There's one thing all great financial advisors have in common. They put their clients' interests ahead of their own. They also listen to what you have to say rather than wait until you stop talking just so they can tell you how they're going to manage and invest your money.
For the uninitiated it's often hard to tell whether your advisor is actually giving good advice or just spouting off what he or she thinks you want to hear. After working with financial advisors for 15 years, I can tell you that there is indeed a great deal of difference and there are ways to weed out those who may be putting their interests ahead of yours.
So whether you are questioning the motives of the financial advisor you already have or are looking for a financial advisor you can trust, here are some questions that could extract their hidden agendas that may not be in line with your financial goals.
Question 1. How exactly do you get paid?
This question should immediately trigger a reaction that could separate the honest financial advisors from the shills just out to make a buck and could care less about your portfolio. You need to be careful if they immediately answer this question by saying "I make money when you make money." If that's their answer, your following question should be, "Does that also mean when I lose money, you'll lose money too?"
There are generally five ways a financial advisor is compensated and many make their money through a combination of some or of all five. They can be strictly on salary, which is becoming more rare these days, or they can be paid on commission, on an hourly basis, a flat fee, or on a percentage of your assets under their guidance.
How they are paid is actually not as important as whether the advice they give you is based on what's best for you or driven by how much they can make from it. Therefore, if commissions are involved in any way, you have every right to be suspicious. It means that they could be investing your money in specific devices such as mutual funds, ETFs or structured products that they are compensated for.
Financial advice should be free from any conflicts of interest.
Advisors that charge a flat fee or on an hourly basis like lawyers, might seem expensive at first, but if their advice is sound and your portfolio grows, it should more than compensate for that fee. If the advisor is compensated on the size of your assets, watch out. This is similar to commissions, only in a less direct manner. Here, they can put you into mutual funds or ETFs and sit back and watch your investments grow without lifting a finger and still make money. Basically, all they're doing is something you could have done yourself and saved the money.
Question 2. More important than how a financial advisor is paid is actually how they conduct their business with you. Are they transaction oriented -- do they try to put you into the latest hot stock or fund and do a lot of trading on your behalf just to generate performance, or are they more interested in developing a long-term relationship and learning as much as they can about the way you're wired when it comes to investing, or what keeps you up at night?
Advisors who simply want you to turn over all the thinking and strategizing to them are advisors you want to stay away from or move away from if you're already doing business with them. These are the "get a hunch, buy a bunch" stock-jockeys who are obsessed with stock picking, and who ignore such important issues as risk tolerance.
They'll use words like "this is a sure thing" or "I can get you in at the bottom and we can ride this baby to the top." One to particularly be wary of is, "I've got an exclusive access to this investment." You want someone who understands that you would rather not lose money than make money when it comes to investing, or that daily gyrations in the stock market are fine with you as long as over the long term, the share price inches up.
Question 3. Ask them what all those certificates on their walls mean.
Unfortunately, the agencies tasked with overseeing this industry have a poor track record for weeding out the crooks. Can anyone say Madoff? Also, in most states, anyone can put up a shingle that says "Financial Planner." It's sort of like the word "Therapist."
So you need to do some investigating and to check out their certificates to make sure they are backed by legitimate or official designations. You want to look for titles such as CFP, which stands for certified financial planner, or ChFC, which is a chartered financial consultant, or the most widely known, CPA for certified public accountant, who has a specialty designation as a PFS, which stands for personal financial specialist.
These designations won't guarantee this person is good for your or even any good at what they do, but they do show he or she has had at least extensive training and experience.
Another thing you should do is find out whether there are any public disciplinary actions against them and how they were resolved. You do this by going to the FINRA BrokerCheck database.
Just remember that even good financial advisors can have a few disputes on their record. Start to worry, however, when there's more than five. Your state securities regulator might also provide background information on registered advisors.
Question 4. Do they have the proper registration forms on file?
This may sound like an unusual question to ask any professional, but in the case of a financial advisor, you want to stay away from anyone who's not registered with the Securities and Exchange Commission (SEC) or the state securities agency. This is easily verified by asking to see their Form ADV, which is filed with the SEC and discloses the advisor's education and business background, compensation, and investment methodology. If they manage less than $25 million in assets, they often must disclose similar information with their own state's security agency.
In the same vein, any advisor who is allowed to sell securities will have what's called a Central Registration Depository (CRD) file. You can get CRD information through your state's securities agency and it provides a 10-year history, including any disciplinary actions taken against that person.
Question 5. You probably don't want someone who's fresh out of business school or financial advisor training. You want someone who has some experience under their belts. So ask them how long they've been doing business as a financial advisor. Don't let the gray hair fool you. For many advisors, this is a second or third career.
Question 6. Ask for references. Then go to these people and 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.
Question 7. If you are looking for an advisor, you'll want to know how they work. So find out how often you expect to meet and will this be in person or over the phone. Obviously, most interactions will be by phone or email, but in the beginning you'll want at least two or maybe more in-person meetings, and then at least one in-person meeting a year, maybe more.
You'll also want to know that after you give them all your financial information along with any other information they might need, how much time will it take before you receive an assessment or a financial plan.
What form will this plan take? How will you execute it? A financial plan is like a doctor's prescription. If you don't follow it, you won't get better. And if you don't follow the financial plan your advisor has come up with, you won't reach your financial goals, which should be agreed to at the outset.
Question 8. This is a question to ask yourself. How do you feel about the advisor? Do you trust them? Does he or she make sure you understand what they're talking about or do they speak in financial jargon that only a CPA or an MBA would be able to grasp?
Does he or she care about how you feel and that you understand everything they are saying. If not, find someone else because no matter how good their advice seem now, one day you're going to look back and wonder "what happened."