Lost in all of the political drama surrounding the government shutdown and the debt ceiling is the fact that we are in the middle of Financial Planning Week! Ironic as it may be that the lawmakers are fighting about the nation’s financial future, maybe this is a perfect time to hit the pause button and take control of your own financial life. For the do-it-yourselfers out there, now may be a good time to review how you are doing, compared to the plan that you laid out at the beginning of the year. For those who work with financial advisors or brokers, schedule an appointment, before you get swept up in the holiday season.
For those who need guidance but are daunted by the head-scratching journey of selecting a professional, here are the ten questions to ask any potential financial advisor, stock broker or insurance salesperson before you retain them:
1) Are you registered as an investment advisor? If yes, then the advisor owes you a fiduciary duty, which is a fancy way of saying that she must put your needs first. Investment professionals who aren't fiduciaries are held to a lesser standard, called “suitability,” which means that anything they sell you has to be appropriate for you, though not necessarily in your best interest.
2) How will I pay for your services? The advisor should clearly state in writing how she will be paid for the services provided. The three basic methods of payment are: fees based on an hourly or flat rate; fees based on a percentage of your portfolio value, often called "Assets Under Management" ("AUM"); and commissions paid per transaction. How often you expect to trade, and whether you want your money pro-actively managed, will help determine which model works best for you.
3) What experience do you have? Find out how long the advisor has been in practice and where. Also ask if she has any professional certifications, licenses or designations. While these are signals of credibility, they don't guarantee a successful relationship. Here’s a description of some of the more common financial planner designations:
- CFP® certification: The Certified Financial Planner Board of Standards (CFP Board) requires candidates to meet what it calls “the four Es”: Education (Education (through one of several approved methods, must demonstrate the ability to create, deliver and monitor a comprehensive financial plan, covering investment, insurance, estate, retirement, education and ethics), Examination (a 10-hour exam given over a day and a half; most recent exam pass rate was 62.6 percent), Experience (three years of full-time, relevant personal financial planning experience required) and Ethics (disclosure of any criminal, civil, governmental, or self-regulatory agency proceeding or inquiry). CFPs must adhere to the fiduciary standard.
- CPA Personal Financial Specialist (PFS): The American Institute of CPAs® offers a separate financial planning designation. In addition to already being a licensed CPA, a CPA/PFS candidate must earn a minimum of 75 hours of personal financial planning education and have two years of full-time business or teaching experience (or 3,000 hours equivalent) in personal financial planning, all within the five year period preceding the date of the PFS application. They must also pass an approved Personal Financial Planner exam.
- Membership in the Membership in the National Association of Personal Financial Advisors (NAPFA): NAPFA maintains a high bar for entry: Professionals must be RIAs and must also have either the CFP or CPA-PFS designation. Additionally, NAPFA advisers are fee-only, which means that they do not accept commissions or any additional fees from outside sources for the recommendations they make. In addition to being fee-only, NAPFA advisers must provide information on their background, experience, education and credentials, and are required to submit a financial plan to a peer review. After acceptance into NAPFA, members must fulfill continuing education requirements. The stiff requirements make NAPFA members among the tiniest percentage of registered investment advisers, with only 2,400 total current members.
4) What services do you offer? The services offered can depend on a number of factors including credentials, licenses and areas of expertise. Some offer advice on a range of topics, but do not sell financial products. Others may provide advice only in specific areas such as estate planning or tax matters.
5) What is your approach to financial planning and investing? Some advisors prefer to develop a holistic plan that brings together all of your financial goals. Others provide advice on specific areas, as needed. Make sure the advisor’s viewpoint on investing is neither too cautious nor overly aggressive for your risk tolerance. Also ask whether the planner makes investment decisions herself, or depends on others in the firm to do so. What was the advisor's performance in both good and bad markets and ask yourself whether it’s more important to you to make money in a rising market or prevent losses in a down market. A great follow up question: what were the three worst investment decisions you made over the past five years, and how did you correct them?
6) Can you provide three references? Ask for two current clients whose goals and finances match your own, as well as a professional reference, like an accountant or estate attorney.
7) Do you have a financial interest in the entity that houses my account? This is your Madoff-prevention question. When interviewing advisors not associated with large brokerage or insurance companies, 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. In the Madoff example, he was the investment advisor, broker-dealer, clearing agent and custodian for all of his client accounts.
8) Is there anything in your regulatory record that I should know about? Part of your research should include conducting background checks on the professional you may hire. You can visit 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 understandable (marketing materials not pre-approved; non-client or investment violations).
9) How often will we interact? What should you expect in terms of frequency of verbal, written and in-person communication? Also ask whether the advisor will remain your primary contact.
10) Do I 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 advisors out there, who would like to help you out.