Interview Questions for Financial Planners

Because "financial planning" covers a lot of ground, it can be hard to find the right match of skill and service to meet all of your needs. But if you enter the relationship with the right expectations, and then ask the right questions, you are likely to come away with an advisor you can trust for a lifetime.

Your First Meeting

Here are the questions you will want to answer as you go about selecting and working with a financial planner.

Do you have experience in providing advice in...

Make a list of everything that is important to you, every concern or issue that has you ready to hire a financial advisor.

Stack them up and click them off.

Does the advisor have experience in retirement planning? Investment planning and portfolio management? Tax planning? Estate planning? Insurance planning? Cash-flow and household debt management? College planning? Integrated planning?

Whatever you think you will need, start the interview by asking if the advisor does it and how many years he or she has been doing it for. If he tells you, for example, that he is new to insurance planning, then you will need to decide if you want him involved in that facet of your overall plan, compared to an insurance agent who is a real specialist.

If the advisor doesn't have experience doing the things you feel you need the most, you're interviewing the wrong person.

Smart Investor Tip

If the advisor doesn't have experience doing the things you feel you need the most, you're interviewing the wrong person.

What is your role? What is your approach to financial planning?

Now you have a mental picture of what the advisor is capable of doing, but every advisor has his or her own vision for how he or she likes to work with clients. You may want just a "fiscal physical," a snapshot of where you stand now and what actions you must take to reach your long-term goals, or you may want to hire someone to move your money into specific investments that will lead to a lifetime of financial security. There are advisors to fit each of those roles; sometimes one person is willing to work either way, sometimes she only does things her way.

One of the very best planners I know is a woman named Sharon, who works only on an hourly basis, developing plans; she leaves implementation of the plan to the client. That doesn't frustrate her clients because she tells them up front that they are responsible for putting the plan into action. If they are not confident, in advance, that they can properly execute the transactions, implement the plan and get their money's worth from her advice, she suggests they hire someone else.

Plenty of people using the title of "financial planner" are more like "money managers," interested mostly in your portfolio and managing your stocks, bonds, and mutual funds. If you are looking for an active day-to-day manager of your financial affairs, you want to make sure you're not getting someone who is mostly interested in executing trades. Since the generic titles of "financial planner," "investment advisor," or "wealth manager" cover such a vast territory, make sure you know what the advisor is talking about when applying his or her services to your situation.

Selecting investments should be a small part of a planner's role; if the only reason you want to hire an advisor is to get the names of good mutual funds, chances are you are paying too much money for a service that will let you down the first time any fund pick fails to pan out. Worse yet, an advisor whose role is defined as picking investments can be made obsolete at little or no charge by any number of websites, magazines, or computer software programs. Or you can go to a broker or money manager and get services that are more tailored to your specific needs.

Whether you are seeking periodic check-ups -- plenty of planning clients see their advisors once every two years after an initial consultation sets them on the course toward their goals -- or an active day-to-day manager of your affairs, the planner needs to either work the way you want, or must convince you of how his or her preferred role will work out properly for you.

This is one of the key reasons why you interview multiple candidates.

Years ago, Walter R., one of my friends and colleagues at the Boston Globe, asked me to recommend a financial planner; I would not give one name and pick an advisor for him -- because the selection process is so personal -- but instead gave them the names of several candidates to interview. Walter interviewed three candidates before making his selection; afterwards, he came to me and said, "I talked to three different people about working with me and, from the sounds of it, each of them looked at me as a completely different type of job."

You know the job you want done, and the advisor knows the job he or she prefers to do; make sure those jobs are actually one and the same.

What is your responsibility to me?

This is all about where your interests lie in comparison to the advisor's personal interests in you as a client.

Legally, if you are dealing with a registered investment advisor, he or she must uphold a fiduciary standard, meaning that he or she must act in your best interests at all time. By comparison, a broker functions under a suitability standard, meaning he or she must only give advice that is appropriate. When someone who has the legal standing of a broker functions in almost every way like a financial planner -- but does not have the fiduciary requirement -- there is tremendous potential for conflict of interest. The advisor can suggest moves that are "appropriate" for you, but particularly good for him or her, such as putting you into the financial product that provides the biggest commission.

As the planning industry has moved toward a fiduciary standard (see Chapter for a discussion of this concept), the number of planners who must put your interests ahead of their own has grown. With titles being practically meaningless, however, you always must ask whether the advisor plans to act like a fiduciary. Any advisor who claims to be a fiduciary should be willing to sign a pledge to that effect, confirming that your interests come first.

