Over the past six months, my firm has seen a surge in inquiries from individuals who have decided that managing their own money isn't such a good idea after all, or who are unhappy with the way their mutual funds performed during the bear market, or who are dissatisfied with the broker or financial planner they're currently working with. If you're thinking about hiring a financial adviser, here are some tips and resources to help you do the best job.
Search Strategy
How do you find a financial adviser? As with other professions, such as law or medicine, referrals are the primary means by which my firm obtains new clients. If a friend or relative is happy with their money manager, ask for an introduction. However, the Internet has allowed prospective clients to visit us from across the U.S. and internationally. I estimate that half of our new business originates from the World Wide Web.
Yahoo!, for example, lists nearly 400 advisers under its
Financial Planner category. The category actually covers a range of financial advisers. For example, firms listed include financial planning firms, firms that specialize in insurance products, full-service brokerage firms that have adopted the asset management model for their clients, accounting firms that have also developed financial management practices and registered investment advisory firms.
There are no clear-cut distinctions between a registered investment adviser, a financial planner, a broker or an insurance representative (for information on the qualifications required for the different types of financial advisers, read this
recent story by TSC's K. C. Swanson). Generally, though, an RIA focuses on larger (at least $100,000), separately managed accounts, while a financial planner or broker may offer individual securities, mutual funds and insurance products. You need to determine which firm offers the services you need.
In order to help you learn about different firms, including information such as the products and services they offer, account minimums and fee schedules, I've listed some resources and links at the end of this article. These resources should enable you to learn about the companies without actually identifying yourself. Once you've picked out a few that appear to meet your needs, you can pick up the phone and request additional information.
Questions You Should Ask
About the firm: How long has the firm been in business? (0ver five years is preferred.) What is the background of the investment professional? How many years has he or she been in the business? What professional credentials does he or she hold? Where is the firm registered? (Firms managing more than $25 million are usually regulated by the Securities and Exchange Commission and, with some restrictions, can operate nationally. Firms with less than $25 million are regulated by state agencies. Individual states have varying registration requirements. At a minimum, a firm should be registered with regulators in its home state and may or may not also be registered in your state. If in doubt, check state securities regulations on your home state Web site -- www.state.two_letter_state_abreviation.us.) How many professionals (people making investment decisions) are in the firm? How many support staff? Who is the client's point of contact? (What you're trying to find out here is whether or not you'll be getting access to decision-makers or just sales people.) Ask for a copy of the firm's SEC Form ADV, which provides general background on the firm and details of any disciplinary actions taken against it in court. (It's an SEC requirement that firms provide this if asked, so if a firm won't do so, terminate further conversations immediately.) About the firm's investment philosophy:
What is the firm's investment strategy? Does the same strategy apply to all clients or does it vary by client? How did the firm perform in the recent bear market? If it performed poorly, what will be changed as a result of that experience? (No money manager or adviser has a perfect strategy, but better managers strive to improve their decision-making process over time. In particular, a good manager will demonstrate the link between risk and return and invest you only to the level of risk you are comfortable with. Any investment made on your behalf should be completely explained to you. And illiquid investments such as hedge fund investing, limited partnerships and insurance products require additional due diligence.) Does the firm use a team approach with clients, or are specific personnel assigned to specific clients? About the firm's performance:
What benchmarks are used? How do you know if your strategy is effective? Ask for performance results. (At least annually, preferably quarterly for at least the last five years and, preferably, for the entire life of the firm.) How representative is this performance (e.g., is it for all clients? All clients with accounts of at least $500,000? All clients invested for at least one quarter? Also ask if they provide carve-outs of client groups with different goals, such as Retirees vs. Capital Accumulators.) Are these numbers computed according to AIMR Performance Presentations Standards? (The AIMR is a professional service organization that has established
ground rules for performance reporting.) Are the numbers audited? If so, by whom? (Larger firms, especially those handling ERISA accounts, will have audited numbers. The process is very expensive and time consuming, so smaller firms generally won't have audited numbers, but the industry trend is in the direction of getting audited numbers.) About compensation:
How is the firm paid for its work? (The options are as a percentage of assets under management, on a per-hour or per-service basis or on a commission basis.) If a firm charges as a percentage of assets, is there a minimum? Is there a sliding schedule as assets rise? (Most RIAs operate on this basis.) If a firm charges on a fee-for-service basis, is it per hour, per service or on an annual retainer? If a firm is compensated on commissions, are these commissions fully disclosed? (The industry trend is away from commission-based businesses among financial planners and brokers for the simple reason that it's tough to give objective advice when different financial products have different commission schedules. Stock brokers, for example, won't offer you no-load funds even though those funds are in your best interest. You need to be particularly diligent in investigating commission schedules on insurance products. For example, variable annuities look pretty good in concept since they offer tax-deferred growth, but you also need to know how much is deducted from your returns for commissions.) If you were referred to a firm by an investment representative, how was that person compensated? (Investment reps are consultants who match clients with firms.) Additional questions:
How are clients' assets held in custody? (Some firms, like Neuberger & Berman, hold clients' assets within their own broker/dealer. Other firms use Fidelity, Schwab or a number of other firms as custodians. The important issue is that your cash and securities are held in such a way that you have ready access should you need it. Most of the major frauds of the last decade revolved around firms that commingled clients' assets in firm accounts without proper segregation. Our firm maintains clients' accounts at our custodian, Fidelity Investments, in separately managed accounts with $100 million SIPC protection. We are not permitted by Fidelity to remove cash or securities from any client's account. Furthermore, Fidelity permits our clients to review their accounts online at any time and provides a separate monthly accounting of asset values, which our reports must reconcile with. We believe these are the minimum safeguards.) What kinds of reports are sent to clients? How often should a client expect to speak with a firm professional? Has the firm or any personnel ever been sanctioned by any regulatory agency? If so, how was the matter resolved? (You can double check this information on the
NASD site.) What percentage of clients take their business elsewhere each year? Why? Ask for three references from clients with backgrounds and interests similar to yours. Ask for a copy of the firm's privacy policy (As of July 1, companies will be required by the SEC to provide this to clients.) This may seem like a lot of questions to ask, but remember, this is your money, your life savings and your retirement. Take the time to find out about a potential money manager before you invest.
Resources:
Registered Investment Advisers
Nelson's Directory of Investment Managers -- (914) 937-8400
Directory of Registered Investment Advisors with the SEC -- (800) 446-2810
Financial Planners
Financial Planning Association -- (800) 322-4237
National Association of Personal Financial Advisors -- (888) 333-6659
Personal Financial Specialist/CPA
American Institute of Certified Public Accountants -- (888) 777-7077
Life Insurance
Life Insurance Advisers Association -- fee-for-service (not commissioned) agents -- (800) 521-4578
Disciplinary History
National Association of Securities Dealers Central Registration Depository -- (800) 289-9999.
General Information
Securities & Exchange Commission -- (202) 942-7040
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