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Financial advisers and planners attend seminars and classes and read books so they can learn how to win your business or, if you're already their client, to "deepen the relationship." The customary procedure is for the adviser to ask you questions, orally and in writing, and for you to reply. Then the adviser considers the facts and tells you what he or she thinks.
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But when you decide it's time to hire (or replace) a financial adviser, it is a two-way street. Are you also prepared to be assertive? You should be. Whether you're working with a financial planner on general big-picture matters or an investment manager who will actually handle your money, you are retaining these people and their organization to work for you. This may cost you as much as 2% annually of your total assets that the adviser manages -- probably more than you've had to pay an accountant or a lawyer. So there is no reason to be shy or to hold back in any introductory session. Tell the planner or broker or investment manager -- in a genial but matter-of-fact way -- that you would like him or her to answer a series of your own questions in writing. If you run into resistance, or learn something troubling, take your business elsewhere.
This proactive, "educated consumer" approach doesn't play well with all planners. After I wrote a story in Kiplinger's Personal Finance a few months ago chronicling one family's search for an adviser -- a year-long process that included a thorough if somewhat cheeky questionnaire prepared by the investor -- one planner wrote to me rather indignantly about my praise of this approach. The planner said the questions should have been "How old are you?" and "What school did you attend," and then the more pertinent, "What are your other clients like?" The first two are irrelevant, as long as the adviser has recognized professional credentials and a clean record. On the third point, yes, if all the other clients are older and richer, or younger and with less-complex affairs, that's a fair warning. You could end up as an afterthought to the adviser, the equivalent of being seated at the darkest table next to the kitchen, the last client to get a call returned.
So what questions should you ask? The AARP has a sample financial-adviser questionnaire, but it is overly weighted with bureaucratic matters such as "Are you a registered investment adviser?" (not all planners are, and anyway, it doesn't make one competent) and "Have you ever been disciplined by the Securities and Exchange Commission, the NASD, or other regulator?" That's important to know, but you don't normally start by asking a professional if he or she is a crook. Perhaps there's a regulatory blemish, but with extenuating circumstances. Better to talk this subject out.
In all seriousness, many advisers are receptive to being interviewed. They have an incentive to get off on the right foot with you or any other prospective client. So concentrate on the nitty-gritty: the cost, the investment performance, the type of investments the adviser favors or is most expert about, and the way the practice operates to serve you. There's also the issue of whether the adviser is a fiduciary (which means your interests legally come first) or a broker, which puts the pro in the awkward position of trying to improve your finances while owing primary legal allegiance to an employer, who may have sales quotas and other rules designed, first and foremost, to boost its profits. These are the areas you want to explore in your interviews and questionnaires.
First, the fees
There are all kinds of arrangements on how you pay an adviser. Fee-only financial planners charge by the hour, but they may also bill a percentage of your assets if you retain them to provide hands-on investment advice such as to design a portfolio of mutual funds. Others charge a combination of fees and commissions. So it's key to ask the adviser to provide you a written breakdown of all fees and commissions, how they are figured, and which ones are fixed and which ones are variable. You can also ask how these charges compare to industry benchmarks. (One percent of total assets is fair; 1.5% is high although common; and more than that is too much.) After all, many no-load mutual funds have low expenses, but if a planner charges you several thousand dollars to assemble a simple mix of index funds and then takes a cut of your balances when there's little or no management required, you're wasting your money. Someone else might merely charge you $750 to take five hours to evaluate and reconfigure your investments and to update you every quarter. If you need additional advice, you can pay as you go.
Next, the performance
This is a tough one because the timing of investments determines the performance. When an adviser makes claims -- which they sometimes do on their Web sites or in brochures -- that other or "typical" clients have earned, say, two percentage points a year more than the S&P 500 over a long period, you need to see objective evidence. This result is plausible, but you might engage the adviser on the subject of this "track record" by saying, "I know you have experience and credentials, but can you show me how exactly you have delivered this sort of return?" You'll at least get a sense of how the adviser expects to add value to your portfolio -- at least enough to cover his or her fees. (Remember, you can always solicit advice at a low cost from Vanguard or Fidelity, as long as you're content to use their mutual funds for most of your investing.)
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