commissions).
- Will my assets be held at an independent third-party custodian?
- Firms that hold client assets away at an independent custodian have, by virtue of the relationship, created a barrier for account access.
- Who is that custodian? Is it reputable?
- Some popular custodians are TD Ameritrade, Charles Schwab, and Fidelity Investments.
You are seeking a “yes” answer to all three questions, if possible. If the answer is “Yes” then you’ll find it is difficult for the financial advisor to engage in fraudulent acts.
The Interview Stage
Further Interview Questions to Ask a Financial Advisor When You Meet
After you have narrowed your list to firms that pass your Big Three test, you may want to print out the following list of questions to ask a financial advisor:
Background & Experience
- What is your educational background?
- What are your financial planning credentials/designations and affiliations?
- How long have you been offering financial planning services?
- How long has your firm been in business?
- Who is the owner of your company?
Business Practice
- Tell me about your ideal client.
- Do you have experience working with clients whose situation is like ours?
- How many clients do you work with?
- Will you or a financial advisor associate of yours work with me?
- Do you work in a team format or individual format? If so, how do you select your advisor staff?
- What is your advisor-to-client ratio? (# of clients to one advisor)
- If you are on vacation, who will help me?
- Do you have a business continuity plan?
- Are you now engaged in any other business, either as a sole proprietor, partner, officer, employee, trustee, agent or otherwise?
Compensation
- How is your firm compensated and how is your compensation calculated?
- Do you have a minimum fee?
- Do you have an agreement describing your compensation and services that will be provided in advance of the engagement?
Services
- What is the scope of financial help your firm offers?
- Do you offer a comprehensive written analysis of my financial situation?
- Does your analysis include recommendations for specific investments?
- Do you offer help with implementation of the plan?
- Do you offer continuous, on-going advice about my financial affairs?
- How often do you meet with clients to give this advice?
- What topics do you cover at these meetings?
Financial Planning & Investments
- What is your approach to financial planning?
- What assumptions do you use for your financial plan projections?
- Tell me about your investment philosophy and why you have chosen this philosophy?
- Who develops your model portfolios?
- Will you figure my tolerance for risk? If so, how will you do this?
- How will you decide the proper investment strategy for me?
- Do you need “discretionary” trading authority over my investment accounts?
Account Access
- Will I receive a statement of my accounts monthly?
- Do you offer online access to my accounts?
References
- Do you offer any client references?
- Will you give me references from other professionals?
Regulatory Compliance & Conflicts of Interest
- Are you registered as an investment advisor?
- What agency regulates your firm? Are you licensed by your state, the SEC, or FINRA?
- Do you have a staff member who ensures your firm is abiding by those regulations?
- Have you (or your firm) ever been publicly disciplined for any unlawful or unethical actions in your professional career?
- Do you act in a fiduciary capacity towards your clients? How do you define this?
- Could anyone besides me benefit from your recommendations?
- Do you recommend any private investments of which you are an affiliate?
- Does any member of your firm act as a general partner, take part in, or receive compensation from investments you may recommend to me?
- Do you have a financial interest in the entity that houses my account?
- Do you sell any products that have a commission attached to them?
- Are there financial incentives for you to recommend certain financial products?
- Does your firm receive other compensation from mutual fund companies to invest in their funds?
- Do you receive on-going income from any of the mutual funds that you recommend in the form of “12(b)1″ fees, “trailing” commissions, or other continuing payouts?
- Do you have any proprietary products?
- Do you take custody of, or have access to my assets?
- Will my assets be held in my name only and always be under my control?
- Do you receive referral fees from attorneys, accountants, insurance professionals, mortgage brokers, or others?