Keys to selecting a wealth advisor

Todd Kockelman

How do you find a good wealth advisor? That is a very important question. It is amazing how casually many couples and families approach the search.

Consider the observations of MarketWatch senior columnist Chuck Jaffe, who has given many presentations on this very topic.

Jaffe commonly polls his audience, asking people to raise their hand if they have worked with a financial advisor. Next, “I ask them to keep [their hand] up if they hired the first financial advisor they met with or if they hired someone recommended by family or friends. Virtually all hands stay up.”

“Next, I ask them to keep their hands up if they did a background check on the advisor – and talked to an independent reference – before they agreed to work together. I have never had a single hand stay in the air.”1

All that said, word of mouth does count for something, and a recommendation from a friend or relative may lead you to a great wealth advisor. Even then, however, you need to discover whether this professional is right for you.

As part of your search, seek answers to these questions.

“What kind of services do you offer?” Beyond retirement planning and a financial strategy, do you want your advisor to provide advanced estate planning, tax planning, succession planning, or portfolio management? What kind of “team” can the advisor put together to address these needs? No one can be a specialist in everything.

“Are you licensed, and do you have a clean record?” Check this out online, no matter what the answer is. FINRA (the Financial Industry Regulatory Authority, formerly the NASD) offers a free web tool called BrokerCheck to help you research the backgrounds of financial services industry professionals and firms. You can also go to www.adviserinfo.sec.gov for an investment advisor search. A state securities regulator may also be a useful resource.2

“How long have you been in the industry?” After you hear the answer, ask what they did before becoming a wealth advisor (it could be illuminating), and what their professional qualifications are.

“Are you held to a fiduciary standard or a suitability standard?” All certified Financial Planner professionals are asked to abide by a fiduciary standard: they must act in the best interests of their clients. For many years, the default in the financial services industry and insurance industry was the suitability standard — an investment or a product only needed only to be “suitable” for a client or customerrather than in their best interest. Which standard would you like your wealth advisor to uphold?

“Are you committed to continuing your education?” certified financial Planner professionals, Chartered Financial Consultants and Certified Investment Management Analysts must do this to maintain their designations – and all wealth advisors should make such a commitment.4,5

“If I ask people about your reputation, what will they say?” You can’t instantly learn if an advisor has a satisfied client base. The Securities & Exchange Commission Client prohibits testimonials and endorsements and sharing client names amounts to a violation of privacy. In addition, if you ask for professional references you will always get glowing ones. Listen for any hints of hesitancy or evasiveness in response to this question, and don’t be afraid to follow up with another one.

“Could you describe your average client?” You want them to describe you (or someone similar to you) in response to this question.

“How are you compensated?” There are fee-only, fee-based, fee-plus-commission, and commission-only advisors. Some advisors make most of their incomes off commissions linked to product sales or investment trades. Others make the bulk (or even all) of their incomes from advisory fees.

“What clearing firm do you use?” What is the custodian firm for client accounts — that is, where will your investment money be held? Are investor-owned assets held in an account insured by the Securities Investor Protection Corporation (SIPC)?

“How do you approach discussing personal financial matters?” You may or may not like their process; you will want an overview of it.

“What did you do in 2008?” The Great Recession tested many wealth advisors — some were embarrassed, some were vindicated, and others changed their philosophies. Follow up the response with another question: ask what percentage of the clients they had in 2007 are still with them today.

“What kind of risk management strategy do you favor?” How does this advisor like to play defense? In rough markets, what level of tactical asset management is adopted to try and help protect clients against losses?

“Are you going to tell me about excessive surrender charges and fees?” Most wealth advisors are very cognizant of how these little “dings” can impact you. You want to try and gauge their level of effort and attention to this matter.

“Do you have a service guarantee?” This is not a guarantee of future investing or financial success — just a pledge that if you timely communicate that you are unsatisfied with a specific service the advisor provides, the advisor will waive the balance of a fee or partly reimburse you for account transfer, account closing or custodial fees that might come from “changing horses”. Hopefully, a service guarantee will not seem like a radical or outlandish notion to your candidate.

“Do you sell insurance?” Some wealth advisors come up through the ranks of the insurance industry, and they have a depth of understanding of insurance products and the versatility of life insurance that other wealth advisors may not. Some couples and families really appreciate having an advisor with this knowledge base. Others do not and prefer advisors with a different background. When an investment professional also sells insurance products, there is the potential for conflicts of interest.

“What client protection standards do you abide by?” We’re talking confidentiality, auditing and regulatory compliance and E&O insurance. A proper clearing firm should be used to prevent any temptation an advisor might have to tap into client assets.

“Can you show me your real-time track record?” While any fund manager has a track record, things get hazier when it comes to wealth advisors. Ask to see a multiyear track record taking in bull and bear markets. You want to see how the accounts of their clients performed across X number of years – either a random sampling of clients or the whole lot, in a report that is independently produced and audited. The track record should also tell you if the performance numbers represent gross returns or net of fees returns (i.e., the return once management fees are subtracted out of the account, which constitutes a more accurate picture).

These questions give you the basis for a thorough interview. When you search for a wealth advisor, you need to conduct one.

 

  Todd Kockelman is a registered Representative with Packerland Brokerage Services Inc., and may be reached at 651-204-0655 or Todd@K-Ffinancial.com. www.K-FFinancial.com

 

 

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