21st Century Questions for Hiring a Financial Advisor

​By Roy Larsen, CFP®, AAMS®

​​Interviewing financial advisors for this very vital role in your life can be daunting. Plus, the 21st century brings with it new threats to your finances, so your “toolbox” of questions needs to be updated as well. You are trying to achieve many objectives, such as help to plan for key life events and investing your hard earned assets in the most appropriate way. You not only need assistance in achieving your goals but you want to do so in a fashion that represents who you are. You also want peace of mind and time so you can go off and do the things that are most enjoyable to you, which encompasses the majority of your focus and attention.

​​Despite such a daunting and important task, I have been somewhat surprised over the years at how few questions are asked of me, and of the ones that are asked, how many of them are not relevant to whether I am up to the task to serve someone’s family. I’m a really nice guy, but this isn’t a popularity contest! You need to find someone who you think you can work with, hopefully enjoy working with and most importantly, is competent, trustworthy, transparent, open and honest!

With that, let me share with you the good stuff! The key points of information you will need to know in order to feel good about the financial advisor or financial planner you choose. I will even share a question that is always asked which you should remove from your tool box. My list starts from general qualifiers and gets more specific. If they don’t meet some of the first objectives, you can cut the meeting short and move on to the next candidate.

1. Can you describe the typical client you serve? - Right off the bat you want to know if that person is expert in the areas that are most important to you. For instance, I specialize in what I call “Chapter two” Issues. That means, my clients are typically much further along in life and events have transpired where certain areas of financial planning and wealth management are more important. Would I be a good choice If you have young school age children and college funding is a priority, or perhaps you are a charity and need specialization in non-profits? Of course not! Start with someone who is expert in the issues important to you.
2. How and what do you charge for your services? -  Financial advisors are either commission based, commission and fees, or fee only. Some charge fees based on assets under management. Others, charge a retainer.  Others still, charge a commission every time you place a transaction or buy a product. While you have significant choice, it does make it more confusing. Even though we are fee only, which many consider the most above board since it removes product sales and possible conflicts of interest, I would not discount or eliminate other compensation methods. As far as I’m concerned, someone is honest and ethical or they are not. I don’t think compensation method determines that.
3. What are your credentials? - Having letters after their name doesn’t necessarily mean they are right for you. There are literally hundreds of financial advisor designations out there and many of them can be acquired over a few weeks of self-study. To date, the Certified Financial Planner™ designation continues to be the standard bearer. This designation will cover most planning and investment needs for just about every family. It is also one of the most time consuming and costly to achieve. In addition, the time and cost to keep it is also a big commitment. Are other designations worthless? Of course not! Many others may be specific areas of specialization an advisor is focusing on. Just be wary of any designation that has the word “Senior” in it and focuses on older clients. Most of these are not worth the paper they are printed on. Bottom line, make sure the person you hire is invested in their craft. 
4. Do you have any violations or client complaints? - The answer obviously needs to be no but a great advisor will want you to be able to verify that answer. They will likely send you to FINRA’s broker check at http://brokercheck.finra.org/   Advisors affiliated with a broker-dealers are typically under the individual tab and Registered Investment Advisors are typically found under the firm tab.
5. How to do you ascertain an appropriate risk level for me? - This is a question you won’t see many places but it needs to be part of the toolbox moving forward. As emotion is a major reason for investing failure, the investment industries paper questionnaires just don’t cut it anymore. The information gathered from these nebulous questionnaires is useless as what you say now versus how you react in the moment, may be two different things. Advisors now have at their disposal a number of software options that help them and you gain more comfort in the recommended investment allocation, using real life investments and probabilities. Find someone who invests in your peace of mind!
6. What other tools do you make available to me? - Let’s face it, this is a competitive business and you should use that to your advantage.  If all else is equal, what other tools, personal websites, customized reports, education, etc.  does the advisor offer you as a part of their package? You may be able to get significantly more value for the money you pay with the extra’s many advisors offer. To the contrary, many may charge you the same fee or more and offer the bare minimum in investment management.
7. How do you protect my data? - Here is another question that would not have been asked 15-20 years ago! With cyber terrorism on the rise, you not only have to review how the larger custodian protects your data but as important if not more, the local advisor as well. Cyber terrorists may see the local advisor as lax and an easy back door target. Although FINRA has fairly extensive rules for data security, make sure the advisor you choose is spending the money to go the extra mile. Ask them if they encrypt all hard drives on their office computers. Also, are they using double authentication when possible as well as password protection applications? Do they offer encrypted e-mail for you to send and receive anything that has personally identifiable information on it?
8. How long have you been doing this? - Right up front, longer doesn’t always mean better but this will lead to other questions. While I certainly know more than when I started and have a wealth of real life best practices, the number of years you are in business means nothing if you aren’t continually learning. There is no shortage of advisors who have been doing some form of financial services for 20, 30, 40 years and longer who still for the most part just sell investments or insurance related products. At the same time, a younger generation is coming out of college already with the CFP® designation in tow, ready to offer a holistic experience. There are always trade-offs. Make sure you choose the best combination for you.
9. Are you a Fiduciary? - Yet another newer question in the toolbox. There are typically two types of standards an advisor abides by. Either they are Fiduciaries or they work under the Suitability Rule. A Fiduciary is bound to put your financial interests above their own. They are regulated by the SEC or the State. Although there are many similarities with the suitability standard in does go a step further as they must disclose conflicts of interest in their ADV which must be provided to you. Typically, advisors who fall under the fiduciary standard will not offer products where they may earn a commission as that can be construed as a conflict of interest. The suitability rule carries some of the same provisions but does not carry as strict a definition. The rule states that any recommendation made is consistent with the best interests of the underlying customer. This advisor is typically associated with a broker-dealer and as such, their loyalties are to the broker dealer first and the client second. Broker-dealers create and sell a lot of products and advisors more often or not have an obligation to the broker dealer to produce so much each year. It does make it more difficult but not impossible to put the client’s needs above their own and those of the broker-dealer. (As I write this the Department of Labor has just passed a new Fiduciary rule that now requires for retirement assets only, a broker to provide a “Best Interests Contract” that now holds them to a fiduciary standard. While a step in the right direction for more transparency, the final rule was a bit watered down from original intent. It will not go into effect until April, 10th, 2017.)
10. Can I have 3 references? - I always coach my prospects on this question and want to give you some advice as well. After the advisor tells you everything they will do for you, it’s time to check with some of the clients if that is actually what they will do. When a prospect asks me for a few clients to call, I always ask them to re-word the question. Instead, give the advisor 3 random letters out of the alphabet and tell them you would like to speak with clients that are similar to them. Now as advisors are doing more and more for their clients, many work with less clients simply because of servicing. With that, they may not have someone just like you that represents every letter of the alphabet, so be prepared to offer up some additional choices. If you have to go through half the alphabet, guess what? They don’t work with people like you.​

