Recently this column has discussed ways to calculate and monitor whether you will have enough money for your retirement years. If you want to be accurate and safe, the calculations you will use are complex. You will need a financial advisor to help you. If you choose to consider hiring a financial advisor, use the following questions in your initial appointment.
What is your employment history? If the advisor has moved firms often, ask for clear explanations. If none are given, skip this person. If you are still interested, check out this advisor with the Financial Industry Regulatory Authority at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck. Even better, investigate potential financial advisors before your first meeting with them.
What are your qualifications? Ask about his or her licenses and certifications. Before hiring this advisor, learn about the quality of the certifications on the Finra website. Go to the web address: http://apps.finra.org/DataDirectory/1/prodesignations.aspx to learn about those certifications that adorn the business card. Certifications that take years to attain are better quality than those with a quickie course and open-book test.
How are you paid? A financial advisor should be able to hand you a written description of how you will pay him or her. Methods of compensation can include an hourly rate, a flat rate, a percentage of your investments, a commission from products he/she sells you, or a combination of commission and hourly fees.
What are your other clients like? You are looking for two pieces of information. One is how much the advisor tells you about his or her clients. Is there a breach of confidentiality? If so, assume that your private information will also be made public. The second is to find out whether this advisor is a good fit for you. When the other clients are similar to you in their attitude toward risk, wealth level, age, and financial goals, the fit might be good.
What services do you offer? Know what your needs are and verify that this advisor’s specialty meets those needs with his or her other clients. Check for consistency between the services and products offered and the credentials on the business card.
Who else will be working on my account? Financial planning often involves others in the office or the assistance of outside professionals. Don’t hesitate to meet the others working with you; gather information about their qualifications and involvement in your investments. If any outside professionals are used, such as an attorney, insurance agent, or tax specialist, get a list of their names and check on their backgrounds.
How much time will you spend with me? Advisors usually contact their clients quarterly. This can range from a statement of investment performance to a face-to-face meeting. Find out how accessible this advisor will be for you by phone, email and appointments.
Is this firm a SIPC member? SIPC is the Securities Investor Protection Corporation. Congress mandates that it maintain a special reserve to protect customers of insolvent brokerage firms. Not all investments are protected by SIPC, and SIPC is not the FDIC. Some ineligible investments are futures contracts, limited partnerships and fixed annuities. Some firms are actually a group of firms. Be sure your money will be invested with the firm that is a member of SIPC.
May I have your ADV form? If the firm does not have an ADV form, get up and leave the office. This form is required of investment advisors to register with both the SEC and the state securities board. The form comes in two parts. Part 1 includes information about the business, ownership, clients, employees and disciplinary actions. Part 2 is a narrative written in plain English about the kinds of services offered, the fee schedule, disciplinary information, conflicts of interest and backgrounds.
What kinds of investments do you recommend? Do you get an answer you can understand? Don’t invest in anything that you do not understand. It is crucial that you know where your money is invested and that your advisor chooses investments in your best interests and to meet your needs, not his or her needs.
If you leave this firm, can I follow you or will I be assigned a replacement broker? Know what your options are if your broker leaves. Find out if there would be any fees associated with following your broker to another firm. Know whom to call if you receive notice that your broker is gone.
What code of conduct do you follow? The “CFA Code of Ethics” and “Standards of Professional Conduct” is a good benchmark answer. Generally, the Code of Ethics requires the advisor to place the interests of clients above their own; to act with integrity and competence; to maintain professional competence. The Standards of Professional Conduct include professionalism; duties to clients; investment analysis and recommendations; and conflicts of interest. You can learn more at www.cfainstitute.org.
Arm yourself with information. If something doesn’t check out or make sense in the first meeting, skip that advisor and move to the next one. Plan and prepare carefully and thoroughly before making a commitment. Measure twice and cut once.