MONEY IS THE NUMBER ONE SOURCE OF EMOTIONAL STRESS FOR AMERICANS, according to a recent study1, significantly more than personal relationships, work or health issues. Of those that identified finances as the primary source of their anxiety, nearly half stated that their financial worries revolved around having enough money in retirement or outliving their savings. These are critical planning issues that are not easy for a typical investor to confront on their own, and many people will be more successful in accomplishing their long-term goals with the help of a financial adviser who can be an objective and experienced third party.
Selecting an adviser to help you through the financial transitions in your life is a big decision. This person or firm should be more invested in your financial success than anyone without your last name – and in many cases even more so. Like a physician, an attorney, or an accountant, a good relationship with a financial adviser that you trust should last a lifetime, and replace the emotional stress that Americans report that they feel about money with peace of mind and confidence in the future. Here are ten questions that should be asked and answered when considering a relationship with a potential new financial adviser or when analyzing an existing relationship with a current adviser.
1. "Are you a Fiduciary?" A Fiduciary is a person who acts for the exclusive benefit of their client. This means that they must place the client's interest ahead of his or her own or that of their firm. Fiduciaries must also disclose what their fees are, how they are compensated, and any other conflicts or potential conflicts of interest that might influence an individual's decision to use their services. A fiduciary must act without regard to their own best interest or any other individual or entity besides the client, and must uphold this duty at all times.
In contrast, non-fiduciary financial advisers might receive a commission in exchange for selling you a particular product that isn't the best for you – and not tell you how they have profited from it. They may provide advice to you in areas in which they are not competent. They may fail to disclose a conflict of interest, in which they render recommendations that primarily benefit another party other than the client.
2. "How do you charge for your services, and how much?" you should expect transparency on how much his or her service will cost you. Do not be shy to inquire about initial planning fees, hourly rates, annual charges, or any other costs.
Asking this question can also reveal a potential issue. Many advisers earn commissions from selling specific products. This does not mean that they are untrustworthy, but it does mean that they have an incentive to sell you things. This potential conflict of interest must be disclosed and discussed.
3. "What licenses, credentials or other certifications do you have?" Unfortunately, it is not safe to assume that a financial adviser is legally qualified to render advice! Visit brokercheck.finra.org to verify that the person (and their firm) is registered as required by law. In addition to considering licenses, it is also good to consider employment history and disciplinary records.
In addition, credentials among financial advisers can be confusing. Unlike law, medicine, academia, and accounting which all maintain well-defined courses of study and respected credentials, there are numerous financial designations.
Dr Jim Dahle, the author of The White Coat Investor writes: "I insist that you find a financial adviser who holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) credential or the Chartered Financial Analyst (CFA) designation because each establishes a baseline for the adviser's competence and commitment.
The CFP® and CFA are the most respected designations for financial planning and investment management, respectively. They require members to abide by a code of ethics, have several years of related work experience, complete continuing education requirements and demonstrate mastery of a body of knowledge through a comprehensive examination."
4. "What services do you/does your firm provide?" Implicit in this question is also what assistance that adviser will not give you. Some people are just asset managers or investment advisers, and only provide you advice on your investments. Other advisers provide more holistic financial planning including investments, retirement plans, insurance, estate planning, and tax planning. Go with someone whose capabilities match your needs.
5. "What types of clients do you specialize in?" The best advisers specialize in a specific area, and ideally, they will focus on clients with needs and perspectives just like yours. It is a good idea to work with someone with whom you feel some commonality and who is fluent in your particular issues and circumstances.
It is very common to hear - but it is less helpful - that an adviser "specializes" in clients of a certain net worth. Although it may be true, and may be the only characteristic relevant to that particular adviser, there could be enormous differences in perspective, background, and need amongst clients of similar net worth. Understanding and embracing these distinctions is the hallmark of a truly specialized adviser.
6. "What are you reading right now?" The experts to work with are the ones that are still learning. Inquisitive people relentlessly seek to expand their wisdom in many directions, not limited to the field in which they are employed. Great financial advice is a combination of many disciplines, including psychology, philosophy, history, and mathematics. Passionate learners are also less likely to fall into overconfidence born of certainty.
As well as revealing something about the mind that you might be relying on for advice in the future, this question might reveal possibly stale and outdated knowledge. Information changes constantly and quickly and it is crucial that accountable individuals stay current. Consider the changes in medicine over the past several decades. Wouldn't you prefer a physician that is up to date on the latest research? Financial science is not different.
7. "What is your investment approach or philosophy?" If you have a strong preference for a particular philosophy, ask the adviser what his or hers is. For instance, if you have an ethical preference towards sustainable industry, you might ask about that adviser's experiences with socially responsible investing. If you are a cautious, risk-averse investor, learning about the adviser's perspective on managing risk is important. If you prefer low costs, you might want to avoid an adviser that prefers costly actively- managed funds, high-frequency trading, or hedge funds.
The answer to this question can be almost anything, but it is only "correct" if it intuitively makes sense to you as a client, and if it sounds like it fits the way you see the world. It should be clearly and unambiguously articulated.
Many advisers rely on their companies to provide off-the-shelf investment approaches, so do not be surprised if you do not get a well-developed answer at first. Do not be shy to press for more details. For example, if the advisers' philosophy is to buy and hold "high quality" stocks, he or she should be able to explain the selection and management of those stocks.
8. "How much contact do you have with your clients?" As in the answer above, look for a specific answer to this question. Some advisers hold an initial planning meeting and then see their clients once a year. Others mutually agree upon a meeting frequency with each client. Many advisers default to a quarterly "check-in". There may be a need to meet quarterly, especially during a period of financial transition, but unfortunately this frequency has become the industry standard primarily because it creates cross-sell opportunities for future business. The right answer to this question is variable, but in all cases, it should be well thought-out and a good fit for your expectations.
9. "Will I be working only with you or with a team?" Some advisers practice as part of a team and others adopt an individual approach. One is not necessarily better, but you may have a preference for one or the other. It can be an advantage to have a single knowledgeable point of contact in the individual model, but it may be easier to get simple answers right away with a team. A team may also bring various personalities and complementary skill sets to bear to create an unparalleled client experience, or be bloated and overpriced.
Additional considerations are that if you work with – and pay for – a team, that no teammate has an ambiguous or redundant role, and that it remains easy to reach beyond support staff directly to the advisers if the need arises. Finally, bear in mind that all of the questions above will apply to each person on the team.
10. "What makes your client experience unique or special?" In other words: "Why would I want to work with you?" The top practitioners in any field are not only knowledgeable and dedicated, but they are also passionate about their craft. Working with clients is not a job, it is a calling. The answer that the adviser provides to this question should reveal what is important to them professionally and personally, and should act as a differentiator – it should not be a sales pitch, designed to appeal to any prospect, about what they can do. It should be a declaration about who they are, which in turn will or will not result in instinctive trust.
Any serious practitioner has already devoted significant time and energy thinking about this question for him or herself, so any uncertainty on this response is big red flag. On the other hand, a clearly articulated and compellingly simple answer is a positive sign of a professional who might make a good partner.
Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
(239) 207-4392
29744 Riverview Center Blvd, Suite 108
Bonita Springs, FL 34134
Any opinions are those of Frank Hujsa are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.