How to Tell Your Advisor's Real Agenda

We hire professionals for their expertise, and pay them for guidance on topics that are unfamiliar to us. And there's the rub: How can we judge whether it's sound advice, or advice that just sounds good because you're being told what you want to hear?

This paradox is particularly true when it comes to shopping for financial advice. The common signs that you're talking to someone who's more concerned with their paycheck than your way of life include:

  • The financial pros who insist that you relinquish all the thinking -- and the authority to manage your money -- to them.
  • The life insurance salesperson who seeks out your business, offering a free consultation.
  • An advisor who is preoccupied with stock picks (unless you're specifically looking for them).
  • A pro who glosses over or completely ignores the topic of risk, using the words "sure thing" or offering "exclusive access" to an investment.

Of course, the best salesmen are much more subtle when they pitch their services. But with your money on the line, it's important that you vet your professionals.

To help your reconnaissance, here are four questions to ask before you shake hands and tell a financial advisor, "You're hired."

1. How do you get paid?
Obviously, you want to know how much the expert charges to dispense advice. But even more important is finding out how your advisor gets paid. Is the advisor paid via flat fee? Hourly? Asset-based? By commission? (Here's a guide to how money pros make their money.)

The answer to that question is the easiest way to determine whether the recommendations you'll receive are based on what's best for your financial situation, or what's most lucrative for theirs. At The Motley Fool, we've been longtime fans of The Garrett Planning Network philosophy -- that financial planning advice should be free from conflicts, that products are sold without commissions, and service is billed on an hourly or per-project basis, not based on the client's net worth. (We recently partnered with Garrett to offer a discount for Fools. Keep reading for details!)

2. What are your professional initials?
Sadly, in most states, any joker can call him- or herself a "financial planner." It's your job to look for the seal of quality, in the form of official designations. Look for titles such as certified financial planner (CFP), chartered financial consultant (ChFC), or certified public accountant (CPA) with a specialty designation as a personal financial specialist (PFS). These designations don't tell you that the person does good work, but they do say that the person has extensive training and experience. You can double-check their credentials and find out whether there are any public disciplinary actions, and how they were resolved, via the FINRA BrokerCheck database. Keep in mind that even good brokers may have a few disputes on their record -- however, more than five is a red flag. Your state securities regulator might also provide background information on registered advisors.

3. Do you have the proper forms on file? 
Avoid any individual provider or firm principal who is not registered with the SEC or the state securities agency. In general, you can expect any person who provides financial-planning services and manages investment assets of $25 million or more to file Form ADV with the Securities and Exchange Commission. The form discloses the advisor's education and business background, compensation, and investment methodology. (Those who manage less than $25 million in assets often must disclose similar information with their own state's security agency.) Along the same lines, any professional who sells securities will have a Central Registration Depository (CRD) file. (You can get CRD information through your state's securities agency.) It gives you a 10-year history of the provider, including any disciplinary actions taken against that person.

4. Are you experienced?
How long has the financial professional been doing business, and has he or she done similar work in the past? Ask the advisor to provide client references. But instead of asking these hand-picked clients how they liked working with the advisor, ask them what they didn't like about the services they received, or in which areas they think their advisor isn't as strong in as others.

Gut check time!
In addition to those four items, you'll want to find how your relationship with the advisor will work. How often will you meet? After you provide the needed information, how much time will it be will it be before you receive a prepared assessment? What form will it take? If you're interviewing advisors for an ongoing relationship (not just to handle a single issue), ask how often you'll receive tips or updates throughout the year.

And, finally, there's the intangible but important gut check. Do you click with your advisor? When you ask questions, do you understand the answers you receive? When you ask for clarification, does the subsequent explanation make more sense? If not, move on to the next candidate. Your money is much too precious to waste on bad advice.

More help on finding good help:

Fool.com writer Dayana Yochim judges people by what's inside -- but only after she's checked out their shoes and poked fun at what's on their iPod. The Motley Fool has a disclosure policy.


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