Derek Burnett
Derek Burnett is a Contributing Writer at Bottom Line Personal, where he writes frequently on health and wellness. He is also a contributing editor with Reader’s Digest magazine.
Hiring a financial advisor is one of the most important decisions you can make. Because the work they’ll do for you has a very real and lasting impact on your life, it’s crucial that you find a financial advisor you can trust. No one wants to open their books, much less their very personal hopes and dreams, to someone who’s going to overcharge them, ignore their wishes, or compromise their interests. Here’s how to make sure your relationship with your advisor is marked by openness and transparency, not just during the hiring process but throughout your entire engagement.
In an earlier installment, we discussed the various types of financial advisors and the different qualifications, licenses and designations each might have. Obviously, your search for an advisor will begin there: Who performs the service I’m looking for and has the best qualifications to do the work well? But simply having the paper qualifications to advise you in the areas you’re looking for doesn’t necessarily mean the person is going to be as open as you need them to be. To nail that down, you need to do some extra digging.
You may have received a referral to an advisor from a friend or relative. Before you speak with the advisor, ask the person making the referral a few questions, not just about the advisor’s effectiveness but about the transparency they provide. “Is it always clear to you how much the advisor is charging? Is the fee structure complicated or simple? Does the advisor discuss conflicts of interest with you? Do you feel like you’re consulted adequately on important decisions? Is your advisor good at explaining things? Do they have a knack for simplifying complex topics? Have you ever felt like you were being led into something you didn’t quite understand?”
Listen carefully to your friend or relative’s answers (If you haven’t received a referral from someone you know, you can ask a prospective advisor to put you in touch with one of their clients and direct your questions to that person). Bear in mind that when asked for referrals, people often embellish the quality of the things they’re recommending, as if it reflects better on them if everything appears flawless. If the person hesitates or appears to be hedging, take note.
Whether you’re acting on a stellar recommendation, a lukewarm recommendation, or no recommendation at all, your next step is to pick up the phone—or, even better, sit down face-to-face with the prospective advisor—and ask some very pointed questions. Don’t feel shy about this. Advisors understand that, even though you’re the one who reached out to them, they’re essentially asking you to hire them, which makes your conversation a kind of job interview. There’s no reason why you shouldn’t treat it that way.
In your interviews with advisors, be sure to cover the following transparency-related topics.
A trustworthy financial advisor should be able to tell you, clearly and understandably, how much they charge and how they structure their fees. There are several different types of fee structures, including fee-only, commission-only, and hybrid structures combining flat flees with commissions. But just hearing someone mention one of these labels isn’t enough. Make sure you understand what it entails. For example, an advisor could charge on a fee-only basis by charging a single project-based fee, an annual fee based on a percentage of your assets invested, or an hourly rate. A commission-based advisor should tell you exactly which types of products or transactions earn them a commission. Whatever the fee structure, it should make good intuitive sense and should be something you can identify and calculate so that you know what you’re paying.
You should also seek to understand not just how much you pay, but when and how you are expected to make payments. Some fee structures are set up such that the customer scarcely “feels” the payment. It’s taken out behind the scenes, either as commission or as a percent of assets (in which case it essentially comes out of your return on your investments). Such arrangements are great for people who don’t like “feeling the pinch,” but you always want to know how the payments are going to be made and to have access to the records of payment.
Although more and more advisors are moving to a fee-only model, citing its lack of conflict of interest, there remains some debate about the best type of fee arrangement. For the purposes of transparency, the best fee structure is the one that you can see and understand and keep track of.
It’s important for you to get a sense from the advisor what drives the decisions concerning your portfolio. What is their investment philosophy? Does their appetite for risk generally match yours? Do their social values align with yours when it comes to investment? What goes into their thinking when they decide to recommend or advise against certain products? How comfortable are they sharing that thinking?
Perhaps the most important transparency question has to do with conflicts of interest. A key question is, “Are you a fiduciary?” If the answer is yes that means that the advisor is legally and ethically required to make recommendations with your financial best interest in mind. For many people, whether or not an advisor is a fiduciary is a deal-breaker. But understand that there’s more to transparency than fiduciary status, and that there are plenty of highly ethical commission-based, non-fiduciary advisors out there.
A trustworthy financial advisor is more than a decision-maker. A financial advisor you can trust is a teacher, someone who can explain, in clear, everyday language, how products work and why they’re a good or bad idea. Turn the job interview into an audition by asking the advisor to explain a concept to you, such as the difference between term and whole life insurance or fixed versus variable annuities. You should come out of the conversation feeling like there’s a good rapport and that you’d be comfortable asking the advisor any type of question that might come up.
Ask the advisor to disclose any of the following marks on their record (or that of their firm):
Unfortunately, financial advisors are only required to disclose the first three of those items. For the others, they have discretion as to whether they deem the information “material” to your decision to hire them. Whatever answers you get, follow up by asking the advisor for their ADV brochure, or obtain it by visiting the SEC’s Investment Adviser Public Disclosure website. The brochure contains information deemed “material.” Advisors must also post a “Customer Relationship Summary” to their websites, which has similar information to that contained in the ADV brochure. You can also look for disciplinary information on FINRA’s broker check or at your state’s regulatory body. For lawsuits, arbitration claims or controversies, Google is your friend.
