Need an Advisor? Here's 13 Questions to Ask

The Securities and Exchange Commission has released “Regulation Best Interest” and at 771 pages, you might have thought that the new rule would make it easier to distinguish among the hundreds of thousands of folks running around offering financial products and services, some with a vegetable soup worth of designations after their names. Before you sign on any dotted lines, here are 13 questions to help you out.

1) Do I Need to Hire Someone to Help Me out With My Money? If you think that you have the time, energy, know-how and emotional discipline to do so, managing your own financial life can be rewarding. As a bonus, the price is right! But as I wrote in my book, The Dumb Things Smart People Do with Their Money, “sometimes you need financial advice because you’re your own worst enemy: You think you know more than you do, and you have to come clean with yourself. Sometimes you need financial advice because you manage your money in a way that your romantic partner finds abhorrent, and the two of you need to get on the same page. Sometimes you need a financial advisor because you just don’t want to do the work of managing your affairs.”

2) Can I Use a Robo-Advisor or Online Platform, Instead of a Human Being? If you haven’t been following the evolution of financial technology, you will be happy to know that most organizations have added an advice component to their online services for reasonable fees of less than 0.50% a year. Industry giants Vanguard and Charles Schwab join Betterment in offering automated service with access to CFPs. Vanguard Personal Advisor Services requires a $50,000 minimum, Schwab Intelligent Portfolios Premium has a $25,000 minimum and Betterment Premium requires a $100,000 minimum.

3) What’s the Deal With FIDUCIARY? Ah, the F-Word. A fiduciary duty requires that the person providing advice or guidance acts in your best interest, even if doing so is not in their company’s best interest. In financial services, this means that he/she recommends a product or service that is better for you, regardless if it results in lower compensation for his/her. It may surprise you to learn that about half of the so-called financial professionals out there do NOT have to put your best interest first. They are held to a lesser standard, called “suitability,” which means that anything they sell you has to be appropriate for you. Even though the SEC’s new Best Interest rule is a slight improvement, the rule is not nearly as robust as consumer advocates wanted.

4) If My Broker Is Not Held to the Fiduciary Standard, Should I Fire Him? Not necessarily, but fiduciary is preferable. If you remain with someone who is held to suitability, just understand that when he/she is recommending a certain product or service, you will need to probe a little further and find out whether or not there is a cheaper alternative available. You should also ask how much money the company makes from whatever is being sold to you.

5) Is One Fee Structure Better Than Another? There’s a case to be made for commission-based, asset under management (AUM is where you pay a percentage of assets being managed) and hourly or monthly retainer (sometimes called fee-only). The vast majority of those held to the fiduciary standard use either AUM or fee-only.

6) How Important is Experience? You should always ask how long the advisor has been in practice and if he/she is new to the business, is there a more experienced colleague who is mentoring? Also ask about professional certifications, licenses or designations. The gold standard of certifications and memberships include: CFP® certification from the Certified Financial Planner Board of Standards, CPA Personal Financial Specialists, members of the National Association of Personal Financial Advisors, and Chartered Financial Analyst.

7) Big Versus Small Firm: Discuss! This is a tough one, because many of the largest commercial banks and financial institutions do not adhere to the fiduciary standard of care. On the other end of the spectrum, there are loads of individuals, who claim to be advisors, but are often product salesmen. If you go small, make sure that there is adequate staff to deal with service requests.

8) Do I Need Full-Blown Financial Planning? Everyone needs some sort of plan to prioritize goals and to create a road map to help achieve those goals. In fact, some professionals conduct financial planning alone and do not sell financial products or ongoing money management services.

9) Should I Ask for References? I know that you think that the pro is not going to give you the name of someone who dings him, but you may get some interesting feedback from current clients whose goals and finances match your own. You many also want to ask for a professional reference from a CPA or attorney.

10) How Can I Prevent Getting Madoff-ed? When interviewing those who are not associated with a large brokerage or insurance company, ask if they use an independent, third party custodian or clearing firm (this is the entity that produces your statements), which prevents the advisor from having direct custody of your assets and adds another level of security for your account.

11) Where Can I Check Regulatory Records? Go to the Securities & Exchange Commission and FINRA websites or the State Securities website NASAA as well as the CFP Board. While some violations are non-starters (settlement of multiple customer complaints) others may be acceptable to you.

12) How Often Should I Expect to Hear from My Financial Pro? That’s something you need to iron out before you start the relationship. Just ask about the frequency of verbal, written and in-person communication, and also, who will be the primary contact.

13) Do I have to Like This Person? You are about to enter into an intimate relationship that will hopefully last a long time. If you have any reservations, move on. There are plenty of qualified professionals who can help you out.