"Fiduciary" Is an Imperfect Safeguard

Plenty of people in the industry and in Congress want to see a fiduciary standard applied universally to all stripes of advisors, thinking it will resolve conflict of interest issues.

No legal standard will stop an advisor from becoming a crook. I've interviewed plenty of advisors who were working under a fiduciary standard, and who broke it -- and the law -- by stealing client funds or selling fraudulent investments.

If someone is sufficiently desperate to turn to crime, he or she won't be dissuaded by the "responsibility" to put your interests first. Even if this person doesn't go all the way to theft and fraud, there are plenty of cases where an advisor could act in a way that looks like your best interests at heart, but which is designed, first and foremost, to maximize the advisor's payday. Customers must always be vigilant, even if they are working with a fiduciary.

Negotiating Your Financial Advisor Price

Now that you know the questions you need to ask when selecting your advisors, here's what you'll need to ask to figure out how much you should pay.

How Do You Charge for Your Services?

The entire financial planning community has been moving away from traditional methods of payment (read: commission) for over a decade now. While there are still many advisors who work on a commission basis -- if only because that allows them to serve people with less money to work with and still make a supportive wage -- a percentage of assets under management is increasingly common. Some advisors charge on an hourly basis, and still others use a fee-offset approach. (For a full discussion of compensation methods and the pros and cons to each method, read Chapter .)

Despite the fee-only trend, or perhaps because of it, it is more important than ever not to assume how a counselor exacts his fee. Be sure to find out if costs are associated with products or with overall services, and be careful when those lines are blurry.

For example, some advisors claim to be fee-only, but the moniker applies only to their investment products. The minute they sell you insurance, they are back on commission.

Likewise, advisors may get a piece of the action for helping to keep you in certain mutual funds. A "12b-1 fee," for example, is a marketing charge that some funds apply to accounts every year. Essentially, the fund takes as much as 1 percent of your account balance to pay for "marketing and distribution costs," and then pays a portion of the fee to your broker. This charge is added to the fund's management costs to come up with your total expenses for ownership. (If you fire your advisor, the fee keeps going to her so long as you own the fund, unless you direct it to a new helper; if the advisor changes firms or quits, the fee -- often known as a "trail commission" typically continues to flow to the firm.)

If you are changing advisors, make sure any applicable trail commissions get credited to the new planner. This encourages your new helper to retain those holdings that are appropriate, which may have tax benefits.

Your planner may offer you an investment management account with something called a "wrap fee," which combines management and brokerage fees. These fees can run as high as 3 percent of the assets under management, which is steep. Something closer to 1.5 percent or 2 percent is about average for a stock wrap account; 1.0 to 1.5 percent is the norm with mutual fund wraps. A wrap fee lets you know in advance what you will pay a money manager, but it will be worthwhile only if the manager trades actively and if you have a significant amount of cash -- at least $25,000 and preferably $100,000 or above -- to commit to the program; if you and the manager employ a buy-and-hold strategy, run the numbers to make sure you aren't better off with straight commission.

Last, there are some occasions where a planner works on a salary-and-bonus basis for a financial-services firm, so that he or she will tell you that you are not paying anything for his or her services. There is no such thing as a free lunch in financial services; you will pay planners' salaries through the costs associated with the investments they sell, and they will earn those bonuses by selling you products. Make sure you understand their incentives, because human nature says they will take the actions that earn them the most money, and you're paying the costs even if it doesn't look like it.

What Can I Expect to Pay?

Now that you know how planners charge, you want an idea of what they charge.

Whether it's a flat-fee, an hourly rate, or a percentage of assets under management, they can give you an idea of their standard charges and how they are likely to apply to you. If they can't provide this estimate early in the process, they shouldn't get your business.

Remember, too, that there are thousands of financial planners out there; if you can't afford the services of one, there will be others whom you can hire without breaking your bank.

Ask About Your Financial Advisorâ s Background

And of course, you must ask the following administrative questions that let you know more about the advisor's background.

What's your status? Are you a registered investment advisor, an investment advisory representative, or a registered representative? What states are you licensed in?

By now, your need to have the very basic information should be obvious. Use this for background checks and for confirming the advisor's legal responsibility to you.

What is your educational and professional background?

Look at a planner's background to see if he has a stable employment history. You want an advisor who will be there for you in the years ahead, as well as one who has not bounced from job to job because his work did not satisfy previous employers.

