Wednesday, October 01, 2014 |
Joe Alfonso, GoLocalPDX Contributor

No one wakes up in the morning and decides that today is the day they will hire a financial adviser. It usually takes a big “spear in the back,” such as the birth of a child, the receipt of a windfall, a job change or some similar major life event before engaging a financial adviser becomes a priority.

Regardless of your particular motivation, if you are in the market for a financial adviser, read on to learn what questions you should be asking prospective advisers during your search.

Whom do you work for?

Most advisers don’t work for you; they are employees of large financial services firms. They therefore owe their primary loyalty to their employer and must abide by that employer’s policies. This includes which financial products they can offer to clients to the exclusion of others that might be lower in cost and a better fit for that client, but pay the employer a lower fee to distribute.

Regulations do not treat these advisers as “fiduciaries,” which would require them to place their client’s interest ahead of their own or their employer’s.

Thus, as long as the products offered are “suitable,” a lower standard of care, these advisers have met their obligation to the client under existing regulations.

In contrast, independent advisers who operate their own firms, known as Registered Investment Adviser firms (RIA), are held to a fiduciary standard and therefore must place their client’s interest’s first.

Any actual or potential conflict of interest that would impede the fiduciary adviser from living up to this standard of care must be avoided or, if unavoidable, must be fully disclosed in writing. Offering one financial product rather than another because it pays the adviser a higher commission is a clear violation of the fiduciary standard and would subject the RIA firm and its adviser to discipline.

(Full disclosure: I am an independent, fee-only financial adviser.)

How Are You Paid?

Advisers are compensated in various ways, but all of these fall into one of three categories:

Fee-Only: Fee-only advisers’ only source of compensation is the fee paid by the client directly to the adviser. Fee-only advisers receive no third-party compensation for the advice they provide or the products they offer.

Commission: Commissioned advisers receive compensation from the companies whose products they sell to clients. These include mutual funds, annuities and insurance.

Fee-Based: Fee-based advisers receive a hybrid form of compensation consisting of a mixture of fees and commissions. These advisers may, for example, charge a flat fee for a “financial plan” and then implement that plan using products that pay them a commission.

What services do you provide?

Here as well advisers run the gamut. Some are primarily product sales people and provide little if any planning advice. Others might do some initial planning to develop an investment strategy and then focus most of their on-going effort on managing client investments. A minority of advisers provide comprehensive financial planning and investment management services advising in all areas of client’s financial lives.

What is your investment philosophy?

Always ask the adviser to explain their investment philosophy to see if, first, they have one, and second, they can coherently explain it in clear terms that you can understand. A good adviser will have a well-defined strategy and be able to explain it to you without resorting to arcane terms or obscure concepts. Demand such an explanation so that you know what to expect with your investments and will not be surprised by how they behave during the inevitable ebb and flow of the market.

What are your qualifications?

Amazingly, anyone can hold themselves out as an “investment adviser” as long as they pass a single three hour exam. No advanced degrees or specific course of study is required. Additional exams are required if the adviser wishes to earn commissions but these also do not require a specific degree or course of study.

Some advisers have taken the additional step of obtaining an actual designation based on further study and testing. The pre-eminent designation for financial advisers is the CFP® (Certified Financial Planner) and is earned after completing a course of study at an approved institution and the passing of a comprehensive all day-exam, among other requirements. Other certifications you will run across are the ChFC (Chartered Financial Consultant), CFA (Charted Financial Analyst) and CIMA (Certified Investment Management Analyst). There is literally an alphabet soup of designations out there and not all are credible. Always ask an adviser what those letters behind his or her name stand for.

Have you ever gotten into trouble?

RIA firms are regulated by either the SEC or the state. Advisers must annually submit to their regulator a document called the ADV Part II, which, among other things, discloses that adviser’s background, services and fees. All advisers must provide this document to prospective clients. These same agencies also post adviser license status and complaint history on their websites. Commissioned advisers are regulated by FINRA which posts adviser background information online via a service called BrokerCheck.

The search for a financial adviser can be daunting. I hope the above suggested questions are of help to you in your quest. In addition, check out the following adviser membership organizations and regulator websites for additional resources, including directories of financial advisers.

National Association of Personal Financial Advisers:

Alliance of Comprehensive Planners:

Certified Financial Planner Board of Standards:

Securities and Exchange Commission:


This Article Originally appeared in the Business Section of GoLocalPDX