Too many people ask the wrong questions or don’t know which questions to ask of a potential financial advisor. In this two-part series we provide a detailed process of how to properly evaluate and select a professional financial advisor. Not every reader will use a financial advisor, but for those that do, this information can save you from a lot of strife. This post takes the critical points and lessons learned from my 20 years in the financial services industry and compiles them into a single checklist called the Financial Advisor Evaluation and Selection Tool™.

Why should I care?
Using the wrong financial advisor can negatively impact your wealth! Important financial issues can fall through the cracks if the chosen financial advisor is unskilled or, worse, not putting your interests first.

When interviewing and evaluating a potential advisor (or evaluating your current advisor!), educate yourself on the proper process and questions to ask by reading this series of blog posts and using the available Financial Advisor Evaluation and Selection Tool™ (“Tool”). Take your evaluation and selection process one step further with my second post which describes and provides you with the Dear Financial Advisor Letter™. The Dear Financial Advisor Letter™ is given to your current advisor or any potential advisor, providing them with a well-thought out roadmap of your expectations in terms of professional education, fiduciary duty, level of analysis and planning, and client education. Don’t settle for a subpar advisor (or worse, a financial product salesperson calling themselves an advisor) who doesn’t meet your needs. Just because a friend, family member or coworker recommended them to you doesn’t mean you have to use that advisor. Don’t worry about making them feel bad! It’s your life and your financial challenge. Time to take charge!

When we strip away the fancy titles, nice office and expensive apparel, and look past the accolades and self-promotion, what are we really trying to know about a financial advisor candidate? We want a professional, competent advisor who believes in financial planning and a fiduciary duty to their client. Great, how do we do that? The Financial Advisor Evaluation and Selection Tool™ provides the key questions you need to ask of your potential (or current) advisor.

Why Does this Tool Exist?

The Tool will help you separate the wheat from the chaff, and believe me, there’s plenty of chaff!

It will also help you discover a professional, financial planning-oriented financial advisor. Such an advisor:

• is not just an investment manager, but also assists with plans and coordinates your whole personal financial situation
• believes in a fiduciary duty and always puts their clients’ interests first
• pursues advanced education and is a lifelong learner

The questions that make up the Tool are listed below. Each question contains some background information and reasonable or desirable answers. Do not print this blog post and provide these questions in this format to your potential advisor (otherwise you might lead their answers toward what you are looking for and not get an honest response). The Tool includes two versions of the questions: the first version is formatted without the desired answers, so you can give it to the potential advisor to complete or you can fill it out as you interview the advisor, the second version (same format as the questions below) provides background information and expected or reasonable answers for each question.