If an advisor has had more than two jobs in the last three years or has a regular pattern of job-switching, find out what's going on. While a planner may switch firms to get better career opportunities or to specialize in a personal field of interest, she also might move after having disciplinary or other troubles. If necessary, call the previous employer for a reference check.

A planner's educational and pre-financial planning background also is interesting to know. Many planners come to the field as a second career. Their first interest may have been teaching or money management or art. You can often learn a lot about an advisor -- and get a feel for the human skills he or she brings to the job -- by learning what he or she did before becoming a planner.

What credentials do you have? Are there areas in which you specialize?

Consumers (and advisors too) sometimes place too much emphasis on credentials and not enough on chemistry, but there's no denying that you want someone who has the expertise to handle your situation. Just as telling for the future of your relationship may be the credentials the planner doesn't have. A financial planner who lacks insurance credentials probably will pass you on to an insurance agent or consultant and will focus her efforts on your more liquid assets. That's a smart move, and it's the right thing to do, but it may disappoint you if your hope is to hire one advisor who can handle all of your current needs.

There are also some amazing specialties that may be worth asking about, depending on your personal situation. There are advisors who are particularly adept at helping parents with disabled children, or parents who plan to adopt, who focus on single women or widows, who work with people facing terminal illness, and more. If you have what you think is a unique situation, you at least want to know if the advisor is prepared to handle it or willing to learn about it.

Remember, too, that some specialties are only important for a time. I know of advisors who specialize in helping parents amass college savings and pay for tuition bills without going into hock. That's terrific, but you've got several decades of life left once the kids are through college; if you hire an advisor for their specialty, consider whether that will someday mean changing advisors to handle future needs that are your lesser concerns right now.

What continuing education classes have you taken? What certifications, if any, do you have?

Finding out what an advisor has been learning recently is a good way to know what is on her mind. It also shows where her practice is headed. If you hear that she has used her educational credits on some esoteric subject that will never come up in your finances, you should wonder about the scope of the practice and whether you're a great fit.

Can I have your Central Registration Depository (CRD) number or Investment Advisor Registration Depository (IARD) number?

When you do your background checks, you want to make sure you get the right person. By having the appropriate registration depository identification number, you are certain to get the right guy in the right place. Advisors may not know their CRD/IARD number -- and it can be just one even if a financial planner is in both databases -- off the top of their heads, but they can find it easily enough. If the financial planner sold securities in the past, separate from being a registered investment advisor, get his CRD number so you can make sure disciplinary problems did not lead to the career change.

When you ask this question, the advisor should be pretty sure you are going to check her out; if she doesn't get you the numbers, she's trying to hide something.

Can I have a copy of your complete Form ADV?

Form ADV is an investment advisor's registration form. They're required by law to give you a copy, which you would think would make this question unnecessary, but it's not. Specifically, you are asking for a complete ADV, when the law only requires them to provide Part II.

Some advisors -- mostly those who are brokers providing some measure of financial planning service -- will not have an ADV, but instead will have a U-4 registration form for you to review.

Yes, you can get this form on your own; you shouldn't have to. In fact, ask the advisor if there is anything he thinks you should discuss about the information in the form, anything he thinks will raise a red flag with you. If he tells you there are no red flags and your subsequent review of the document shows you otherwise, you know he tried to sweep trouble under the rug.


By rule, advisors must give Form ADV to all new clients. The same rule, however, only requires the advisor to give you only Part II of the form.

The problem is that Part I is where all disciplinary actions and potential conflicts of interest are listed.

Advisors know you can get this information (in fact, you will get to it through the websites for checking an investment advisor listed earlier in this chapter), but most only give Part II unless you specifically ask for both sections of the form. (In fact, the Certified Financial Planner Board of Standards, in its list of interview questions for advisors, suggests that you request only Part II or its state equivalent.)

Do not let anyone dissuade you from getting Part I.

Request a "complete" Form ADV (make this request even if you already have the information). If a financial planner only gives you Part II, clarify your request and say you'd like to see Part I. If the advisor declines -- and cites the rules in doing so -- the interview is over. Just walk away. Planners who won't give you information you want before you are a client will be tough to work with after they have your money in house. Moreover, a planner who knows you intend to do a background check but refuses to honor a simple request for information you can get on your own is acting as if he has something to hide. Don't risk it.

Do you provide a written client engagement agreement?

For many planners, this is the document where they pledge to be a fiduciary and to always act in your best interests. It also puts the terms and conditions on paper, which may help you if anything goes wrong down the road.

