7 Questions to Ask Before Hiring Financial Adviser

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Working with professional athletes and entertainers, I’ve come across some people who have come into wealth suddenly for the first time getting started on the financial planning path. There are a lot of decisions to make, not the least of which is who can you trust to help you along the way?

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That question has come to the forefront as a March 15, 2018, circuit court ruling throws the consumer protections of the Department of Labor’s fiduciary rule into question. With the NFL draft already behind us and the and NBA draft just around the corner, it is imperative that those finding sudden wealth be equipped with the proper information on the financial professionals they will be choosing.

You would expect that your best interests will be taken to heart, but they might not be. Potential clients need to know the differences in the various kinds of financial professionals out there. With that in mind, here are seven questions you should ask as you seek to hire a new financial professional, or to determine if the person you’re already working with is right for you.

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1. What type of financial adviser are you?

Financial advisers use many different terms in order to distinguish themselves from their competition. Some may use terms such as “Financial Planner,” “Wealth Manager,” “Private Wealth Adviser,” “Portfolio Manager,” “Investment Adviser,” as well as a multitude of other fancy titles to impress potential clients. Bottom line, it all comes down to licensing and experience. However, it’s possible that an adviser who is licensed multiple times is more interested in selling products versus an adviser with one license who is paid on investment advice.

Everyone’s needs are different, so it makes sense to look for someone who has the appropriate knowledge for your objectives. For instance, a person receiving an inheritance would benefit from a fee-only financial adviser to help put a financial plan together. Insurance agents are more appropriate to give advice on mitigating risk and alternatives to the stock market.

A portfolio manager is a type of financial adviser that is involved in the day-to-day management of your investments and might have a Chartered Financial Analyst (CFA) designation. A financial planner is a type of financial adviser who is more focused on your whole financial picture instead of recommending investments and might have a Certified Financial Planner (CFP) designation. There are several instances where the financial adviser will have both, so it’s pertinent to ask what their specialty is as they cannot do everything.

2. Do you receive any bonuses or incentives for investments recommended?

Financial advisers often receive both bonuses and incentives on investments sold, but they seldom mention it during their presentations. For instance, certain mutual funds, annuities and life insurance policies will offer trips and additional compensation to them for their business. Although you might think your financial adviser is recommending the right investments, they may actually be doing the complete opposite.

On the other hand, there’s nothing inherently wrong with bonuses, and just because they are being offered doesn’t necessarily mean it’s a bad investment. But it needs to be disclosed, and clients should know. I have seen bonuses and incentives get in the way of providing the best advice.

Also, when financial advisers change brokerage firms, bonuses are often received for bringing clients to the new firm. It is imperative to find out if there was any additional compensation given for following a financial adviser to a new company. Although the bonus itself doesn’t come out of the client’s account, when an account is transferred to another brokerage firm there will be costs, such as commissions, that will be incurred as a result. And while the adviser might’ve done a good job in the past, that doesn’t mean his new firm will provide the same investments as before.

3. How are you paid?

Finding out how your financial adviser gets paid is one of the most important questions. There are three main forms of compensation:

Charging a percentage of assets managed or a flat or hourly fee for creating a financial plan;
Commissions on securities or 12b-1 fees (e.g., mutual funds, stocks, bonds, Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), oil and gas offerings, etc.); and
Commissions on insurance products (e.g., annuities, life, disability and long-term care insurance, etc.).

By learning your financial adviser’s compensation model, you will have a much better understanding if he or she operates under a fiduciary or suitability standard (explained below).

4. What types of services do you provide?

Different types of financial advisers offer an assortment of services. For instance, a portfolio manager (or asset manager) will most likely only render advice pertaining to the types of investments you should have. Unfortunately, many others are salespeople looking to sell products for their company, and don’t offer holistic advice.

Typically, a financial planner will assess your risk tolerance and create a long-term plan that takes taxes, retirement, estate planning and other needs into account for different needs.

Before deciding if you even need a financial adviser, ask yourself the types of services needed and if it even makes sense to pay fees to someone who may not offer what you’re looking for.

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5. Do you have any complaints and what were the results?

Every financial adviser who is properly licensed has a profile with detailed information on complaints and any other disclosures. This advice can be easily accessed either through FINRA’s Broker Check (https://brokercheck.finra.org/) or the SEC’s Investment Adviser Public Disclosure (https://www.adviserinfo.sec.gov/) websites. It’s a good idea to take a look before meeting with a financial adviser. Keep in mind that not all complaints are created equal. Some end up being unfounded, and others may be very minor or old. There are also complaints that could’ve ended up being settled but since the adviser offered a “suitable” recommendation, they may not have ended up in the clients’ favor. If for some reason there are complaints, the objective is to ask and get an idea of how this adviser might work for you.

Investment advisers are required to provide the SEC with an ADV Form with the information mentioned above, which was created for regulatory purposes.

Depending on the financial advisement firm your adviser is affiliated with, he or she may sell proprietary investments or operate under a revenue-sharing model. What does this mean? Simply put, your financial adviser and his or her firm may receive additional compensation (often referred to as “marketing support”) in addition to their commissions for selling you certain mutual funds.

As a potential client, you can perform a search on your financial adviser’s investment firm with the words “revenue sharing.” This should answer the question if you don’t get a clear response. Just like the bonuses and incentives question above, there needs to be more transparency on how firms make their money instead of putting the burden on the client to seek an ADV brochure or have to ask additional questions. And any lack of transparency should be a red flag to investors.

7. Are you a “fiduciary,” or do you operate under a “suitability standard”?

For a potential client, deciphering between the fiduciary and suitability standard is difficult. The reason is because often many financial advisers don’t want to fully disclose their real intentions and would rather operate under facade versus transparency. Knowing the difference is critical in order to understand the motivation behind investment recommendations.

Here are a few key differences:

Suitability Standard

Investments sold must be deemed to be suitable, but not necessarily what's the best option for the client.
The advisers covered by this standard are classified as brokers (or stockbrokers), Registered Representatives (RRs), wirehouses and banks.
The advisers are paid commissions calculated as a percentage of the amount invested.
They are governed by the Financial Industry Regulatory Agency (FINRA).

Fiduciary

The investments offered must be in the best interests of their clients.
Such financial professionals are classified as investment advisers, Investment Adviser Representatives (IARs) and
Registered Investment Advisers (RIAs).
They are often paid a percentage of assets under management, a flat fee, a fee per hour or as a percentage of assets under management.
They are governed by the Securities and Exchange Commission (SEC).

Choosing the wrong financial adviser — at its very worst — can be the difference between a secure financial future and possibly losing everything you’ve accumulated. So it pays to ask these questions and to make sure you understand who you’re dealing with and whether they are the right type of professional for your needs.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Carlos Dias Jr. is a financial adviser, public speaker and president of Dias Wealth, LLC, headquartered in the Orlando, Fla., area, but working with clients nationwide. His expertise spans a diverse clientele, including business owners, retirees, lottery winners and professional athletes with wealth management, tax planning, estate planning, long-term care, annuities and life insurance. Carlos has contributed to Kiplinger, Forbes and MarketWatch, and his work has been featured in CNN, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today and other publications. He’s spoken at various CPA societies across the United States, and Carlos’ presentations often focus on innovative tax strategies, retirement planning and asset protection, providing valuable knowledge to accountants, attorneys and financial professionals.