Over the last 2 weeks, I’ve talked about investing.  Which firm is best? How do you view risk? So, I figure I’ll keep the ball rolling on questions I hear a lot about investing.

Q:  When I am looking for a financial advisor, financial planner, stockbroker, etc.  do you know what kinds of questions I should ask?

A:  Oh yeah!  This is a fun one!  With multiple parts:

How They Make Money

One of the questions that people are usually afraid to ask might just be the most important question of all.  “How do YOU (financial person) get paid?”  Long ago, during Watergate, the phrase “follow the money” became popular.  It’s popular for a reason.  It’s very instructive.  Financial people usually get paid either via commissions or fees.  If it’s through commissions, be careful about a whole lot of transactions into and out of various products.  Too many transactions (tough to define a particular number but it’s good to know if the investment strategy is a “buy & hold” or an active trading model) could signal that something might be amiss and that you are paying a lot of money in commissions that might benefit your advisor more than yourself.  If the financial person is fee based and that fee is hourly, make sure that the number of hours you pay for appears to be in line with reality.  If the fee is based on assets under management, make sure that it’s reasonable; around 1% seems to be the industry norm.  The advisor is going to get paid, it’s just a matter of what form.  Advisors who don’t get paid are called barbers or uncles!  And, you may want to be careful about following their advice…

Who They Work With

Another important question is if you fit into their business model as the type of client they want to specialize in serving.  The financial world is getting more specialized and more fragmented.   I’ve met advisors who specialize in professional athletes & entertainers, some who focus on executives, some who serve small business owners, and some who deal primarily with retirees.  The person you hire should have a level of knowledge about the issues that impact you and your particular situation.  If I built a practice serving retirees with $500,000 to $2,000,000 investment portfolios, I might be out of my league if I started to work with Bill Gates, Adele or Tiger Woods.  It’s important for your advisor to understand the fears and concerns that you might have in your stage of life and the risks that your “profile” may be subject to.  Bill Gates’ financial advisors probably wouldn’t want me as a client!  As you’re talking to an advisor, make sure they know and work with clients with similar needs and goals.  Make sure that you fit into their business plan.  And make sure that they fit you, too.  If you don’t like them or trust them, don’t work with them!

What Theyve Done

Do some homework too.  Check them out!  There are a few ways to do a little digging into the background of your potential advisor (or current one for that matter).  Most financial advisors have a regulatory agency that is in charge of their registration process.  For broker/dealer firms, FINRA is their regulatory body.  FINRA has a Broker Check on their website that allows you to check out your advisor and their firm (Do both, please!) to see if there is a history of regulatory violations as well as the advisor’s employment history.  The SEC has a similar function on their website.  The SEC and state regulatory bodies are the reporting channels for fee based advisors.  While you’re checking out FINRA and the SEC, don’t forget to do the easy stuff.  Let Google be your friend!  Google the firm name and your advisor’s name.  It’s amazing how much information is out there on the Internet.   If you’re feeling particularly adventurous, type in the name of your advisor and the word “scam” and see what happens.  I’ve heard an expression that the person you marry and the person who manages your money are the two biggest choices you’ll make.  Don’t just blindly trust the person who wants to manage your money.  Dig into their business, their employment history, and their regulatory history too.  You want to find any signs of a Bernie-Madoff-in-training well before they’re managing your money!

These are just a few questions that you can ask.  This article has a lot more questions that you can ask.  Of course, when you ask these questions along with any others that you may create,  you are probably not the first person who has asked an advisor that particular question.  So while you should definitely pay attention to their answers, also pay attention to their body language and your “gut.  Ask yourself if you trust this person.  Do you find their firm and their reputation suitable for your situation?  If you feel like something is wrong, maybe there is.  Remember taking tests with a #2 pencil and filling in the dots?  Sometimes your first instinct is right! If you meet with someone and don’t trust them or you don’t find a good fit, don’t let a smooth sales pitch sway you.  Be prepared to walk away when you walk in!

Speaking of walking away, I sense another blog about walking away from particular investments in my future