Expect to have an engagement agreement; new account forms are standard when you first give money to an advisor, and they actually help form the basis for your relationship, as well as prove what you agreed to in the event of trouble. Make sure you get a copy for your files.

If there isn't a new account agreement, find out why, because it's a big red flag that there could be trouble. (A crooked advisor might give you a document to look legit, but any reputable advisor will want the protection that the document gives him or her every bit as much as he or she will want you to feel comfortable.)

Learn about Clientele and Scope of Practice

Below are some questions you should ask to learn about the advisor's clientele and scope of her practice so that you can make an informed decision of whether you fit within her niche.

Who is your typical client?

If the average client looks like you, financially speaking, and has concerns like yours, chances are the advisor has already dealt with whatever situation your personal finances can dish up. In addition, planners generally put the bulk of their educational time toward figuring out how to better serve their core client base, which means learning about things that will benefit their average client.

Make sure the planner's answer doesn't focus solely on age, income, and size of portfolio. If you are a union worker with a particular type of pension plan, for example, you want someone who understands the workings of those plans, as opposed to a consultant whose clients are largely self-employed and setting up their own retirement plans.

If you resemble an advisor's average client, there is a good chance he will want you as a customer because you fall comfortably within his circle of confidence.

How many active clients do you work with?

There are only so many hours in the workweek. If a planner promises regular attention, but then tells you he has 200 clients, something doesn't add up. Either he palms off a lot of work on subordinates, or he doesn't live up to his promises.

Many of the top financial planners in the country work with no more than 60 clients at any one time. When their calendars are full, they simply stop taking new customers.

An advisor is not necessarily doing you a favor by squeezing you into his datebook, particularly if you won't be satisfied with the attention you get.

Will anyone else be working with me?

Financial planning firms come in all shapes and sizes. I know of one prominent planner who functions largely as a rainmaker, bringing clients into the firm and then passing them on to subordinates; the big guy does the initial meeting and dispenses the advice, but he is little more than a puppet for the back-room personnel that do the grassroots work of strategizing.

If others besides the planner will work on your account, find out why. Then learn who they are and how they are qualified; if they will be critical to your success and happiness with the planner, you want a meeting, and enough details so you can review their backgrounds, too.

Do you take possession of, or have access to, my assets? Do you have discretion to change my investments without my approval?

Generally, the answer to these questions is "No."

Beware of signing any form that gives the planner the right to manage your money in accordance with your wishes, but without your direct approval. If you pick a planner who turns out to be a crook -- or who is simply dumber than advertised -- agreeing to a discretionary account is like giving him the keys to your investment vehicle before seeing how he can drive.

Some financial advisors ask for "limited discretionary powers," especially if they are managing money in accounts at mutual fund supermarkets, such as those offered by Fidelity or Charles Schwab. Typically, this allows them to execute trades on your behalf, rather than forcing you to pull the trigger yourself, but make sure you understand why there's a need for the advisor to have this power, how full or limited control really is, and why it's necessary.

The rule in these situations is to walk away from any financial advisor who pressures you for too much control over your assets.

There are extremely rare circumstances under which an advisor might hold assets -- or be able to access them at will -- but you should be wary of a planner who wants this access, as it is a cornerstone of many financial fraud cases. Expect the advisor to tell you that there is a custodian for your assets and a clearing firm for the trades, and that your checks and deposits will be made out to that firm. You want to know this before dealing with an advisor, because the one thing your background checks and due diligence can't stop is the advisor who goes rogue after you are a client. By knowing up front where your checks will go and who will handle them, you will be alarmed if the advisor ever asks you to change directions and make deposit checks out to his firm.

There are many fraud cases where advisors had personal issues and dipped into customer funds to bail themselves out, hoping they could recoup the money and replenish the accounts later. As a general rule, their easiest way to access the money was to have the checks made out to the wrong party.

What will my plan look like? Can I see a sample?

You want to know what you get for your money, and you are paying for a financial plan. Many advisors have samples -- with the real names scratched out and replaced by Prince Charming and Cinderella, or Mr. and Mrs. John Doe -- and they'll let you see what you get for your money and whether you like the form and format.

Make sure you understand the information that is presented -- and that your spouse or anyone else involved in your decisions can make sense of it -- because if you think it would keep you bamboozled, rather than informed, you're interviewing the wrong advisor.

Can I get the names of a few clients to act as references?

Just because you've now seen work samples doesn't mean you don't want to check with real people. See Chapter for a list of questions you will want to ask references in order to make sure that that clients believe the advisor delivers services in the manner being described to you in the interview.

