Selecting a financial advisor (also spelled adviser 😉 ) is a big step. It’s the time when you realize you want a plan in place for your future and guidance on how to best achieve all your goals. There are many types of services available to you for your investment needs and it takes some education to understand them all.
Is there a difference between a broker and a financial advisor? Yes, a broker is affiliated with a brokerage firm and collects a commission for trades placed in your account. They also may sell you other products, like insurance, available through the brokerage firm. A financial advisor is someone who will take a more active role in your entire financial situation, by offering to create a financial plan for you in addition to managing your investment accounts. Financial advisors are there for you to ask questions to when you need it.
Not all people decide they want a financial professional’s help. You can simply open a brokerage account online and begin to select your investments and asset allocation. You must be willing to educate yourself and commit time to your plan and investment strategy to be successful. This is the way most of us start, and as our assets grow we may decide to have a professional periodically review our portfolio.
Many other people decide they don’t want to manage their money themselves, they would rather hire someone to help create an investment portfolio from the beginning. The seek someone that will help them meet goals and create a strategy for success. When you cannot, don’t want to commit the time, or your portfolio has gotten large enough it is a good choice to hire a professional.
If you are considering a financial professional’s help, here are some things you should ask.
Interview two or three potential professionals before you agree to anything. Think about what they have told you and be sure you understand everything. This is a big deal!
- Are accounts managed with discretion or non-discretion?
Advisors will typically manage your account with discretion, which means they will place trades on your behalf based on your agreed upon strategy and risk tolerance. You will sign a document or client agreement that gives your advisor discretion. If you want to approve every trade or rebalance that is done to your account, your advisor would not have discretion and your client agreement should state the account is non-discretionary. Make it clear which you prefer when interviewing a potential financial advisor.
- What fees do you collect?
Sometimes an advisor will charge an asset-based fee, which is a percentage of the assets (or amount of your money) they will manage. Ask if the fee will change depending on the amount you invest. If it does change, this is called tiered pricing. Other times an advisor will charge you a flat fee per quarter. It is normal for the advisory fees to automatically be pulled from your accounts. In either case, it is my general recommendation that the overall fee should not go over 1% of your total portfolio value each year. Remember, your investment vehicles will also be charging a fee on top of the professional advisor fee. See our previous post about fees and who is charging them.
Ask if there is anything the advisor recommends to clients that would pay them a commission. Also, ask if there are products or services they recommend to clients that would benefit the entire firm in some way (called a soft dollar arrangement)? A commission is a payment made to the advisor for selling a product. A soft dollar arrangement is when a vendor gives the advisory firm a good or service for free or at a discount for using them as a vendor. For example, Fidelity may give your advisor a stock research tool for free if they put their client accounts with Fidelity. Commissions or soft dollar arrangements are not a deal breaker, but you must be aware of them and the total compensation going to those involved with your account. Excessive fees mean reduced returns for you!
Every year around the end of the first quarter, you should get a document, called an ADV, that describes the advisor’s firm, services, and fee schedules. They must send this to you every year! This is their way of telling you any changes to their fees or services, even if they don’t say them out loud. You can always review the ADV prior to meeting with the advisor, available by searching the firm name in FINRA’s Broker Check system here.
- What is included in the fee? Some items that may be included are:
- A financial plan
- An asset allocation strategy implemented by the advisor with selection of investments
- Account opening on your behalf
- Management of your review and rebalance schedule
- Money transfers when needed
- Questions or calls throughout the year as needed
- Team of professionals available to you when you need them
- Quarterly communication about the advisor’s views on the market and your portfolio
- What is their investment philosophy?
Let them describe to you how your accounts will be invested and why they believe that is best for you.
- What process do they go through to select my investment vehicles (mutual funds, ETFs, bonds, etc…)?
Does the process make sense to you? If it doesn’t or feels too risky you need to say so. You want to know if the investments are registered with the SEC and what fees will be charged for each. You must be involved and understand the investment. If you don’t, you shouldn’t invest in it!
- What is their experience?
Get a detailed background of the financial professional and their team. What is their expertise and how long have they been doing it? What is their track record of success and do they have enough experienced staff to support them? Advisors should be able to provide you a vitae or resume on the spot. Noteworthy credentials or designations include: Certified Public Accountant (CPA), Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Chartered Life Underwriter (CLU), or Chartered Financial Consultant (ChFC).
Do a FINRA Broker Check on the individual name of the advisor and check their disciplinary history or complaints filed against them and their firm. Do this before your initial meeting and let them explain any marks on their record or choose to cancel the meeting.
- What licenses do they have?
To give investment advice an advisor must be registered with a regulatory agency. A Series 7 is the federal license for registered representatives of a broker-dealer (such as Morgan Stanley, Wells Fargo, or Raymond James), and it allows professionals to sell securities with the oversight of that broker-dealer firm. A Series 63 or 66 is a state exam that allows an advisor to sell securities under a broker-dealer.
An advisor may choose to be affiliated with a broker-dealer because it may offer their firm streamlined benefits. Benefits such as such as compliance oversight, technology, or already researched and approved investment vehicles for their clients. If an advisor is willing to do those things on their own, they can choose to be independent. A Series 65 is for those advisors who do not have their Series 7 and the license is held by independent advisors not affiliated with a broker-dealer.
- Are they a fiduciary?
A fiduciary is someone who acknowledges and accepts their relationship of trust by you and is promising to make decisions with care and for your best interest. This includes telling you any conflicts of interest the may have at any time. You want someone who is managing your money to accept their fiduciary duty in writing. A broker would be someone who does not have a fiduciary duty to your accounts because they are simply there to carry out a transaction that you instruct. A financial advisor or registered investment advisor should accept fiduciary duty for your accounts.
- Who is their ideal client?
You want to know if you are going to be a priority for the advisor and their firm. Before you get into too much discussion about yourself you may ask this question first. If their ideal client is a physician with $1 million to invest and you only have $50,000 and are not a physician, you should be realistic that you are not going to be the firm’s top priority. That doesn’t mean you shouldn’t do business but have realistic expectations. You absolutely should be treated with respect and importance nonetheless. Don’t compare yourself to others, look out for you and get your goals accomplished!
- What is the succession plan?
You will want to know who is the backup to your financial advisor, especially if your advisor is in a practice alone. What if they get hit by a bus? This shouldn’t deter you from having a great relationship with a sole person firm, but you must know what you will do if something happens to that individual. Have a plan.
- What are the regulatory controls in place?
You will want to know how the advisor and their firm will protect you from identity theft or fraud and how they will service your accounts in the event of a disaster or office closure. Advisors are required to have controls in place that are reviewed annually. You should know what they are.
- Take notes during your meetings. ALL OF THEM!
Having a great financial professional at your side can be very beneficial to your future and your freedom. Take that relationship seriously and be involved. If you don’t have a good feeling about someone you are interviewing, don’t do business with them. A professional should care about your success and if they aren’t delivering good service and results it’s time to look for another professional. Knowledge is key! Keep informed about the changing environment and regulations for financial professionals.
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