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How to Hire a Financial Advisor

05.11.10

Custody

The first question to ask is “Who has my money? Hopefully a well-known, third party, public custodian. Online access to your accounts is a must and deposits or checks written out should be made to the name of your account or the third party custodian never to the financial advisory firm or advisor.

Transparency

Are your monthly or quarterly statements coming directly from the third party custodian in addition to those coming form your advisory firm? Statements should specify securities held, ticker symbols, account values and how your advisor is being compensated.

Compensation

Knowing exactly how your advisor is compensated will help determine if they’re truly working in your best interest. Are they commissioned on every product they sell or trade made? Are they compensated based on the size of your portfolio (i.e., fee-only)? Or are they compensated on a flat, hourly basis. Decide which model is right for you, but know up front how the firm you are considering is compensated. Does your advisor receive compensation from outside managers with whom they place your money? Do they benefit more from selling the firm’s internal products? It may be important to know if your advisor also sells insurance and annuities. Also inquire about if the firm receives referral fees from outside advisors. Understanding compensation is a key component to determine if the advisor is right for you.

Integrity/Ethics

At the nucleus of any advisor relationship is trust. Built on two factors, you should know that 1) the advisor is working in your best interest as a Fiduciary and 2) you’ve received full disclosure of their background, business practices, fees and any potential conflicts of interest.

Fiduciary

If your advisor can’t tell you that they hold themselves out as a Fiduciary, you should strongly consider one that can. Not all advisors choose to hold themselves to this higher standard of care. Being a Fiduciary means that the advisor will deliver all financial planning services in accordance with the following standard of care:

* Put the client's interests first
* Act with due care and in the utmost good faith
* Do not mislead clients
* Provide full and fair disclosure of all material facts
* Disclose and fairly manage all material conflicts of interest

In addition, if you hire someone with the CFP® designation, they must abide by a stringent Code of Ethics which is built on the following principles: Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, and Diligence.

Credentials

What credentials does your advisor hold? CFP® (Certified Financial Planner™) should be at the top of the list. Other designations to look for are Chartered Financial Analyst, Certified Public Accountant, or Chartered Financial Consultant. If the advisor holds certain securities licenses (for example, Series 6, 7, or 63), this simply means they can sell you products but is not necessarily an indication that they are credentialed to handle your wealth.

Educational Background

What degree does your advisor hold and from what college? Advanced degrees such as an MBA, JD (law), or a Masters degree can help an advisor’s ability to better serve its clients.

Affiliations

Ask if the advisor belongs to the Financial Planning Association or other industry boards.

Business Continuity

How long has the firm been in business? And how long have they been in the financial services industry? Longevity is an important factor but doesn’t necessarily always translate into trust or a solid track record.

Financial Planning

Helping you with investments is important, but your advisor should also be able to help you in all areas of financial planning including retirement, estate, insurance, charitable giving, asset protection, education planning and due diligence when buying or selling a company.

Confidentiality

Make sure that your advisor has a strict written policy that keeps your information confidential and procedures in place to safeguard your personal data.

Regulation and Background Check

The SEC, FINRA, a state regulatory board, and the CFP Board all have a mission to protect the investor. Know which regulatory body will be watching over the advisor or firm you’re about to hire.

If the firm is a Registered Investment Advisor with more than $25 million under management, the information (Form ADV) can be found at http://www.sec.gov. Information about the advisor's clients, fees, and disciplinary actions can be found here.

If the firm is a bank, stock brokerage firm, or an insurance agency, this information can typically be found at http://www.finra.org (search under BrokerCheck). You can see where they are registered, what licenses they hold, and employment history. In addition, you can see any formal investigations and disciplinary actions, customer disputes, criminal charges, and other financial disclosures.

Ask the advisor if they or their firm have ever been disciplined and then examine the records online. You can learn additional information about advisors at http://www.cfp.net and http://www.fpanet.org.

Get it in Writing

If an advisor is not willing to sign a contract outlining all the services they will perform for you, including how they will be compensated, you should not be doing business with them. In addition, make sure your advisor provides you with a written Investment Plan (that you and the advisor both sign) detailing how your assets will be invested.

Investment Plan

Failure to adopt a written diversified Investment Plan could be a huge mistake. Hiring an advisor that simply invests each client’s assets identically isn’t truly an advisor – someone that has taken the time and interest to learn up front about your goals and objectives and then draft a written diversified Investment Plan that reflects those goals, your risk tolerance and time horizon. Also NEVER accept the response “It’s proprietary” when asking the advisor’s investment strategy or philosophy. And be leery of the promise of unrealistic annual returns.

Internal Products

Be careful of an advisor who pushes internal products or "proprietary" products. An advisor may be compensated at a higher rate for selling the firm's own products. It’s always better to hire an advisor that can access the entire universe of financial products from which such advisor is not compensated any more or less to do so.

References

Ask for, and talk to, 2 or 3 clients of the firm you are about to hire. Also ask outside advisors (e.g., CPAs and attorneys) what they think about the financial advisory firm.



posted by Rachel Meador on 05.11.10 • comments (0) • Wealth Management