Looking for a financial adviser? Ask these questions

The economic downturn has had a sobering effect on people — heightening the demand for objective financial guidance. Below are six key questions you should ask before working with an investment adviser.

Do you have an independent custodian for client assets?

In the Bernie Madoff world we now live in, it’s important to ask if clients’ assets are held by an independent custodian. In the Madoff situation, all of his clients’ money was accounted for only by Madoff’s firm, which was generating false statements. For this reason, it’s imperative to have an independent custodian so that you can compare your statement to what you’re getting from the adviser.

Do you serve clients in a fiduciary capacity?

In the financial world, true fiduciaries are difficult to identify. Many in the financial industry adhere to the “suitability” standard — meaning that they only have to document an explanation of why their investment advice was reasonably justified for a client. That said, an adviser operating under this standard could still win an incentive prize to Hawaii for referring you to a particular “suitable” investment. Most non-fiduciary financial advisers work under commission-based sales models, but this is not always the case. The linguistic waters are murky, and the line is blurred between functioning in a fiduciary capacity and almost functioning in a fiduciary capacity.

How are you compensated?

Insist that the financial adviser disclose all sources of compensation. And don’t become confused by the purposeful tricky terminology used in the industry. Case in point: The difference between financial advisers who are “fee-only” and “fee-based.”

“Fee-only” means an adviser is paid a flat fee, a percentage of the value of a client’s assets or an hourly fee. The compensation structure eliminates conflicts of interest because there’s no commission. “Fee-based” means an adviser takes either fees or commissions on products and/or services they sell.

Some financial advisers are strictly fee-only, some are solely fee-based and others are a combination of both. Ideally, fee-only compensation ensures impartial judgment. However, there are some highly qualified fee-based financial advisers, so evaluate this on a case-by-case basis.

Can you provide references?

The SEC forbids financial advisers from disclosing any client references. Therefore, ask for professional references — preferably those who are attorneys or CPAs. They can provide insight because they have a basis for comparison in working with various financial advisers.

How is your portfolio invested?

Ask the financial adviser if they invest their money the same way that they invest money for clients.

What is the total cost of services?

Ask the financial adviser to provide an estimate of total annual costs as a percentage of the portfolio. The estimate should include a breakdown of visible and less visible costs. Visible costs include commissions and adviser fees. Less visible costs include expense ratios on mutual funds, transaction fees and whether the financial adviser gets some sort of credit toward that Hawaiian trip.

In addition to the preceding questions, inquire into the financial adviser’s education and credentials, such as if he/she earned a Certified Financial Planner designation. Furthermore, the financial adviser must be someone who you actually like. Financial advising involves divulging personal information, so if don’t find the adviser likable, the relationship will be a rocky one.

Winter Park resident Mike Davis is founder and CEO of Resource Consulting Group, the largest fee-only financial planning and investment advisory firm in the state of Florida. For more information, email [email protected] or visit www.resourceconsulting.com