How are you compensated? While one could argue that no method of adviser compensation is totally without bias, fee-only advisers come the closest. Fee-only advisers receive no compensation from the sale of investment or insurance products. Can an adviser who receives a significant portion of their compensation from the sale of financial products really be counted on to recommend solutions that are in your best interest?
Will my assets be housed with an independent third-party custodian? This applies if the adviser will be providing on-going investment advice. Examples of third-party custodians include Charles Schwab, Fidelity, TD Ameritrade, and most other brokerage firms and mutual fund companies. A third-party custodian provides periodic (monthly or at least quarterly) statements independent of any reports provided by the adviser. Bernie Madoff's failure to use an independent custodian enabled him to defraud investors for so many years. If an adviser tells you that you don't need this type of arrangement, end the meeting and leave immediately. This is a deal-killer and should raise many red flags.
Do you have experience working with clients whose situation is similar to ours? Ask the adviser about their client base. If you are a corporate employee looking for help planning for the exercise of your stock options, you should ask the adviser about their knowledge and experience in dealing with clients like you. For example, an adviser who deals primarily with teachers might not be the right choice for you. Likewise if the adviser's typical client has a minimum of $1 million to invest and your portfolio is more modest, this adviser might not be a good fit for you.
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What services do you provide? If the adviser's primary service is investment advice and you are looking for a financial planner to construct a comprehensive financial plan for you, this adviser is likely not a good match.
Do you have any conflicts of interest that influence the advice you provide? Financial advisers who are registered representatives will often be incentivized to sell insurance or annuity products promoted by their broker dealer. Ask how they select the financial and investment products they recommend to clients. Ask them directly about all forms of compensation they will receive from working with you, and if they will disclose this information on an ongoing basis. Ask them if there are any restrictions regarding the products they can recommend.
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Do you act in a fiduciary capacity towards your clients? In laymen's terms, you are asking if the adviser is obligated to put your interests first. The brokerage industry uses the suitability standard, but this falls far short in this regard. This argument continues in the financial services industry as the regulators work through this issue.
The questions listed above are just a few of the many questions you should ask when choosing a new adviser or an adviser with whom you currently have a relationship. As an investor, it is ultimately up to you to select the right adviser. Do your homework and due diligence. The National Association of Personal Financial Advisers (NAPFA), the largest professional organization of fee-only advisers, has a new guide to selecting an adviser called "Pursuit of a Financial Adviser Field Guide," which is an excellent resource for those seeking the help of a financial adviser.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisers to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner. Roger is a NAPFA Registered Adviser.