What a Planner Should Want to Know about You

The short answer is everything financial, from your debt and investment picture to your tolerance for risk, your insurance, and more.

Most advisors have a questionnaire that they may ask you to fill out in advance of the first interview. Do your homework, and be forthcoming. They can only determine if you are a good fit for their practice -- and you want them to be as excited about adding you as a client as you are to have found a good advisor -- if they have a complete picture. Don't start them out with bits and pieces of your information and then give them the rest once they are hired; you can provide details of your investments without giving up so much information that you fear identity theft.

The scope of information that the advisor asks about should give you a clue about the focus of his or her practice. With that in mind, pay attention to the questions that are not asked. If the advisor doesn't ask about insurance coverage, for example, he may have you rely on another specialist to do a needs assessment. If he doesn't want to know your debt picture, he may not provide credit counseling to help you eliminate the debt while adding to your investments.

Inquire about the Financial Advisorâ s Relationship and Investment Style

With this information in hand, below are questions you should ask to learn about the advisor's relationship and investment style.

How often will I hear from you and what will prompt your calls?

This question covers both phone calls and statements. You should find out how often you will get a statement of your account, as well as when you might expect a phone call from the planner.

Some financial planners do a lot of hand-holding, stroking clients to preserve the emotional discipline necessary for long-term investing. Others call only when there is a need or an investment recommendation to make. Good planners talk about many things besides immediate sales.

Why do you want to hire me as a client? What kinds of people do you NOT want as clients?

You want a planner to "hire" you as a client every bit as much as you are anxious to work with her as an advisor. In that way, the relationship becomes a partnership, where she is excited to work with you and your assets, while you are anxious to have a pro guiding you. The hope, of course, is that you make money together, that she profits as you profit.

Presumably, the answer to this question gets back to the fact that you are within the advisor's target client range, with a situation she finds appealing. But listen carefully when an advisor tells you what kinds of people she turns away or dislikes working with; if she is describing you -- but doesn't know it because this is a first interview -- you will be better off going elsewhere for your financial help.

Signs of Trouble

  • Paperwork you don't understand. If you are asked to sign any agreement that does not make sense to you or does not seem in keeping with what you and the planner have arranged for, get nervous. Some planners pass discretionary agreements in front of customers as a matter of course; the authorizations make it much easier for mismanagement to go unnoticed, so don't sign unless you agree to the terms.

  • Statements that don't arrive on time or no statements from anyone but the planner. You should receive regular statements from the investment or insurance companies with whom your planner works. If all you get is a statement from the planner, something is amiss. Don't forget that a scammer can mail fake statements, making everything seem fine while he is robbing you blind. Be prepared to follow up directly with the company if something is wrong with your statement; if an advisor is mismanaging your money, you almost certainly will have to go around him or her and get to the investment company for copies of your statement showing how much of your investments, if any, actually made it to an investment account.

  • "It's just a computer error." Glitches are extremely rare; when they happen, they should be corrected in a snap. Do not tolerate this excuse if something shows up on your statement that does not belong there. Do not brush off an anomaly or abnormality on your statement; many frauds and Ponzi schemes have gotten so big and hard to manage that the cheat behind them makes errors on statements and simply explains them away as input or data or computer errors. If it is not corrected immediately, you have a problem; even if it is fixed, make sure it doesn't surface again.

  • The only products being offered are run by the house. This is a bad sign for two different reasons. First, planners sometimes get more compensation for selling products developed by their firms or selling fund families they have a relationship with. Just as important, however, is that you want a free thinker, someone who does not give you formulaic, one-size-fits-all planning.

  • Significant declines in investment value for which you were not prepared. As bad as 2008 was on the stock market -- and it was ugly, with the market off more than 30 percent -- your financial planner should have taken every step of the journey with you, so that you were prepared to endure your share of the carnage. Surprises in your investment portfolio are a bad sign; the wrong time to find out that your investments are hard to sell or that they are overly volatile is when it's too late to sidestep trouble. If you are consistently being surprised, it's a sign of poor communication. There may be nothing illegal going on, but no advisor worth his salt would let a client get bushwhacked by bad news.

  • You are consistently passed along to people you barely know and never checked out. If an advisor promises to work with you but regularly hands you off to a subordinate, you may be in a situation where your real financial planner is the underling. It may be the size of your account, the nature of your transactions, or you personally, but if it's not what you signed up for, you'll want to know why you are getting the brush-off.