1. With which regulatory organization(s) is your firm registered? The Securities and Exchange Commission (SEC), one of the state securities regulators, the Financial Industry Regulation Authority (FINRA) or one of the state insurance commissioners should be named. If the firm is not registered with any of these regulatory organizations, the “advisor” and the firm may be suspect.
2. What form of compensation do you use? Ninety-nine percent of advisers use one of three compensation methods: Commissions, Fees (“Fee-Only”) or Commissions and Fees (“Fee-Based”). Don’t confuse Fee-Based for Fee-Only. If you are concerned about commissioned products, make sure the advisor is Fee-Only, for all clients, all the time.
3. Can you please provide me with a copy of your Form ADV? Only Registered Investment Adviser firms are required to file a Form ADV with the SEC. Many advisors make their Form ADV accessible on their company websites.
4. What securities and insurance licenses do you hold? These licenses are usually the Series 6 or 7 general securities license and perhaps the Series 63, 65, or 66 which are licenses associated with state-level knowledge. These licenses are required for entry-level positions and they can help you to understand the adviser’s focus and method of compensation.
5. What professional certifications have you earned and currently maintain? Ignore any titles such as Financial Advisor, Wealth Manager, Principal, Owner or President…these titles mean nothing. Also ignore the fancy office and expensive suit. You are looking for an adviser who has earned their CFP®, CFA, CPA or ChFC®. An adviser with a master’s degree isn’t sufficient unless they also hold the CFP®, CFA, CPA or ChFC®. (Note: If the adviser holds the ChFC®, make sure their recommendations aren’t leaning heavily on insurance products.)
6. Which standard are you required to meet: a Fiduciary Standard or Suitability Standard? The Fiduciary Standard is the higher and preferred standard. Advisers with multiple regulatory registrations (a hybrid or dually-registered firm: RIA/Brokerage combo, for example) might need to meet a Fiduciary Standard at certain times and the Suitability Standard at other times. This does create confusion and requires due diligence. Even if a broker feels it is important to fulfill a fiduciary duty, their employer does not require this higher standard.
7. How are you continuing your professional development? Their answer should reflect attendance at conferences, professional reading, courses, degree programs, or continuing education to maintain advanced certifications.
8. In which professional community do you participate? The most common professional community for Certified Financial Planners (CFP®) is the Financial Planning Association (FPA). A subgroup of CFP®s who use the fee-only method of compensation gravitate toward the National Association of Personal Financial Advisors (NAPFA). The American Institute of Certified Public Accountants (AICPA) is the community for CPAs, and the Chartered Financial Analyst Institute is the community for CFAs. Participation in these communities provides the professional with opportunities of lifelong education and training, networking and career advancement, exchange of business management ideas and the chance to discuss complex client situations with other professionals. An advisor not participating in a professional community is suspect.
9. Do you consider yourself an investment management-oriented adviser or a financial planning-oriented adviser? Most consumers really need a financial planning-oriented adviser. The adviser focused mainly on investments may miss or overlook significant tax, legal and other personal financial issues or opportunities.
10. Show me one of your sample financial plans. The goal of these request is two-fold; to make sure the adviser offers financial planning as a service and to observe how they explain their planning process. Assuming the adviser provides financial planning, this line of questioning leads into several important and related questions:
    • Can I bring my own list of questions, issues and concerns to our planning meeting? The answer should be, yes. Don’t let the advisor dictate what they will or will not analyze in your financial plan.
    • Will you help me determine the best Social Security claiming strategy? The answer should be, yes. If the advisor tells you to talk with someone else regarding Social Security, it may be time to find a more educated adviser.
    • Will you help me determine what pension payout option is best for me? Even if you don’t have a pension, ask as if you do; the adviser’s answer may be very insightful. Give them a hypothetical example such as, my pension has five or six payout options including a lump sum option of $500,000. See how the adviser responds. If, without analysis, they quickly come to the lump sum option as the best solution, it could be a red flag. Maybe they just want your accounts and aren’t interested in planning.
    • Will you help me determine if a Roth conversion makes sense, and when and how much to convert? The advisor should be willing to help.
    • What documents do you need from me to do your analysis or create my financial plan? Hopefully the adviser provides you with a document checklist. If the adviser doesn’t ask for your tax return, it’s a red flag. Not requesting your estate planning documents (trust, powers-of-attorney, last will, living will) is also a red flag.
    • What will you use for my long-term rate of return? Don’t let the advisor get off the hook with an “it depends” answer. Of course, it depends, but a range of returns is fully reasonable. Depending on how conservative, moderate or aggressive you are, the adviser should discuss using a long-term rate of return somewhere between 4% and 9% (before inflation).  They might use an inflation number between 2% and 4%. Using an annual rate of return of 10% or higher is probably unrealistic. Also, high return expectations, above 8% or so, would be appropriate only for a portfolio consisting of 100% stocks or stock funds. 
    • How does your financial planning software deal with market volatility? Does it use Monte Carlo simulations or similar analysis? Asking this question should get an interesting response from the adviser. Most of them won’t expect such a sophisticated question from a client. However, their software should use the more modern analysis, like Monte Carlo analysis, instead of assuming your portfolio will earn the exact same return year after year (no portfolio does this, unless the entire portfolio is invested in some type of fixed return investment).
    • What will you use for my life expectancy and why? If the adviser talks about using the average life expectancy without having a discussion with you regarding your health, your parents’ longevity and their process of determining a life expectancy number, understand that the planning results could be misleading. Plan updates are also important, especially as health conditions are revealed or diagnosed.
    • Will you detail periodic expenses such as car replacements, large trips, remodeling projects, and other large expenses? If you have an idea of how and when these various expenses take place, the adviser should be able to model them in some way. If you don’t have any idea of how much you spend, modeling this unknown gets harder. Sometimes in these cases the plan will show a single amount that can be spent each year. Just know that all your one-time and periodic expenses must come out of this single annual amount.
    • How often will you, or should I, update my financial plan? Plans should be updated at least every four or five years and anytime a significant life event or financial event takes place.
    • What will my financial plan cost? A free plan or one that costs just a few hundred dollars is most likely a sales tool for the adviser to figure out what assets you own and how they can get their hands on those assets. There may be other reasons for the free or low-cost plan. Plans, if done right, are time intensive and can cost thousands of dollars. A professional financial plan should be considered an investment, not an expense.
11. With what financial issues you have helped widows/widowers? This can be a long list, but the specific issues most widows and widowers need help with are:
    • Cash flow management. Where will the “paycheck” come from to pay bills, and how much can I afford to spend without running out of money? This is a primary concern and should be addressed early in the process.
    • Financial organization. Just locating all the paperwork, statements, policies, and documents can be a major chore. Your advisor should be willing to help you with this, even if it involves them rummaging through boxes in your garage!
    • Comprehending your entire financial picture. Once all those documents are collected, some detective work might be needed by the advisor to determine if any accounts, assets, and sources of income are not accounted for. Then building a picture for whose accounts are where, how are they titled, and how they are invested.
    • Estate settlement and ongoing wealth management. Your advisor may need to coordinate with your estate planning attorney, tax advisor, insurance agent and other professionals. Are they willing to communicate, coordinate and collaborate with your other professionals or do they expect to leave this all up to you?
    • Sources of income and benefits. What sources of income will continue, which ones will stop and what decisions must be made to collect benefits such as life insurance, pensions and deferred compensation. Will the advisor help you analyze options you may have for payouts and benefits?
12. Does the advisor have any disciplinary history with a regulatory organization or professional certification organization or have they ever been sued by a client or required to participate in arbitration for any reason related to the financial services or products provided. It’s best for you to check this yourself rather than ask:
    • For a regulatory background check: Use FINRA’s BrokerCheck for advisers and brokers. Contact your state’s insurance commissioner for insurance agent information.
    • For a professional certification background check: For the advisor who is a CFP®, check with the CFP Board. For a CPA, check with the AICPA. And for a CFA, check with the CFA Institute.
    • Public records background check.  Some consumers may want to order a public records check of the advisor to learn of a criminal background or bankruptcy. This may require the potential advisor to release their Social Security number and/or sign a release form for the agency doing the check.

