How to Interview a Financial Advisor

Advisor CSI, Reading Lounge

HOW TO INTERVIEW A FINANCIAL ADVISOR

First off, be skeptical and ask questions.  Some questions to ask are below.  Both the SEC and FINRA have published lists of tips on picking an advisor and questions to ask.  The advice, tips and questions in this article are complied from those sources.  Remember, any good financial advisor will welcome questions.  In fact, he or she should have some questions for you, (but that’s a separate topic).  Take notes.
Tip 1. Make sure the financial professional is licensed.  Always check the background of any financial professional to make sure the person is licensed.  Unlicensed, unregistered persons commit much of the investment fraud in the United States.
Tip 2. Find out if the products and services available are right for you.  Financial professionals offer a range of financial and investment services such as advice on choosing securities and purchasing and selling securities.  Just as a grocery store offers more products than a convenience store, some financial professionals offer a wide range of products or services, while others offer a more limited selection.  Think about what you might need, and ask about what would be available to you.  For example, do you need access to a broad range of securities, such as stocks, options and bonds, or will you mostly want a few types such as mutual funds, exchange traded funds, or
insurance products?  Do you need a one-time review or more complete financial plan?  Do you want to do your own research, but use the financial professional to make your trades or to provide a second opinion occasionally, or do you feel you need a professional recommendation each time you think about changing or making an investment?  What about ongoing investment management, with the financial professional getting your permission before any purchase or sale is made, or ongoing investment management, where the financial professional decides what purchases or sales are made, and you are told about it afterwards?
On a side note, be aware that just like there are DIY investors, there are DIY Advisors.  In the mid 80s I developed a product for EF Hutton called Hutton Portfolio Management where we trained certain Advisors to follow a methodology and become an investment manager.  It was not open to everyone, only those who passed an exam and met certain quality criteria.  In 1991 I created Guided Portfolio Management which followed the Hutton successor firm (Shearson or Smith Barney at the time: after a while they all blur together into a miasma a bad ties and golf shoes).  Today, nearly every firm has a “DIY” program where a Rep acts as PM (“Rep as PM”).  Just because they participate, does not mean they are good at it!  In the independent advisor world, custodians like Schwab and Fidelity make it easy for Advisors to operate as a PM.  They do not provide any oversight, so caveat emptor.
Tip 3. Understand how you’ll pay for services and products, and how your financial professional gets paid as well.  Many firms offer more than one type of account.  You may be able to pay for services differently depending on the type of account you choose.  For example, you might pay:
 An hourly fee for advisory services;
  • A flat fee for an annual portfolio review or a financial plan;
  • A commission on the securities bought or sold, such as $12 per trade;
  • A fee (sometimes called a “load”) based on the amount you invest in a mutual fund or variable annuity;
  • A “mark-up” when you buy certain investment products, such as bonds or other debt securities, or a “mark-down” when you sell them.

 

