So you’ve decided to hire a financial professional to help you navigate your future. You’ve talked to friends and family members, and while you trust their recommendations, putting your financial future into the hands of someone else is a very big deal. You need to do your own due diligence, but where do you start? Not all financial firms/advisors are created equal. And with all the options available to us, many people decide to go it alone out of fear. 
They fear they could be hiring the next Bernie Madoff, or that they might end up being a number in a long list of clients. The task can seem so daunting that it’s often easier to hire the first advisor you meet, or do nothing at all.
It’s a big decision and many don’t know what questions to ask and what to look for. The below can help provide anyone looking to hire a financial professional a place to start. The questions are not meant to sway anyone in a certain direction, but rather to help ensure you hire someone you feel comfortable with and confident in.
Understand how the advisor is compensated.
Find out exactly how your advisor is paid and make sure you understand any fees and charges – and have them in writing – before making any final decisions. Fee-only means the advisor does NOT earn any commission, while fee-based advisors can earn commissions.
I believe fee-only advisors are best. I formed this belief working for firms that were fee-based and fee-only, and witnessed the practices at each. Fee-only advisors do their best to align their interests with their clients. They don’t make money off the investments they recommend. In a fee-only structure, anything that comes out of your bottom line in turn comes out of the advisor’s bottom line. Therefore, it’s in the advisor’s best interest to only recommend investments they truly believe are in your best interest.
Fee-based advisors might have incentives to sell certain products. (Have you ever heard: “If you want to buy your financial advisor a new Mercedes, buy an annuity?”) Fee-based advisors can fall prey more easily to their clients’ views and emotions, especially during volatile markets. You want to make sure you are hiring someone that will give you the best advice, even if it isn’t what you want to hear. “The difference between successful people and really successful people is that really successful people say no to almost everything.” – Warren Buffet. You don’t want a “Yes” man.
There are also advisors who are paid based on performance. If you’re paying an additional fee for performance, you need to understand the risks involved. Ultimately, the most important thing is that you have a clear understanding of how you pay your advisor. If they can’t put this in writing, or it’s too complex and confusing, walk away.
Conduct a basic background check.
The Financial Industry Regulatory Authority, (FINRA), website, gives information on experience, licenses, outside business activities and regulatory disclosures. You can look up individuals and firms on their website. The most important thing to look at is the disclosures. Having a few disclosures is not uncommon (especially if you are looking up a large firm), but numerous disclosures could indicate a pattern. Make sure you’re able to talk about any events with the advisor to have a clear picture of what may have caused them before moving forward.
Understand the firm’s philosophy and verify their history and experience.
When you are hiring someone, you should see their resume. You want to know what they’ve done in the past and what qualifies them. You also need to determine if you’re hiring an actual money manager or a broker.
A money manager makes your investment decisions for you, and these decisions should be rooted in a long-held investment philosophy. They will have a history of how the portfolios they managed have done in the past, so you know how their clients have fared. Keep in mind that any money manager will have periods of outperformance and underperformance, so you want someone who has a sound philosophy you understand and agree with.
A broker is someone who handpicks stocks and other financial products for you, based on what they think you want and/or need. They may also require your input prior to making any changes. They typically work off commissions and are incentivized to sell certain products. The problem with this approach is there really isn’t a clear philosophy or way for you to see how their previous clients did in the past.
If you want to work with a broker, make sure you ask them how they do their research and come up with their recommendations. You can also ask them if they have any current clients who would be willing to talk to you and share their experience. While confidentiality is taken very seriously in this business, there are often clients who are willing to share their experiences.
Find out where your assets will be held, and who is the custodian.
Ever wondered how Madoff and his crew got away with their Ponzi scheme for so long? They held their clients’ assets. The assets were not being monitored in the same way they would have been had they been held at a large financial institution (Charles Schwab, Fidelity, Merrill Lynch, UBS, etc.) with compliance oversight. If you’re going to work with a broker at one of the large wire houses, your assets will automatically be held there and have the compliance oversight needed. However, if you choose to work with a money manager or boutique firm, make sure your assets are custodied/held at a major firm to guarantee compliance oversight. If they tell you they don’t use a custodian (or it’s some firm you’ve never heard of), walk out the door and find someone else.
Understand the recommendation. What is it based on, what are any inherent tradeoffs?
Understanding the specific recommendation also ties in to understanding the advisor’s philosophy. They should walk through the recommendation with you, and tell you what data and information they used to come up with it. The recommendation should be something you can somewhat easily understand. If you don’t understand something, ask questions. The advisor should be able to address all your questions and concerns, and offer to provide you with any additional information to help you better understand what they’re recommending.
If you’re presented with a variety of products, ask if they’ll earn any additional fees or commissions on those products, and what they are. Don’t be shy about this. You want to make sure they base their recommendations on what they think is the BEST for you, versus one that is good for you and great for them.
Find out what your relationship look like after you’ve hired them. What if something happens to them?
When it comes to financial success, the relationship you have with your advisor is of paramount importance. Why? If you look at what makes investors successful, it’s discipline. It’s not about their education, credentials or performance but how they work with their clients. You need to be working with an advisor you’ll have a good relationship with, one you’ll listen to and trust. In the words of Warren Buffett, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.” You want someone dedicated to keeping you on track. You don’t want an advisor who becomes a ghost.
Understand their business’s structure, and who can help you if they retire, or something happens to them. You want someone who has a team in place, or a succession plan, to ensure you’re always taken care of and don’t encounter any big changes in how your investments are managed.
While there are certainly other things that will come to mind as you set up interviews, these are questions you don’t want to miss. Download this checklist to print and bring to future interviews, so you don’t forget the most important things.
Written by: Hannah Ahmed, CFP®, CDFA®