The Importance of Rapport!

Most of the answers to the questions in the Tool will be objective, meaning they are fact-based and measurable. In addition to the very important objective assessment, a gut feel is of value too. Specifically, it’s important to sense that there is rapport between you and your potential advisor. Rapport is the idea that the client/advisor relationship is harmonious. Mutual respect between the client and advisor results in a willingness to work toward understanding and valuing each other’s perspectives and ideas. Communication should flow freely both ways. Without rapport you must ask yourself how this client/advisor relationship is expected to develop over time. If communication is mainly one-sided, specifically from advisor to client, the client may not have a chance to be heard and feel that their concerns really aren’t getting addressed. Lack of rapport simply won’t work. The potential advisor might have stellar qualifications and do everything they think is right for the client. But if that perfectly qualified advisor isn’t listening to the client and isn’t willing to build, or interested in, rapport, the relationship may not work. Don’t forget about rapport!

Next Post. The next post in this two-part series covers the Dear Financial Advisor Letter™. It’s an actual letter you provide to a prospective advisor that lays out exactly what you expect of them.

 

Jim Schwartz, CFP®, RICP®
[email protected]
Blogger, Widowed Community Financial Blog
Twitter, @WidComm, @JimSchwartzCFP
Website, www.WidowedCommunity.com

Jim Schwartz is a Scottsdale, AZ fee-only financial planner with an expertise and interest in financial planning and education for widows and widowers.  Years of working with and advising widows, widowers, and surviving partners has provided a wealth of experience and knowledge in this complicated financial arena.  He is particularly skilled in his ability to guide his clients through difficult decisions while ensuring the stability of their finances. 

Contact Jim: If you would like to contact Jim directly, without submitting a public comment below, feel free to use the Contact page.

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