What to Ask a Financial Adviser

Financial advisers and planners attend seminars and classes and read books so they can learn how to win your business or, if you're already their client, to "deepen the relationship." The customary procedure is for the adviser to ask you questions, orally and in writing, and for you to reply. Then the adviser considers the facts and tells you what he or she thinks.

But when you decide it's time to hire (or replace) a financial adviser, it is a two-way street. Are you also prepared to be assertive? You should be. Whether you're working with a financial planner on general big-picture matters or an investment manager who will actually handle your money, you are retaining these people and their organization to work for you. This may cost you as much as 2% annually of your total assets that the adviser manages—probably more than you've had to pay an accountant or a lawyer. So there is no reason to be shy or to hold back in any introductory session. Tell the planner or broker or investment manager—in a genial but matter-of-fact way—that you would like him or her to answer a series of your own questions in writing. If you run into resistance, or learn something troubling, take your business elsewhere.

This proactive, "educated consumer" approach doesn't play well with all planners. After I wrote a story in Kiplinger's Personal Finance chronicling one family's search for an adviser—a year-long process that included a thorough if somewhat cheeky questionnaire prepared by the investor—one planner wrote to me rather indignantly about my praise of this approach. The planner said the questions should have been "How old are you?" and "What school did you attend," and then the more pertinent, "What are your other clients like?" The first two are irrelevant, as long as the adviser has recognized professional credentials and a clean record. On the third point, yes, if all the other clients are older and richer, or younger and with less-complex affairs, that's a fair warning. You could end up as an afterthought to the adviser, the equivalent of being seated at the darkest table next to the kitchen, the last client to get a call returned.

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So what questions should you ask? The AARP has a sample financial-adviser questionnaire, but it is overly weighted with bureaucratic matters such as "Are you a registered investment adviser?" (not all planners are, and anyway, it doesn't make one competent) and "Have you ever been disciplined by the Securities and Exchange Commission, the NASD, or other regulator?" That's important to know, but you don't normally start by asking a professional if he or she is a crook. Perhaps there's a regulatory blemish, but with extenuating circumstances. Better to talk this subject out.

In all seriousness, many advisers are receptive to being interviewed. They have an incentive to get off on the right foot with you or any other prospective client. So concentrate on the nitty-gritty: the cost, the investment performance, the type of investments the adviser favors or is most expert about, and the way the practice operates to serve you. There's also the issue of whether the adviser is a fiduciary (which means your interests legally come first) or a broker, which puts the pro in the awkward position of trying to improve your finances while owing primary legal allegiance to an employer, who may have sales quotas and other rules designed, first and foremost, to boost its profits. These are the areas you want to explore in your interviews and questionnaires.

First, the fees

There are all kinds of arrangements on how you pay an adviser. Fee-only financial planners charge by the hour, but they may also bill a percentage of your assets if you retain them to provide hands-on investment advice such as to design a portfolio of mutual funds. Others charge a combination of fees and commissions. So it's key to ask the adviser to provide you a written breakdown of all fees and commissions, how they are figured, and which ones are fixed and which ones are variable. You can also ask how these charges compare to industry benchmarks. (One percent of total assets is fair; 1.5% is high although common; and more than that is too much.) After all, many no-load mutual funds have low expenses, but if a planner charges you several thousand dollars to assemble a simple mix of index funds and then takes a cut of your balances when there's little or no management required, you're wasting your money. Someone else might merely charge you $750 to take five hours to evaluate and reconfigure your investments and to update you every quarter. If you need additional advice, you can pay as you go.

Next, the performance

This is a tough one because the timing of investments determines the performance. When an adviser makes claims—which they sometimes do on their Web sites or in brochures—that other or "typical" clients have earned, say, two percentage points a year more than the S&P 500 over a long period, you need to see objective evidence. This result is plausible, but you might engage the adviser on the subject of this "track record" by saying, "I know you have experience and credentials, but can you show me how exactly you have delivered this sort of return?" You'll at least get a sense of how the adviser expects to add value to your portfolio—at least enough to cover his or her fees. (Remember, you can always solicit advice at a low cost from Vanguard or Fidelity, as long as you're content to use their mutual funds for most of your investing.)

