Many people hire a fee-based adviser to help with their investments. Before you do, it's important to ask the right questions. It's also important that the adviser asks you the right questions.
Your first question: How do you earn the fees I would pay you? If you like the answer, be prepared to offer the adviser some guidance about your investment goals, time horizon, and risk tolerance. Only when an adviser knows your unique situation can he start to develop an investment plan for you. If you don't answer many questions, that can be a red flag about that adviser's intentions.
And let him know you have the following expectations:
Look out for your best interests. Registered Investment Advisers (RIAs) must abide by a fiduciary duty, making decisions about your investments based on what's in your best interests, not his. With ongoing monitoring, an adviser makes sure your investments remain in your best interests.
If you hire a broker who's paid by commission, he doesn't have the same fiduciary duty as an RIA. Brokers are required only to recommend investments that are "suitable" at the time of the transaction. That means a broker might sell an investment to you one day, pocket the commission, and move on to his next sale.
Establish regular communication. Ask the adviser how often he'll communicate with you. A good adviser doesn't wait for you to call; he will reach out at least two times annually. And, when you leave a message, he should return your call within one business day. Lack of communication is a complaint I hear frequently from callers to The Mutual Fund Show, my weekly radio program.
Your adviser should provide regular updates on market and economic developments along with their potential impact on your plan. If your plan needs to be adjusted, he should inform you of that as well. At least once a year, he should be available to meet with you to discuss your progress and find out if you've had any major changes to your situation.
Additionally, your adviser should provide regular investment performance updates. At The Mutual Fund Store, we send clients a report every quarter that includes their investment returns with percentage and dollar value changes. We provide the returns of stock market benchmarks so they can compare their performance against the benchmarks.
Tell you how he's compensated. Many advisers are paid by investment companies for recommending certain products. That compensation can take on many forms, but if an adviser is receiving compensation to sell one company's products over another, how can you be sure those investments are best for you?
Also, be wary if an adviser tries to sell you investments from only one company. He might be getting some sort of incentive to do so. No one firm has all the best investments for each asset class, so if an adviser uses products from only one or two companies, you should consider staying away.
Explain his investment strategy. An adviser should be able to explain an investment strategy in a way you understand. Whether it's asset allocation with no-load or load-waived mutual funds, or something more complicated, you need to be able to understand it. If you don't, ask again. And if you still don't understand, it's a good idea to find another adviser to work with.
If the strategy doesn't include regular rebalancing of your investments, that's another red flag.
Give a written investment plan. The reason you print out driving directions from Mapquest or Google Maps is because you need to know exactly how to get to your destination. No one likes to get lost. Likewise, your adviser should provide an investment road map in a written document, with a list of investments and asset allocations. If your plan changes, you should receive an updated version.
Have some type of expertise. Some advisers might specialize in stocks, bonds, or estate planning. Others might have a license to sell insurance policies. At The Mutual Fund Store, our advisers are certified as Chartered Mutual Fund Counselors (CMFCs) or Certified Fund Specialists (CFSs), which means they've received specialized training in mutual funds.
For many people, a big factor in picking an adviser is whether he's nice or not. It might be someone who goes to your church or you socialize with. But that doesn't mean that person is qualified to develop an investment plan for you. Be sure you ask a potential adviser what he specializes in. If he isn't qualified to meet all your investing needs, look for someone else you can trust with your financial future.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast-to-coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.