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Questions to Ask a Prospective Financial Advisor

There’s a fight brewing in Washington. While fighting in Washington isn’t new, the cause of this particular fight might shock you. People are arguing about financial advice. Last week, the debate gained national attention as President Obama waded into the discussion.

At the center of this argument is a surprising fact. The traditional financial services industry doesn’t follow a uniform standard of care. When you visit a bank, an insurance broker, a credit union or an independent adviser, the way you get financial advice varies.

This debate has been simmering for years, but it is bubbling up now with a proposed rule change from the Labor Department. It wants everyone providing retirement investment advice to meet what is called a fiduciary standard. Simply put, being a fiduciary means you put your clients’ interests first, ahead of your own.

While I applaud any politician who wants to push the discussion, I’m not holding my breath that there will be a solution soon. So I wanted to give you some practical advice instead.

Many of us have learned that we should never judge a book by its cover. In that same vein, we really shouldn’t care about titles, job descriptions or even where someone works. What we should focus on is what someone actually does.

The fight over the standard of care and who gets to call themselves a financial adviser is important. But in the meantime, here are three questions to help you get a lot more clear about what someone does. If you already work with an adviser, have a conversation with these questions in mind. If you’re considering hiring an adviser, use these questions during your initial conversations with the people you’re considering.

1. Do they bother to diagnose before offering a prescription?

Imagine a visit to the doctor’s office that doesn’t start with a question, but a statement. “Everyone I’ve seen today has the flu. Here’s your prescription.” The doctor leaves the room before you get the chance to explain you’re there for an allergy shot.

Crazy, right? But a quick prescription without a diagnosis describes too many investor experiences. People need advice that fits their financial situation, not someone else’s. During the initial meeting, any financial professional should ask a lot of questions. In fact, you should do most of the talking.

A solid financial diagnosis requires learning about you and your goals. If your first meeting includes a prescription before too much talking has happened, say “You should be doing …” or “I recommend …,” you’ll want to find someone else.

2. Do they disclose conflicts of interest?

Asking about conflicts of interest isn’t foolproof. People can lie, and because we’re dealing with money, it’s all but impossible to remove every conflict. But the way people react to the question is telling. For instance, I’ve crossed paths with many people who follow the suitability rule – a lesser standard of care that simply means an investment must be suitable and not necessarily in the customer’s best interest. They happily disclose their conflicts of interest. Others are clearly uncomfortable and don’t want to talk about potential conflicts.

Again, the issue is less about a title or a standard and more about asking the question and getting the answer. The professionals who don’t hesitate to pull back the curtain are more likely to put your interests first. They want to help you and understand the need for transparency. Once they reveal their conflicts, you can use this information to weigh the advice you receive.

3. How are they paid?

I suggest asking financial professionals two questions: How much do I pay you? And who else is paying you? The first question deals with how much someone may be charging you for the advice you receive. The cost may be a flat fee or a percentage of the money you have in an account. You may get monthly or quarterly bills. Your goal is to understand how much you’ll pay for this service.

While some financial professionals only make money directly from you, the second question – the who else one — can reveal other sources of income that may represent a conflict of interest. Compensation can include things like commissions, bonuses or trips based on the products or services someone sells you. The more specific the answer to this question, the better. As a follow-up, you can ask, “Do you get paid (or win) anything based on the products you recommend to me?”

I want to stress that answering “Yes” to either question doesn’t mean you can’t or shouldn’t work with these professionals. Again, the goal is transparency. You want more information so you can put the advice you receive in context.

In a perfect world, a title, a standard or a rule would tell us everything we need to know. But the financial world is far from perfect, and what we really need is more information. We need answers. We need to know what conflicts might influence the advice we receive. We need to know the price we’ll pay for the services we’re offered. Only then can we begin to understand if the professional sitting across from us is the best person to help with our investments.

This commentary originally appeared March 2 on NYTimes.com

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2014, The BAM ALLIANCE


Carl Richards

Director of Investor Education

Carl Richards is the creator of the weekly Sketch Guy column in The New York Times and is a columnist for Morningstar Advisor. He has also been featured in The Wall Street Journal, Financial Planning, Marketplace Money, The Leonard Lopate Show, Oprah.com and Forbes.com. His simple but meaningful sketches served as the foundation for his first book, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.”

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