Is the advisor acting as a fiduciary?
A fiduciary is required by law and his responsibility is to put the client’s needs above everything else. Even if a product would mean a bigger fee or commission for the planner, if it was not in the best interest of the client, the planner would not recommend it. An advisor who is not a fiduciary only has a suitability requirement. This advisor may recommend something that is suitable but not best for the client because he just wants a bigger commission. This type of planner might sell a riskier investment than would be in the client’s best interest.
Advisor or salesperson?
How and how much an advisor is compensated is very important for you to know before going into a new relationship. An advisor who only charges a fee typically doesn’t have the same potential conflict of interest when recommending investment strategies as an advisor who receives even a portion of their compensation in the form of a commission. It’s even more confusing when some advisors are a fiduciary for some actions, but not all. Some advisors are fee-based instead of fee-only. This typically means that they offer some fee-based solutions, but also sell products for a commission. Be sure to ask about fees, commissions, and any hidden fees for services and products. You need the total cost before making any decisions.
What are their credentials and experience?
Virtually every letter of the alphabet is used for credentials. The Certified Financial Planner (CFP) professional designation is the most widely known. This designation also includes continuing education and ethics requirements. Some others that you might see are CIMA, CLU, ChFC, PFS, CRPC, CKA, CFA and others. The designation doesn’t automatically qualify the designee as competent or with the experience and expertise needed to provide adequate planning. It does signify that the advisor has made an effort to gain knowledge and be subject to some accountability. The advisor should not just depend on their designation but should continue to research and study to gain more knowledge. Be aware that some advisors who have designations could still be trying to just sell products without financial planning.
What should a financial planner offer?
A financial plan consists of many components. Cash flow analysis helps determine how much money you need to live on, how much is available to put towards your future goals and other aspects. An objective insurance review makes sure you have the right amount of coverage for your family as well as the right kinds of insurance for your situation. Retirement projection and distribution planning will help you know when you can retire and how you might be able to make contributions to organizations or people you care about. Investment analysis makes sure you are at the right risk level, correct investments, among other things. Tax planning might be the most critical aspect because it can affect you on-going, helping make sure you are paying the right amount of taxes. Estate planning is important to make sure your affairs are in order. Over time the best planners teach their clients to understand that investments should be the fuel to support their life goals, not the focus of their life’s plan.
Did the advisor emphasize their ability to provide above market return?
If an advisor starts recommending a certain investment or portfolio during your first meeting, that is a warning sign. The first meeting should be finding out information about you. If the advisor is pushing you to buy something right away, he is not even meeting the suitability requirement. If the advisor says he is being paid by his company and not by you, that is false. The commission that he is making on that sale, which you are paying, is what his company is using to pay him. You should not feel pressured to buy anything from a good advisor. Don’t trust an advisor who is offering a big percentage back on an investment or guaranteeing a big return on your money. Those kinds of statements are not binding and unrealistic. Don’t rely only on performance. It’s too easy to evaluate your portfolio over a short period of time which can be too random. Using a goals-based approach will provide a better measure of your progress toward reaching your personal goals.
The best financial plan/planner is the one you will stick with!
Have any complaints been filed with FINRA or SEC?
For registered investment advisors (RIAs), look for Form ADV in the SEC’s Investment advisor Public Disclosure database if they manage more than $110M or with their state regulator if they manage less than $100M. Brokers and RIAs both have data on FINRA’s website. Don’t be intimidated about asking these tough questions. The prospective advisor should have nothing to hide, and you will be glad you asked.
Where do you start your search for your personal CFO?
If you ask a friend or relative, the advisor they suggest may not be a good fit for you, even though he was for them. Unless the person you ask is very savvy in financial matters, they might not really know if the advisor is competent.
Start by asking other professionals like a CPA or tax attorney who they refer their clients to for financial advice. These professionals usually work together to create and implement a plan for you.
Research the internet and read through the description of what is offered by the firm. You can get a good idea of what the qualifications are of the planners through the website. Read reviews that are posted. Be careful not to just ask for client referrals because, of course, the planner will give you only clients who like them.
Do not be enamored with someone who is on TV or quoted in a publication or is listed on one of the “Best of” lists. Many of these are based on production or total assets under management which does not address the quality of the financial planning they provide.
