Objective information about financial planning, investments, and retirement plans

Choosing A Financial Advisor? – Ask These 6 Questions

Share

Deciding to hire a financial advisor can be a tough decision for many investors. Once you’ve made this decision, how do you go about finding the right advisor for you?  Here are six questions to ask when choosing a financial advisor: 

Madoff, Looking the Other Way

How do you get paid?

Fee-only advisors receive no compensation from the sale of investment or insurance products. When selecting a financial advisor, ask yourself whether you feel that a financial advisor who receives a significant portion of their compensation from the sale of financial products can really be counted on to recommend solutions that are in your best interest?

Are you the next Madoff?

One of the tactics used by Bernard Madoff to perpetrate his fraud was to send clients his own statements instead of statements generated by a third-party custodian like Charles Schwab, Fidelity, TD Ameritrade, and others.  A third-party custodian provides periodic (monthly or at least quarterly) statements independent of any reports provided by the advisor.  You should never give your investment dollars directly to a financial advisor, they should always be sent directly to the custodian.

This is critical if the advisor will be providing on-going investment advice.   In fact it is a deal-killer if this is not the arrangement.  If the advisor says something like “… we send out our own statements to our clients…”  end the conversation and find another advisor.

Are we the exception or the norm for you?

Ask your financial advisor 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.  A financial advisor who deals primarily with teachers or public sector employees might not be the right choice for you. Likewise if the advisor’s typical client has a minimum of $1 million to invest and your portfolio is more modest, this advisor might not be a good fit for you.

What can you do for me?

If the advisor’s primary service is focused in an area like constructing bond portfolios for their clients and you are looking for a financial planner to construct a comprehensive financial plan for you, this advisor may not be a good match.  Make sure to find someone who offers the types of services and advice that you are seeking.

What are your conflicts of interest?

Financial advisors who are registered representatives will often be incentivized to sell insurance or annuity products promoted by their broker dealer or employer.  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.

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 in my opinion this falls far short of a true Fiduciary Standard. 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 financial advisor or to ask of an advisor with whom you currently have a relationship.

As an investor, it is ultimately up to you to select the right financial advisor. Do your homework and due diligence. The National Association of Personal Financial Advisers (NAPFA), the largest professional organization of fee-only advisors, has a guide to selecting an advisor called “Pursuit of a Financial Adviser Field Guide,” which is an excellent resource for those seeking the help of a professional financial advisor.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.  

Photo credit:  Flickr

Enhanced by Zemanta

That Nice Man at Church Wants to Sell Me a ….

Share
My point here is that just because you and a financial product sales type attend the same church or are both members of the same Rotary club doesn’t mean that the financial products or services this person is selling are right for you. English: Bernard Madoff's mugshotMy original inspiration for the above was a pro bono financial counseling event in which I participated about 15 years ago.
I counseled a young couple with two young kids.  A registered rep from their church had sold all four of them a variable annuity product.  For the life of me I can’t come up with a good reason for a 7 and a 9 year old to buy a variable annuity policy. I was trying to be diplomatic in my answers when the wife said to me “…we really got _____ed…”  It was hard to disagree.

On a positive note, a client once asked me to review a long-term care insurance policy they were considering that was offered by an insurance company affiliated with their religious persuasion.  The policy had excellent features, the company was solid, and the price was competitive.  They purchased the policy.

Here are a few examples of affinity fraud from a Wikipedia article on the subject:

  • “Baptist investors lose over $3.5 Million”: The victims of this fraud were mainly African-American Baptists, many of whom were elderly and disabled, as well as a number of Baptist churches and religious organizations located in a number of states. The promoter (Randolph, who was a minister himself and who is currently in jail) promised returns ranging between 7 and 30%, but in reality was operating a Ponzi scheme. In addition to a jail sentence, Randolph was ordered to pay $1 million in the SEC’s civil action.
  • On November 16, 2007, Michael Owen Traynor a Bradenton, Florida, investment broker, who had found many of his clients though his church and private school social circles, was arrested on a first degree felony grand theft charge that he had stolen $6.5 million from his investors. It is believed Traynor stole funds from at least 34 clients in Sarasota, Manatee and Hillsborough counties between 2001 and February 2007. Traynor was subsequently sentenced to 12 years in Florida state penitentiary.
  • “125 members of various Christian churches lose $7.4 million”: The fraudsters allegedly sold members non-existent “prime bank” trading programs by using a sales pitch heavily laden with Biblical references and by enlisting members of the church communities to unwittingly spread the word about the bogus investment.
  • On December 11, 2008, Bernard Madoff, an American businessman, was arrested on charges of securities fraud, having been turned in by his own sons after allegedly telling them his business was a “giant ponzi scheme“. According to the New York Post, Madoff “worked the so-called ‘Jewish circuit’ of well-heeled Jews he met at country clubs on Long Island and in Palm Beach.”. Additionally, one of Madoff’s middlemen was J. Ezra Merkin of Ascot Partners. According to Samuel G. Freedman of the New York Times, Merkin was prominent in the Modern Orthodox community. This allowed him to defraud institutions such as Yeshiva University,Kehilath Jeshurun Synagogue, the Maimonides School, Ramaz and the SAR Academy. 

Should a religious or other affinity connection disqualify a prospective financial advisor?  Of course not.  However, this affiliation should not serve to give an advisor or a financial product a free pass either.

In all cases, verify then trust.  Check out the advisor and/or the company behind the financial products you are considering.  Put them through the same rigor you would if the affinity connection was not there.  Tragically there are people who prey on the trust and validity that can come via an affinity connection.  Don’t be another victim of affinity fraud.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Enhanced by Zemanta