  • The planner does not return your calls or e-mails promptly. To be an active partner in your financial life, a planner has to be interested in you and your case. You're not dating or married, and you shouldn't abuse the privilege you have by calling incessantly over nothing at all. But if you keep your requests reasonable and your planner doesn't get back in touch promptly or answer your questions at his first convenience, he has lost interest in you. Once you sense that lack of interest, start the search for someone who can serve you better.

What is your investment philosophy? What criteria do you use before deciding what to buy? Under what conditions do you sell?

You may be hiring an expert, but the logic behind all investment choices must be something you agree with. If the planner tells you that astrology plays a key role in decisions, for example -- and there actually are some planners and brokers who use star charts for guidance -- you may decide to hit the road if that's not your cup of tea.

While that example is extreme, many advisors have a certain bent, where they prefer to be a value investor (buying securities that are cheap and waiting for the market to recognize their worth and bid the prices up) or a growth investor (looking primarily for securities driven by current revenue and profit growth). Some advisors are dedicated to buy-and-hold strategies, while others like to trade so that they can ride the hot sectors and try to surf the market's wave.

Find out how a planner selects investments, because those criteria will be the basis for all recommendations made to you. If it doesn't sound good now, imagine how nervous it will make you when there is money on the line.

Do you personally research the products you recommend?

If an advisor relies entirely on someone else's research, she may just be pushing product. Good advisors know how to analyze financial products and which investment analysts they trust; they make decisions based on their own experience and intuition, rather than on something they got in the firm's sales manual or a recommendation from a service they subscribe to. If an advisor does not do her own research, ask whether she puts her own money into the products she recommends.

Ask These Questions before Buying an Investment

With the slew of questions you will have asked in simply selecting the financial advisor, you'd like to think there's not much to do after you hire someone but sit back and enjoy the ride. Alas, it's not that easy, especially when the relationship is new.

As your relationship starts -- and perhaps for the life of the relationship, depending on how certain questions are answered -- you will want the advisor to answer a raft of follow-up questions before putting your money to work:

How much will you and/or your firm earn on this investment?

You should always know what a transaction will cost you; remember, even fee-only advisors sometimes charge commissions on certain transactions (and may accept 12b-1 fees and other investment-related charges in addition to their prescribed fee). Some financial planners will work on a fee-only basis when it comes to financial planning and money management, but are on commission when selling insurance products.

This is particularly important when your financial planner is turning funds over to a money manager, in which case you want to know how that manager is compensated, too. For example, the standard hedge fund arrangement is what's known as "2-and-20," meaning 2 percent of the assets under management, plus 20 percent of any profits. That's enormous, but you won't complain if the return numbers are big enough.

Let's remember, however, that your advisor is being compensated for putting you into the hedge fund, too. It may be that this just falls under "assets under management," so that it's a part of your regular fee, or it might be that there is some type of arrangement with the hedge fund. Bernie Madoff made a lot of deals with advisors, who plowed funds into his Ponzi scheme.

If the cost structure makes you nervous, speak up.

Smart Investor Tip

If the cost structure makes you nervous, speak up.

After all fees are paid, how much must this investment gain in value before I break even?

Again, this looks at the cost of making an investment, showing you in dramatic fashion whether a trade puts you at a financial disadvantage. If nothing else, layers of compensation -- for the planner, for the fund manager or insurer, or for anyone else -- should make you think twice about the effect costs have on returns. If you pay a fee of 1 percent of assets under management and the advisor puts you into a fund with a 1 percent expense ratio, then you're paying 2 percent off the top for advice and management. If you are expecting your portfolio to be up by 10 percent on average annually -- roughly the long-term historical return for the stock market before expenses and transaction costs -- then your expected gain would actually be 8 percent once you factor in the costs, meaning that one-fifth of your expected potential gain will go to the people who sold you the investment and managed it.

Some "separate accounts" and "private-equity" deals sound great, until the costs are completely factored in. Factor costs in before giving your approval.

What is your rationale for picking this specific investment/product? Do you have a business affiliation with the company behind this product or service? How does it suit my needs and risk tolerances? What standard will we set for performance and how will we monitor progress?

A planner should be able to justify decisions and mesh advice into your personal circumstances. If a planner can't put investment selections into the context of your individual circumstances, then you are getting off-the-rack counsel, or you are being put into the same "box" as the bulk of the clientele, even though you thought you were paying for a custom tailor.

Will this sale help you win any prizes or sales contests?

