Need Advising? 4 Questions to Ask Before You Choose…

Are you considering hiring a financial advisor? The reasons for doing so can include:

  • You no longer have time to manage your investments
  • Your returns fall far short of what you had hoped
  • You want a knowledgeable person who will provide a detached unemotional perspective

There’s no shortage of financial planners, insurance agents, and stock brokers who are more than happy to assume the role.

Where do you start?

The best place is by asking friends, colleagues, and family for referrals. You don’t have to share financial details with them. Simply find out who they use or would recommend.

After you have a shortlist of names, there are four important questions to have answered before scheduling an appointment.

Question 1: Do they have any blemishes in their background?

This can be a little tricky because not all advisors are regulated by the same entities.

They go by various generic titles, such as registered representative, financial consultant, financial advisor, or investment consultant.

And to make it more difficult, there is no official regulation for the title of “financial advisor” or “investment advisor.”

Many financial representatives work for broker-dealers, such as Merrill Lynch or Edward D. Jones & Co., that buy and sell securities. They are regulated by the Financial Industry Regulatory Authority (FINRA).

You can use this free tool to see if any actions have been taken against those on your shortlist or the firm.

Also check with your state securities regulator for customer complaints or arbitration claims.

Broker-dealers are required to reasonably believe that any recommendations made are suitable for a client’s financial needs, objectives, and special circumstances.

However, a broker’s duty is to the broker-dealer, not necessarily to the client.

On the other hand, registered investment advisers (RIAs) have a legal obligation to provide appropriate investment advice and always put clients’ best interest before their own.

RIAs are regulated by the Securities and Exchange Commission (SEC) or your state’s securities authorities. Go here to search for background information from the SEC and click here for a link to your state’s regulator.

If you can’t find a financial representative on the FINRA’s, the SEC’s, or your state’s websites, it could mean that she or he isn’t regulated under federal or state securities laws. However, they might be regulated by state law to sell insurance products. Those products may include: life insurance, long-term-care insurance, health insurance, fixed- or fixed-indexed annuities.

Contact your state’s department of insurance regulation. Their websites will often let you do a background check online. You can find a listing here.

If they aren’t registered with FINRA, the SEC, or your state, it could indicate they’re providing financial advice and/or selling products without any authority or effective oversight.

That should immediately send up a red flag.

Question 2: What licenses do they have?

The FINRA, SEC, and state regulatory websites will also list licenses the advisors hold.

Those who work for broker-dealers can sell you products depending on the licenses they have. For example, a representative who has passed the Series 6 exam can sell only mutual funds, variable annuities, and similar products, while the holder of a Series 7 license can sell a broader array of securities.

RIAs generally have a Series 65 license, although, some states waive this if they hold certain certifications.

Brokers and RIAs might also hold state insurance licenses, which allow them to offer insurance products to clients.

Insurance agents must have a license to sell insurance and annuities.

No licenses? Another potential red flag.

Question 3: What certifications do they have?

The FINRA and SEC websites will list certifications advisors hold. You might also check the advisor’s website. Then you could go to the organization that issues those accreditations to see if the advisor is in good standing.

There’s a truck load of certifications available for financial advisors.

CFP® (Certified Financial Planner™) is the best known. Among the others are:

Not at all.

What it could mean though, is that they have shown a commitment to keeping up to date on the latest trends in the profession.

Question 4: How are they paid?

The advisor’s website might explain how he is paid. If not, call his office and ask. You’re not looking for a specific figure … just the structure used.

There are generally three different ways financial advisors can be paid:

  • Commissions only — They receive commissions on products sold
  • Fee based — They charge a flat fee for financial advice and receive commissions on some of the products sold
  • Fee only — They charge by the hour and/or a percentage fee for assets under management.

One structure isn’t necessarily any better or worse than another. All have the potential for bias, so you’re depending on the advisor’s integrity. Still, it’s your money… understand how they’ll be compensated before you meet them.

You can never be too thorough when it comes to your financial wellbeing. Plus you’re looking for a long-term relationship, so take your time.

There’s a heap more questions you should ask before hiring an advisor, for instance: How long have you been in business? What did you do prior? What is your typical client profile? Is there a minimum account size?

But by doing your homework with the four questions I presented today, you’ll be well prepared to choose the right person to provide the type of financial help you’re seeking.

To a richer life,

Nilus Mattive

Nilus Mattive
Editor, Rich Life Roadmap

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The Daily Reckoning