Vetting Advisors

IF YOU NEED a financial advisor, by all means ask colleagues and neighbors for recommendations. But keep in mind that a lot of folks are good friends with their advisor. What they pay in fees, and the quality of the advisor’s recommendations, are secondary considerations. Want to hire a top-notch advisor? Forget friendship—and focus on asking potential advisors the right questions:

• How are you compensated and what’s the total cost I can expect to pay each year? Ask for a dollar amount, not just percentages. What other expenses will I incur, such as fund expenses and account fees?
• Are you held to a suitability or a fiduciary standard? An advisor who is held to a fiduciary standard must act in your best interest. Those held to a suitability standard, which is what happens when a broker is paid commissions, must merely recommend investments that are suitable.
• What credentials do you hold? There’s a maddening array of credentials held by advisors, some of them meaningless. You should be comforted if an advisor is a Chartered Financial Analyst (CFA), Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC). If they have a business, accounting or law degree, that’s all the better. While brokers will trumpet that they’ve passed, say, the Series 7 or the Series 6 exam, those are technically licenses that allow them to do business, not credentials that prove they’re knowledgeable about the finer details of personal finance.
• Where have you worked and how long have you been in the investment business? While everybody needs to start somewhere, there’s no need to let an advisor learn the ropes with your money.
• How would you describe your investment philosophy? Here, you’re looking for an intelligent summary of how they navigate the financial markets, not a series of clichés or hollow boasts about beating the market.
• What complaints have been lodged against you by customers? While there might have been legal claims, most formal complaints result in arbitration proceedings. If advisors are licensed with FINRA, you can see whether there are any “disclosure events” by going to Finra.org and using the site’s BrokerCheck database.
• Who has custody of clients’ investments? Steer clear of advisors who take custody of clients’ assets, because there’s far more potential for fraud. Instead, you want an advisor who uses a third-party custodian, often a large bank or brokerage firm.
• Beyond putting together a portfolio, what other aspects of my financial life will you help with? Some advisors assist with tax returns, estate planning, insurance and when to claim Social Security. Will they charge extra for these services—and do they outsource them to another firm?

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