 The above list covers the most important areas in finding a qualified candidate to help you reach your goals. While no way of doing business or credential guarantees honesty and ethics, it will go a long way to helping you weed out those who shouldn’t even be in the conversation.
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 In closing, I should mention that there is one question that an advisor doesn’t want to hear and may cause them to walk away if you place great importance on it. The main culprit is asking for their performance numbers or returns. While seemingly valid on the surface, if you think a great advisor beats or outperforms the market on a regular basis and that is why you are hiring them, you will be disappointed eventually 100% of the time. While no advisor wants to under-perform ever, your returns are typically going to mirror your risk level over time. Market returns are not a controllable event and all an advisor can do is offer a range of potential returns, especially if they use some of the newer risk software. Be aware that the advisor is interviewing you at the same time.  If they see little focus on planning, the big picture and willingness to work with them on the areas they can control, they will likely not want to start a relationship that will be short term focused and market return based.
 

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Roy Larsen, CFP®, AAMS® is a Fee Only Certified Financial Planner practitioner and acknowledged fiduciary. He works with clients in the Gainesville, GA. area outside of Atlanta and throughout the United States. Larsen Wealth Management specialized in the distribution phase of retirement or your version of chapter two. Roy has been quoted in the Wall Street Journal as well as the New York Times and has won the 5-Star Professional award for 6 consecutive years as one of the top Wealth Managers in Atlanta. Roy can be reached at 678-696-8755 or roylarsen @investinretirement.net. 
 
The opinions voiced in this material are for general information purposed only and are not intended to provide specific advice or recommendations for any individuals(s). To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.