Before you let a stranger manage your money (even if it's someone who's been recommended), make sure you're doing your research. Here are some questions to ask your potential (or current) broker, and some to ask yourself.
1. What's my style of investing?
If you trade frequently, or have a large portfolio, paying a percentage of assets under management might be the way to go for you. If you trade infrequently, paying per trade makes more sense. Know your own style. "If you need more service and for your agent to be more proactive, then it's best to go with fee-based," says Lana Burkhardt, principal of Lana Burkhardt & Associates.
David Lo of JD Power & Associates says it's a best practice for advisors to develop a solid financial plan for each customer. If your advisor doesn't offer one, ask to establish one together.
2. What kind of financial manager do I need?
The kind of financial manager you'll need will depend on several factors: how much wealth you have, your stage of life, and your financial savvy. It's important to know whether you want an advisor who's going to offer personalized attention for more active trading and complex financial planning, or if you're someone for whom a more standard approach could work.
"For someone who's 35 [and] starting to build wealth, your needs are fairly similar to the needs of people who are going through similar life steps as you are," says Francisco Prat, who founded the financial education website http://www.lifewellth.com. "A lot of advisors provide solutions appropriate to 80% of the population. A large portion of the population is better served by having an automated solution rather than personalized attention from an advisor."
3. Is this person a reputable fiduciary?
Len Hayduchok of Dedicated Senior Advisors says, "If a client does nothing else other than identify if their advisor has a fiduciary responsibility and whether the advisor has any complaints or black marks, the client will be ahead by about 95%."
Determine if the advisor has any black marks by checking FINRA's BrokerCheck.
4. What are his or her certifications?
Frank Masselli, president of the Masselli Group and an industry speaker and trainer, warns against assuming all financial advisors meet the same standards. "You could be a registered investment advisor by paying $100 and filling out a form," he says. "It's terrifying. The client won't know the difference, because we all kind of sound the same, and we've all mastered the ability to look good on a quick interview."
So how to avoid the broker who got his license on the Internet? Make sure the agent is Series 7 or Series 65. "If you're not Series 7, then there's a high probability you've got an insurance agent, and he's going to pitch you an annuity," says Masselli. "If you're not Series 7 or Series 65, you're not going to get managed money or stocks and bonds capability."
The Certified Financial Planner Board of Standards issues a certification for financial planners who have met set standards of competence, professionalism, communications, advocacy, and sustainability. They maintain a free, publicly accessible database of all CFP-certified professionals.
5. How is my advisor going to get paid?
"I tell my clients pointedly: Ask what the advisors are making. Some advisors will tell you 100% of your money goes to work right away," Masselli says. "That's a red flag. That's like shooting up a flare. Advisors are in this business to make money, and that's OK. But you have to know how they're making it."
6. Is this person acting professionally?
Think this is a no-brainer? Yes, your broker or advisor will be winsome and charming, he or she may say they've put their own parents in a particular fund, or own shares of something themselves. But at the end of the day, they may be working as more of a salesperson than an advisor. You wouldn't expect a Dodge dealer to tell you you're best in a GMC truck, and if your advisor deals in annuities, you'll often find the answer to your questions is to buy an annuity.
As Don Canale, an entrepreneur who calls his advisor of 12 years a "peach," puts it, "He knows that despite the fact that we're friends of 12 years, it's a business relationship. And if it's not good for me, I have to find someone else."
There's a role for friendship in your relationship with your advisor, but don't let it be an excuse for your advisor not to meet your needs.
7. Am I receiving full and fair disclosure of all important facts?
One of the problems we heard repeatedly is that clients don't always know how they're being charged, or are suspicious of what kickbacks their advisors are getting.
"Ask the advisor, 'Please explain all imbedded fees and upfront fees that this product will cost over the long term.' Make them spell it out and put it in writing. If they hand over a prospectus and say it's on page 32, make them take a sheet of paper and write down the fee structure," Burkhardt suggests. She also recommends bringing a friend who understands fee structures to a meeting with you, if it's not your strength.
8. What's involved in leaving this product?
"If you're in a fee-based product and you decide to move your assets, there's a level of paperwork and selling out and buying into, but it's not that difficult," says Burkhardt. "When you have bought into a commission-based product , every time you leave and buy back in, there's a cost penalty if you're not in a fee-based arrangement."
9. Am I working with the right type of advisor?
If you're like investor Maggie Welch, whose primary concern is a portfolio that lets you sleep at night, and you're in stocks and bonds you don't understand, your best interests are not being put first. "I hope that I can find a good financial advisor so I won't be a bag lady when I retire," Welch says.
Burkhardt says that finding the advisor with the right communication style is imperative. For her, it was working with a female advisor. "In general, when you find a very good female investor, the time, the energy they put into the relationship is generally higher than what I've experienced with male advisors. Particularly for women who tend to be more concerned about asking a lot of questions and admitting they don't understand."
10. Am I learning?
An advisor who is helping his or her clients grow, not only in their portfolios but in their knowledge base, is something Motley Fool co-founder David Gardner recommends. "It's not something I'd require, but it's definitely something I'd seek out. Education, engagement, that the advisor is helping the investor learn and grow. The best financial advisors should enlighten."
11. Do I have an exit strategy?
It's wise to have an exit strategy for stock purchases. This can take the form of an event (such as change in management), price (if it goes lower than my purchase price or if it reaches your estimate of fair value), or windfall (a split, for example) that indicates your pre-determined time to sell.
The same can be true for your broker or advisor. Before entering into an arrangement, tell yourself, "I'll stay until..." Your touch point could be a noticeable drop in service, an increase in fees, or a change in normal trading activity (either significantly more or less). Whatever you decide, write it down and stash it away. It's a note to your future self, warning you, and it should be heeded.
12. Am I trusting my instincts?
Finally, never overlook the importance of your instincts. In Blink, Malcolm Gladwell makes the case that we sometimes pick up on things subconsciously that we don't process consciously. If something feels off in dealing with your broker or advisor, trust your instincts and walk away.
There are plenty of brokers to choose from, regardless of the size of your portfolio or investing experience. You can also always do it on your own. At the end of the day, it's your money, and how you manage it -- whether you hire someone to do it for you, or give it a go on your own -- is entirely up to you.
And even if the advisor you've chosen passes your test, keep in mind the relationship is a continuously evolving one. What might work for you at one stage of your life (or one stage of your advisor's career) may change as you and they evolve. Like your portfolio and your financial needs, don't be afraid to re-evaluate your relationship with your broker or advisor on a regular basis.
