We recently had a prospective client ask us to send out our Form ADV Part 2. That was their only question. This SEC filing is essentially a marketing brochure that duplicates information on our website. We sent it, of course, but we’re certain it didn’t really tell much about what we do and how it would — or would not — match this person’s needs.
A search like this points out a big problem: Everyone’s reading the same information. People tend to stop at whatever comes up first, with the result being that everyone is following the same checklist for finding a financial adviser.
Unfortunately, this approach doesn’t necessarily give you the information that you need to make the best decision.
No. 1: What is your performance track record?
Aside from the fact that past performance does not indicate future results, performance is very much tied to the choices that planners and clients make together. A good financial adviser should help you determine your goals and how you will get there.
This question also conveys a sense that the client is attempting to beat the market, rather than focus on his or her unique situation, and need to generate retirement income. We understand that nobody wants to hire a so-called adviser who gambles with clients’ money, but the way to ferret out a lack of philosophy is to learn whether the adviser takes a scientific approach using evidence-based investing, versus simply guessing which stocks or funds may outperform other securities.
What you should ask instead: A better question would be to ask about the planner’s investment philosophy and approach to building financial plans.
No. 2: How many clients do you have?
This question tells you something about an adviser’s practice, but what? And how does that fit with what you need? Does an adviser have only a handful of clients because all the other clients left, or because the practice has a very narrow specialty? Does an adviser with a lot of clients offer better advice or take a cookie-cutter approach because there are just too many people to serve effectively?
What you should ask instead:
What types of clients do you work with?
How long does it take to get an appointment?
What is your meeting process?
What are reasons that people leave your practice?
No. 3: What services do you provide?
The answer to this question should match the services you need (or think you do). An adviser who works with high-net-worth families, manages 401(k) plans or sells insurance, may not be the best person to help you with a retirement cash flow management plan. Watch out for small practices that seem to offer everything, as they may not have depth of expertise in any of those areas. I see practices that list 30 areas of expertise, many of which require different skills and knowledge.
What you should ask instead: Ask a potential adviser to walk you through their process for clients, especially what will happen in the first meeting and the first year. Then, follow that up by asking what network of support do you have to provide all the services that I need? It’s likely that no one person you’re working with can help you with everything from a budget to investing to retirement withdrawals and estate planning. So, it’s important that the person you’re working with has access to a backup team, if necessary. See what kinds of experts are available to work on your behalf.
No. 4: What credentials have you earned?
The various credentials in the financial services industry require time and study to earn. They do matter, but they don’t tell the entire story.
The Certified Financial Planner designation is increasingly common in the industry, and many firms have at least one CFP on staff. However, use caution when assuming all CFPs are experts in every financial situation. Not all those who hold a CFP have comprehensive planning experience. Some work as insurance agents, stockbrokers or even journalists — not with people like you.
Others in the industry have lots and lots of credentials, but that could be because they like taking classes more than doing the work of an adviser. You should look for credentials, but experience to help you meet your needs is more important than a string of letters after someone’s name.
What you should ask instead: What experience do you have in helping investors like me, and how long have you been giving advice to clients with my needs?
No. 5: Are you a fiduciary?
This is a loaded question. Many advisers have both fiduciary and non-fiduciary roles, depending on the situation. The Securities Exchange Commission says that anyone who collects a commission is not a fiduciary; however, some advisers use commission-based products with some clients but not others, depending on the situation. At our firm we’ve run across several of these hybrid advisers who tout only the fiduciary role, which can mislead clients.
What you should ask instead: All advisers receive some form of compensation for their services, so a better question to ask is how the adviser is compensated. If you know that upfront, you will have a better sense of whether the advice you receive matches the price you pay.
The financial services industry is better off when clients ask good questions. We want to help you or refer you to someone who can better meet your needs. One way is for you to understand what you are asking and how it ties to what you need to know. This is a far better approach than using a standardized Internet checklist.