Federal regulations have gone a long way toward eliminating the contests and other incentives that used to motivate brokers and planners to sell something awful, but there are still times when the advisor has extra motivation to close your deal in a certain time frame. I have friends in the planning business who have won trips all over the world, literally, for being top producers; no one product or investment pushed them to the top, but the honest ones acknowledge that they urged clients to follow through on a part of a plan because closing the deal would help the planners earn the bonus.

If the financial product meets your needs, there's nothing wrong with selling it, though the incentive should be disclosed. That said, contests and product-specific bonuses lead advisors to produce cookie-cutter plans, putting all clients into one basket to earn the prize, even as they pass off their service as being individualized.

How long do you expect me to hold this investment? Why?

Most financial planners pursue a buy-and-hold strategy, although there may be a portion of the portfolio that is actively managed (or they may hire a money manager to do regular moves and tactical allocations).

When you buy a new investment, your file on it should start with a sheet of paper that includes notes from your advisor, specifically his or her rationale and reasons for making the purchase and how long he or she expects to hang on. This is a particularly good tool for allowing you to revisit your thinking periodically to make sure the investment remains a good fit. It also helps you hold the advisor's feet to the fire, especially one who works on commissions.

Smart Investor Tip

If an advisor who gets paid by the transaction comes back and suggests selling in a few months -- unless there is a significant change in the investment's status that warrants a move -- your notes are a wake-up call that he is straying from the original plan.

If an advisor consistently sells more quickly than anticipated, it could be a sign he is mostly interested in the commissions your account can make him or in proving to you that your portfolio requires active management and that his fee is justified.

Can I get out of this investment quickly?

You may be expecting to hang on for a lifetime, but you need to know if what you are buying will be hard or costly to unload. There may not be many buyers for an individual municipal bond, for example, and private-equity deals can become illiquid, making it hard to cash out if you see the company starting to falter.

Other investments, such as annuities or mutual funds, may be easy to get out of, but could carry steep penalties, surrender charges, exit fees, or back-end sales charges.

You've said what it costs to buy this investment. How much would I get if I were to sell it today?

This is about "spread," which you may face if you use a planner (or a broker who functions as a planner) to buy stocks and bonds. Think of it like a new car, for which you pay the sticker price but could not sell it back to the dealer at the same price the second after you drive it off the lot. The bigger the spread, the more certain you must be that you will hold this investment until it pays off.

What is the worst-case outcome for this investment?

Financial planners sell you the good stuff but, before buying any investment or implementing any financial strategy, find out what the worst possible outcome for your investment could be.

What NOT to Do in Working with a Financial Planner

  • If you are buying an investment, never make the check out to the representative. The money goes to the firm that is processing the transaction -- usually the brokerage firm that clears the advisor's trades or the company offering a particular investment product, such as a variable annuity -- to be invested in your account. The firm will pay the commission and use the rest in accordance with your instructions. If you make a check payable to the planner -- or even the planner's firm -- you leave an opening for trouble. Brad Bleidt, the Boston advisor whose $20 million Ponzi scheme I have talked about a few times in this book, only stole money from clients who made their checks payable to his firm, Allocation Plus Asset Management. Those checks, effectively, went into a personal checking account; by comparison, investors whose checks were payable to the clearing broker didn't lose a penny.

  • Never send money to any address other than that of the firm or of an operation designated in the prospectus (such as a transfer agent). Again, this avoids a rogue planner diverting money into his own pocket.

  • Never allow transaction confirmations and account statements to be sent to your advisor instead of you. These are your record of what is happening in the account; without them, you don't have the paper trail necessary to build a strong case when things go wrong. If an advisor wants confirmations and statements, he can help you arrange for duplicates. In the Brad Bleidt case, victims allowed him to say they had investments without showing paper from the brokerage firm confirming it; they got a monthly statement from Bleidt's firm that was a complete work of fiction, and they would have uncovered the fraud if they had simply confirmed with the brokerage the status of their account (which they would have found to be nonexistent).

Prepare for Trouble, Just in Case

Charles Wilson, one-time chairman of General Motors Corp. and a former U.S. Secretary of Defense, once said that "No one can prevent a stupid person from doing the wrong thing in the wrong place at the wrong time -- but a good plan should keep a concentration from forming."

Your plan to keep a concentration from forming involves knowing what you will do if and when there's trouble. An advisor who knows you are vigilant and knows that you are prepared to take action if it's ever needed knows that you're the wrong person to mess with. That's never bad.

Conclude your interview with an advisor by asking about problems.

How will we resolve complaints if I am dissatisfied?

