Some people are entirely comfortable handling their own investment portfolios, while others are much less so. If you need help with your financial life, you need to find the right professional, and that means asking the right questions. In this article, Daniel Calugar, a versatile and experienced investor with a background in computer science, business, and law, takes a look at the key questions you should ask when hiring a financial professional.
Any time you are hiring a professional, regardless of the field, be sure to ask for references. Furthermore, contact the references. Gather all the information you can about their experience with the professional. One indication that you may want to avoid working with a financial advisor is finding that they exaggerated their references. You can determine this by talking with the reference (avoid email only conversations, if possible) to see if their level of engagement or the level of service they received is consistent with what you will want. For example, if you want a financial advisor to help you with all aspects of a sizable portfolio, talk with the provided references to ensure that this is how they worked with the advisor, not just simple advice for limited transactions.
Along with references, ask an advisor candidate if they have had any complaints filed against them. You can quickly determine whether or not they have, but ask anyway. It allows the candidate to demonstrate their honesty and to provide any explanation needed if there were complaints. You can double-check for complaints at the Financial Industry Regulatory Authority’s (FINRA) Broker Check (https://brokercheck.finra.org/) or the Securities and Exchange Commission’s (SEC) Investment Adviser Public Disclosure (https://www.adviserinfo.sec.gov/) websites. Remember, some complaints are unfounded or suitably resolved, so don’t dismiss a candidate based solely on the existence of a complaint.
While looking for the right advisor, ask potential candidates about any financial incentives they may receive for making specific investment recommendations. Certain life insurance policies, mutual funds, and annuities may offer monetary compensation or travel incentives to advisors for steering business their way. For an unethical financial advisor, this may prompt them to provide advice that is better for them than for you.
Financial incentives to advisors are not uncommon and are not inherently wrong or unethical; still, it is something you definitely want to know. Having this knowledge upfront allows you to pay special attention to any advice that involves the advisor’s incentive.
In the end, the questions you will ask a potential financial advisor should be designed to provide an understanding of a few simple facts. You need to know if they are honest and experienced and whether they are bound by a suitability standard or a fiduciary standard.
Investment brokers work for broker-dealers and ultimately serve the broker-dealer’s best interest. They follow a suitability standard – this means that transactions must be suitable for your needs. Not necessarily the best solution for you. On the other hand, investment advisers are bound by a fiduciary standard that places your interests ahead of their own. Ask what standard they are bound to.
A referral from a trusted source is always the best way to find a potential financial advisor. Even so, be sure to interview references, ask about complaints, and understand how they get paid.
About Daniel Calugar
Daniel Calugar is an experienced investor with a background in business, law, and computer science. As a tech enthusiast, he became interested in computer science and pursued it before obtaining business and law degrees. Dan developed a passion for finance while working as a pension lawyer. He leveraged his technical skills to build computer programs that would analyze vast amounts of data and explore trading strategies to identify more worthwhile investments.