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Questions to Ask When Choosing a Financial Adviser

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A good financial adviser can help you manage your savings, investments and spending so you achieve your financial goals. But it’s crucial to select an adviser who is experienced, ethical and a good fit for your specific needs. Here are important questions to ask before choosing a financial adviser…

  • How many years of financial planning experience do you have? Advisers may bolster their experience by citing the years they’ve been in the financial services industry—even if they spent most of that time as an assistant or a salesperson. You want to know how long they have been helping people like you manage their financial plans.
  • Are you a CFP or a CFA? Advisers can use more than 200 professional credentials to demonstrate their experience, but many are fancy-sounding acronyms that require no real expertise. Advisers can simply pay a fee to gain the designations. The two above—short for Certified Financial Planner and Chartered Financial Analyst, respectively—are the gold standards for advisers because they require years of study and rigorous examinations. Also ask whether an adviser is a member of The National Association of Personal Financial Advisors (NAPFA), a professional organization of fee-only financial advisors who must sign and adhere to a strict code of ethics.
  • Do you have any criminal convictions, or have you experienced any bankruptcies, foreclosures or tax liens? You can use a free online tool called BrokerCheck to uncover regulatory actions against an adviser, but determining criminal history is more challenging. Likewise, you can’t easily find records of any trouble an adviser has had managing his or her own money. Asking this question isn’t guaranteed to elicit a truthful answer, but an adviser who opens up about past difficulties might not be automatically disqualified. For example, many people have experienced bankruptcies or foreclosures related to medical emergencies or divorce—which might actually give an adviser valuable insight into preventing and helping others deal with financial crises.
  • Will you provide full disclosure—in writing—of your fees? Advisers may charge an hourly rate (typically $150 to $250)…or an annual fee based on a percentage of your assets (1% to 1.5% is common). The option that’s better for you depends on how much ongoing planning and advice you think you’ll need. If you don’t anticipate needing regular meetings, an hourly rate could be more cost-effective. Other advisers get paid by sales commissions on your investment purchases—a risky arrangement because it gives advisers incentive to choose higher-priced products or change investments more often to line their own pockets. However, an adviser who accepts sales commissions might work for you if you know this person well enough to trust him and you don’t plan to change your investments frequently. Whatever fee model an adviser uses, you want in writing exactly how much you’ll pay for all planning and investment management services.
  • How much will I pay for my investment products? In addition to the adviser’s fees, you also typically pay fees related to owning investments such as stocks and funds. These include, for example, annual expenses charged by fund companies (on average, 0.10% or 0.11% for bond and equity index funds, respectively, and 0.60% or 0.84% for actively managed bond and equity funds). The adviser might also favor funds that carry sales charges, called “loads,” that are deducted from your initial investment. For most people, this just adds unnecessary expenses. You might also pay transaction fees for buying and selling investments such as stocks, bonds and other types of securities. Such fees can vary widely—and every penny will either reduce your investment returns or be deducted from your savings or investment portfolio. Ask to see all the types of types of potential fees in writing so you get a good idea of the full costs you might face.
  • Will you acknowledge in writing that you are a financial fiduciary when providing me advice and services? You want to hire not only a financial adviser, but someone who is also a financial fiduciary because that is what holds advisers to the highest ethical standards. A fiduciary must provide advice with the client’s best interests in mind and disclose any potential conflicts of interest. However, some financial professionals, such as stock brokers, are held only to what’s called a “suitability standard,” which is a vague, less strict guideline for recommending financial products.
  • What is a sample portfolio you would use for an investor my age? This is a quick way to gauge an adviser’s overall investment strategy without getting a sales pitch. Reviewing the mix of investments the adviser typically uses for someone your age—such as relatively straightforward funds and ETFs versus more exotic instruments such as hedge funds or private equity—helps you gauge whether you’re comfortable with an adviser’s investment approach. If you are, you can work together on a more detailed portfolio customized to your needs.
  • Can I see the questionnaire you’ll use to determine my goals and risk tolerance? Good advisers will take time to learn about your unique needs and biggest fears so they can help you develop appropriate plans. Examining an adviser’s questionnaire can help you decide whether the process will be too shallow…or will really uncover your most important financial needs and concerns.
  • How frequently will we communicate, and through what means? Advisers use face- to-face meetings, email, phone calls and even Skype calls to communicate with their clients. You want a breakdown of which methods will be used, and how often, to understand the level of service you’ll get.
  • What kinds of clients do you focus on? This is especially important if you have needs beyond straightforward retirement planning (for example, you’re a business owner or a widow who finds herself suddenly in charge of family finances that her husband used to manage). An adviser who has a lot of experience with clients like you is more likely to understand those needs.
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Source: Jack Waymire, author of Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and founder of Paladin Research & Registry, which offers free, online investor education and maintains a database of vetted, documented financial advisers.
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