Relationships with financial advisors require trust, of course. If we're taking someone's advice, we're relying on him or her to know more — and better — than we do. But sometimes that faith is based on little more than a warm smile and a nice office.
Take Karen, for example, who emailed me because she was at an impasse with her financial advisor of 20 years. The advisor was pushing her to buy a variable annuity, but everything Karen read about the investment made it seem like it was a poor choice for her situation. After two decades, Karen wasn't sure that her advisor had her best interests at heart.
If you're going to trust someone with your money, you need to delve a little deeper. Here are seven questions to start asking today.
What Credentials Do You Have and Where Did You Get Them?
Anyone can call herself a financial planner — there are no education or experience requirements. Most people offering advice today haven't been trained in comprehensive financial planning, and instead know only a sliver of the financial world — how to sell stocks or insurance or compute taxes, for example. Sometimes the only training they get is on how to sell the investment products their company offers.
If you want broader guidance, the credentials to look for are:
- CFP: Certified Financial Planner, from the CFP Board of Standards
- PFS: Personal Financial Specialist, a credential by the American Institute of Certified Public Accountants
- ChFC: Chartered Financial Consultant, a credential offered by the American College and typically used by those in the insurance industry
One of these credentials will signal that the planner has education and at least some experience in advising people on a broad array of financial planning issues.
If all you want is advice on which stocks to buy, you may not need a comprehensive financial planner. But if you're trying to juggle multiple goals, figure out how to save enough for retirement, ensure you have the right insurance, and get advice on a host of other issues, you'll want someone with the training to help you.
What Will I Find When I Check Your Record?
This is the advisor’s chance to explain any blotches. Don't take her word for her record, though. You'll want to check with the credential issuer to make sure the advisor does, indeed, have the qualification she says she has.
The CFP site also allows you to do a background check for disciplinary history. Other places to check include FINRA Broker Check, the SEC, and the North American Securities Administrators Association.
If your advisor has an insurance credential, check him out with your state's insurance department. Finally, enter his name in a search engine (along with his credential) to see what pops up. Sometimes it's easier to find news reports of wrongdoing than it is to uncover a formal disciplinary history.
Are You Willing to Be a Fiduciary?
A fiduciary is someone who is required to put your interests first. There are a whole lot of advisors who can't, or won't, promise to do that. They want to be bound instead by what's known as a "suitability" standard, which just means they're not supposed to put you into any investment that's clearly unsuitable for your situation. But they're allowed to put you into one that isn't very good, or that charges too much, because they make more money doing so.
If your advisor says she's willing to be a fiduciary, get her to put it in writing.
How Do You Get Paid?
It's not rude to ask — and any doubletalk you hear in his answer should be a big red flag. Advisors who are registered with the SEC have to provide you what's called a Form ADV that outlines their sources of income, but any advisor should be able to tell you whether he takes commissions, charges only fees, or charges fees and takes commissions.
Knowing how an advisor gets paid also can help you decide whether you need to get another opinion. If Karen's advisor received commissions for selling annuities, for example, Karen might want to hire a fee-only planner to take a look at the deal before investing.
What Conflicts of Interest Do You Have?
There's no such thing as a conflict-free relationship. Someone who earns commissions on investments has an incentive to sell you those investments. Someone who gets paid for managing your portfolio has an incentive to keep as much of your money in her firm as possible — even if you might be better off using a chunk to pay down your mortgage, for example. Someone who gets paid by the hour has an incentive to bill you for more hours.
Ethical advisors resist incentives to enrich themselves at your expense, but you need to know their incentives so you can put their advice into context.
Who Is Your Typical Client?
Now we move from the ethical questions to those that determine whether you and the advisor are a good fit. Someone who specializes in advising entrepreneurs and venture capitalists, for example, may not be the best advisor for an educator who has questions about her state pension system. A planner who targets millennials may not be up-to-date on Social Security claiming strategies.
Age and experience can allow planners to address many different issues, of course, but an advisor who specializes in clients much like yourself may provide a depth of knowledge you wouldn't get elsewhere.
How Often Will We Communicate?
You're hoping for an advisor who will hold your hand through rough markets. Your advisor may be thrilled to provide that service — or she may hope you'll leave her alone to take care of her more profitable clients. It's best to know up front what she's willing to offer and make sure the scope of your relationship fits your expectations.
Liz Weston is an award-winning journalist and author of several money books, including the best-selling Your Credit Score. She writes about personal finance at her site, AskLizWeston. You can like her on Facebook and follow her on Twitter.