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The adviser may respond by introducing the idea of risk-adjusted returns, explaining that an 8% long-term return with low volatility is better than 8% with considerable ups and downs. Again, ask the adviser to tell you how he or she controls the risk and rebalances or rethinks the investment mix to keep you out of trouble. Many fee-only financial planners are conservative and prefer index funds. Brokers with large national firms may suggest you use separately managed accounts run by outside investment advisers. This costs more but gets you active management, which could over time give you superior returns to the market indexes. If you don't want indexing, this is the time to say so.

Service counts

I've looked at gobs of investment advisers' and planners Web sites, and you can too. You can locate them through random Googling, or consult association Web sites. NAPFA (www.napfa.org) is the National Association of Personal Financial Advisors, a group of financial planners who charge fees but not commissions. The FPA (www.fpanet.org) is the Financial Planning Association, which includes planners of all sorts. And IAA (www.investmentadviser.org) is the Investment Adviser Association, whose members are wealth-management and advisory firms. Their account minimums tend to be high, often $1 million, but they will develop personalized portfolios for their clients and advise on estate planning, taxes and insurance.

All of these firms' Web sites seem to promise superior or unparalleled customer service. But you need to establish just what this means. If you bring in $1 million, you'll probably be assigned to a personal investment representative who will do everything but shine your shoes and fetch your laundry. That's what you should expect, anyway. But if you are one of 600 $100,000 clients of a two-person brokerage team, and you want individualized attention, be prepared to get to know (and get to like) the brokers' young assistants because they will be the gatekeepers. Then again, most advisers do not want to hear from you every time the market has a bad day or a bad week. Once you have an investment strategy in place, you should be patient.

So, on this topic of service, you want to be specific: What kinds of summary statements do I get? What if I call suddenly with a tax or risk question? Do we have regular sit-down reviews, or do we make an appointment as if you were the dentist? Any or all of this can be acceptable, but make sure the arrangement is okay with all concerned.

Now, the personal stuff

No, I didn't forget matters of ethics and independence. With tens of thousands of financial advisers out there, you don't want one who takes your check with investment funds and "converts it to his own use," which is regulator-speak for embezzling from the clients. The NASD publishes a monthly list of enforcement actions against brokers and advisers, and some of the people they bust literally steal their customers blind. Fortunately, most advisers are honest.

The various regulatory bodies—the Financial Industry Regulatory Authority (www.finra.org), the Securities and Exchange Commission, and state securities regulators—all have some version of a search engine through which, in theory, you can find out disciplinary background on any registered adviser. Trouble is, the information is incomplete or limited. Go to the SEC's files (www.adviserinfo.sec.gov) and look for the dossier on a certain adviser who, let's assume, is someone you've just met at a visit to a major firm such as Raymond James or Wachovia Securities. The SEC's site won't help much because the site is organized by firms, and the big firms are huge. Your best bet is the state securities agency.

If you have a small shop, the SEC works better. Let's look up, for example, Brightworth, LLC, an Atlanta advisory firm. You can read the Form ADV, the advisers' periodic registration forms, and confirm that in the past ten years the firm has not been convicted of or charged with a felony or any misdemeanors relating to bribery, perjury, false statements and so on. You can go through the rest of the screens on this firm and find out how many clients it has, the assets under management, the kinds of fees charged (though not the actual pricing schedule) and more.

But the best source of information is full disclosure from the advisers themselves. I asked Ray Padron, a partner of Brightworth, to list some tough but fair questions he's been asked by prospective customers, and he came up with three that make sense:

1. Are you a fiduciary? More and more, investors want to know if their adviser is literally on their side. There are good brokers and lousy advisers, but all things being equal, an adviser who is a fiduciary will work out better in a pinch.

2. How do you get compensated, including soft dollars? Soft dollars refers to money or other compensation from investment companies in exchange for the broker recommending their products. It's legal, but it's not in your best interests. If you're paying someone to advise you on mutual funds, his or her choices should be unbiased.

3. Could you tell me why the last two clients that you lost left you? And the last one you let go? This is a relationship business, and if you aren't happy, you'll probably suffer financially. So find out where the possibility of a conflict arises. The answer could be as plain as people moving away or retiring. But there may be a pattern. The last thing you want is to hopscotch from one adviser or firm to another and another.