Chances are you will sign an agreement to try arbitration before turning to the courts; some arbitration agreements -- the good ones -- do not take away your right to pursue action in court, they merely attempt to settle things using lower-cost, faster-working arbitration. That said, the arbitrator typically is someone with industry ties, so the process is harrowing and difficult.

Legislation in Congress as of 2010 would give the Securities and Exchange Commission the authority to invalidate mandatory arbitration clauses in broker-dealer and investment advisory agreements, a change that would potentially open up the courts system and provide better chances for recovery.

Still, expect that arbitration will be the first step and find out how you can fix problems long before you get to that extreme. Find out how the planner would handle a problem in your account, whether it is a technical glitch, a transaction you don't recall approving or making, investment outcomes outside the realm of what you are prepared for, or anything else.

Many planners try to reassure you that this stuff never happens, but consumers who lived through the market meltdown of 2008 seeing their portfolios gouged and unprepared for the massive hits they took know better. The number of cases filed against advisors has been on a steady rise over the years, but it shot up after the market slowdown in 2008.

That's why you want a planner to guide you through the complaint process, just in case. If the planner works for a large firm, get introductions to the office manager and, if possible, the firm's compliance officer, the first people you are likely to deal with if there is a problem. Get business cards from these people and keep their numbers handy.

All of these actions tell the planner that you won't stand for any shenanigans; a diligent customer is the best deterrent to fraud.

Smart Investor Tip

A diligent customer is the best deterrent to fraud.

How can I terminate this relationship if I am not satisfied?

An advisory agreement should favor you, not the planner. That means it should come equipped with some sort of ejector seat. Most advisory contracts can be terminated with a month's notice -- with fees prorated -- at any time.

Still, be sure you know how to open the escape hatch before you climb into the cockpit.

Have you ever had complaints filed against you by customers? How have those complaints been resolved?

The planner knows you are going to check his record with the state; this is when he gets a chance to come clean and explain what, if anything, you will find in his records or Form ADV. You want the advisor's side of the story, whether the complaint was the result of miscommunication or unrealistic expectations or whatever.

If the planner tells you he has never had these kinds of problems and the state tells you something different, the game is over, and you should turn elsewhere for financial help. If a planner tries trickery when he knows you are looking, what will he do when you have an established relationship and your guard is down?

That said, most complaints are run-of-the-mill differences of opinion. Even the best advisors sometimes run into bad relationships, people who believe they were entitled to investments that only rise in value in all market conditions, or who sign off on investments without really understanding them and who get angry when the risks they agreed to take don't results in the rewards they envisioned getting.

How do we make sure that I will not have similar problems?

Once you know what the advisor's past problem cases were, you should see what the advisor has learned from his troubled clients. Find out what he intends to do to make sure you do not become his next problem client.

Describe your nightmare client, the worst one you ever have had.

This is an old hiring technique, in which you ask the job applicant to describe her worst day on the job. More than once, when I was a boss, an applicant describing her worst day was actually talking about an average afternoon in my shop.

It not only makes for good stories that lighten up the whole interview process, it helps you see if you are the planner's next "nightmare" before actually becoming that horrible client. If the planner's description of her worst client ever sounds just like you and the things you want and expect -- or if you think the worst client's feelings and actions were justified -- you may want to go elsewhere.

Where to Complain if There's a Problem

If the advisor can't resolve your complaints, your advisory contract most likely will put disputes into arbitration or mediation before allowing you to go to court (be sure not to waive your right to seek restitution through the legal system).

If the problem is operational -- such as failure to deliver securities or checks due to you -- and the planner is not solving the situation, put your complaint in writing and seek a higher-up. If the planner is a sole practitioner, go immediately to the state securities commissioner's office (you can find contact information at

At the same time you are making your case in arbitration or court -- and it generally takes 8 to 12 months between filing an arbitration case and getting a hearing -- pursue the matter with state and federal securities regulators. They generally do not have the power to get your money back, but they can lean on an advisor -- who knows what a black mark on his record might do to future business -- and may help speed a settlement. Look through enough ADV forms and you will undoubtedly find some in which advisors settled cases -- even those where they felt they had done nothing wrong -- rather than face the expense and reputation damage that could come from a fight with authorities.

Don't let a complaint sit around unfiled; the statute of limitations on these issues varies, but the general rule is to file the paperwork as soon as you recognize there is a problem that is not being solved amicably.

By Chuck Jaffe
Chuck Jaffe is a senior columnist and host of two weekly podcasts at MarkWatch. He has also been a guest speaker on several television and radio shows.

Copyrighted 2020. Content published with author's permission.

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