Depending on what services you want and on the financial services firm in question, one type of account may cost you less than another.  Ask about what alternatives make sense for you.  And remember: even if you don’t pay the financial professional directly, such as through an annual fee, that person is still getting paid.  For example, someone else may be paying the financial professional for selling specific products.  However, those payments may be built into the costs you ultimately pay, such as the expenses associated with buying or holding a financial product.  While some of these fees may seem small, it is important to keep in mind that they can add up, and in the end take away from the profits you otherwise could be making from your investments.
Tip 4. Ask about the financial professional’s experience and credentials.  Financial professionals hold different licenses.  For example, financial professionals who are representatives of broker-dealers must take an exam to hold a Series 7 general securities license, while state regulators often require representatives of investment advisors to hold certain licenses, such as a series 65.  Financial professionals also have a wide range of educational and professional backgrounds.  They may also have certain designations after their names, which are titles given by industry groups that themselves are not regulated or subject to standards other than their own.  Don’t accept a professional designation as a badge of knowledge without knowing what it means, and caveat emptor when it comes to credentials.
Tip 5. Ask the financial professional if he or she has had a disciplinary history with a government regulator or had customer complaints.  Even if a close friend or relative has recommended a financial professional, you should check the person’s background for signs of any potential problems, such as a disciplinary history by a regulator or customer complaints.  The SEC, FINRA, and state securities regulators keep records on the disciplinary history of many of the financial professionals they regulate.  State securities regulators also have background information on brokers as well as certain investment advisers.
Last, if you don’t know where or how to check out an advisor, you can hire someone who does that for a living for a nominal charge (not an asset based fee!)
Some Key Questions for Hiring and Working With a Financial Professional
Before The Hire: Expectations of the Relationship
  • How often should I expect to hear from you?
  • How often will you review my account or make recommendations to me?
  • If my investments aren’t doing well, will you call me and recommend something else?
  • If I invest with you, how can I keep track of how well my investments are doing?
  • Do you take discretion or do I approve each transaction?
  • Are you a fiduciary to me? (If the answer is “No,” leave).
Before The Hire: Experience and Background
  • What can you tell me about you and your firm?
  • What experience do you have, especially with people like me?  What percentage of your time would you estimate that you spend on people with situations and goals that are similar to mine?
  • What education have you had that relates to your work?
  • What professional licenses do you hold?
  • Are you registered with the SEC, a state securities regulator, or FINRA?
  • How long have you done this type of work?
  • Have you ever been disciplined by a regulator?  If yes, what was the problem and how was it resolved?
  • Have you had customer complaints?  If yes, how many, what were they about, and how were they resolved?
  • How long has your firm been in business?
  • How many arbitration awards have been filed against your firm?
  • What training and experience do you have?
  • How long have you been in the business?
  • What other firms have you been registered with?
  • What is the status of those firms today?
  • Have you personally been involved in any arbitration cases?
  • What happened?
  • What is your investment philosophy?  (If they cannot articulate it specifically so you understand, leave)
  • How long have you been “managing money”?
  • Do you have an audited and track record available for review?  (Or do you have one at all?)
  • What are your other clients like?
  • How do you get paid?  By commission?  Amount of assets you manage?  Another method?
  • Do I have any choices on how to pay you?  Should I pay you by the transaction, or a flat fee regardless of how many transactions I have?
  • If your financial professional changes firms, ask: Did they pay you to change firms? Do you get anything for bringing me along?
 Before The Hire: Payments and Fees
  • How do you get paid?
  • How does your firm get paid?
  • Given my situation and what I’m looking for, what is the [best and most cost effective] way for me to pay for financial services?  Why?
  • How and when will I see the fees I pay?
  • Which of those fees will I pay directly (such as a commission on a stock trade) and which are taken directly from the products I own (such as some mutual fund expenses)?
  • If I invested $1000 with you today, approximately how much would you get paid during the following year, based on my investment?
  • Does someone else (such as a fund company) pay you or your firm for offering or selling these products or services?
  • How frequently will I get statements?
  • Should I expect to understand what the statement tells me? (Correct answer should be “yes”)
After The Hire: Investment Products
  • How many different products do you offer?
  • What type of products do you offer?
  • Do you offer “house” products?  If so, what types of products are they, and do you receive any incentives for selling these products, or for maintaining them in a customer’s account?  What kind of incentives are they?
  • Regarding a Specific product:  Is this investment product registered with the SEC and my state securities agency?
  • Do you make more if I buy one specific security that you recommend rather than another?  If you weren’t making extra money, would your recommendation be the same?
  • Are you participating in a sales contest or do you have sales requirements – is the purchase you recommend really in my best interest, or are you trying to win a prize or meet a quota?
  • You’ve told me what it costs me to buy this stock (or bond, or mutual fund);  how much will I receive if I sell it today?
  • Where do you send my order to be executed?  Can we get a better price if we send it to another market?
  • Does this investment match my investment goals?  Why is this investment suitable for me?
  • How will this investment make money?  (Dividends? Interest? Capital gains?);  Specifically, what must happen for this investment to increase in value?  (For example, increase in interest rates, real estate values, or market share?)
  • How much does it cost?  And that means more than just the price – What are the total fees to purchase, maintain, and sell this investment?  Are there ways that I can reduce or avoid some of the fees that I’ll pay, such as purchasing the investment directly?   After all the fees are paid, how much does this investment have to increase in value before I break even?
  • How liquid is this investment?  How easy would it be to sell if I needed my money right away?
  • What criteria will be used to decide when to buy or sell?
  • What are the specific risks associated with this investment?  What is the maximum I could lose?  (For example, what will be the effect of changing interest rates, economic recession, high competition, or stock market ups and downs?)
  • What is the underlying source of revenue?  If the investment is equity, what is the company?  If it is fixed income, who is the bond issuer and what are their other liabilities or obligations?
  • How long has the company selling equity been in business?  Is its management experienced?  Has management been successful in the past?  Have they ever made money for investors before?
  • Is the company selling equity currently making money?  How are they doing compared to their competitors
  • Where can I get more information about this investment?  Can I get the latest reports filed by the company with the SEC:  a prospectus or offering circular, or the latest annual report and financial statements?
Specific Questions For Mutual Fund Investors:
  • How has this fund performed over the long run?  Where can I get an independent evaluation of this fund?
  • What specific risks are associated with this fund?
  • What type of securities does the fund hold?  How often does the portfolio change?
  • Does this mutual fund invest in any type of securities that could cause the value to go up or down rapidly in a short period of time?  (For example, derivatives?)
  • How does the fund perform compared to other funds of the same type or to an index of the same type of investment?
  • How much will the fund charge me when I buy shares?  What ongoing fees are charged?
  • How much will the fund charge me when I sell shares?
  • Is the fund portable?  If I move my assets to another firm, will I be able to continue holding the fund or will I need to liquidate it?

 

Finally, stay involved and be aware of timelines.  If you have a problem, act promptly!  By law, you only have a limited window in which to take legal action.  Talk to your financial professional and explain the problem.
• Where is the fault?
• Were communications clear?
• Refer to your notes.
• What did the financial professional tell you?
• What do your notes say?
If your financial professional can’t resolve your problem, then talk to the financial professional’s supervisor (which, for brokers, is often the firm’s branch manager).
If the problem is still not resolved, write to the compliance department at the firm’s main office.  Explain your problem clearly, and how you want it resolved.  Ask the compliance office to respond to you within 30 days.  If you’re still not satisfied, send the SEC or this writer your complaint.
Last tip: Take notes and refer to them regularly.  If you see or feel a disconnect, then follow the “problem” line just above.