From Avantax: How To Review a Financial Advisor

Note: The following post originally appeared on the website of our planning partner, Avantax. If you have questions about wealth management or financial planning, please reach out to us.

Once you’ve found a financial advisor that you feel is a good match for your needs, what’s next? It’s a good idea to carefully review the person you’ll trust with your finances.

If you’re unsure of what questions to ask or what information to gather, use the following checklist to help you review a financial advisor.

• SEC Complaints & Compliance
• Online Presence
• Education
• Compensation Model
• References
• Fiduciary Standard & Potential Conflicts
• Sample Work

SEC BACKGROUND: COMPLAINTS & COMPLIANCE

The first thing you should look into is whether the financial advisor has any complaints or compliance issues. Stephen Craffen, Partner at Stonegate Wealth Management, LLC, says that the most important step to take is to visit the SEC and search for the person you’ve selected.

ONLINE PRESENCE

With the Internet, you have access to a lot of information. Consider researching the financial advisor you’ve selected on the following sites:

• Google: It seems basic, but Craffen points out that you never know what you’ll find. Google the financial advisor’s name and dig through the search results
• National Association of Personal Financial Advisors (NAPFA): considers itself “the country’s leading professional association of Fee-Only financial advisors.”
• Garrett Planning Network: a national network of independent, fee-only financial advisors.
• Financial Planning Association: the largest membership organization for Certified Financial Planners in the U.S.
• GuideVine: A website that helps individuals find financial advisors who meet their requirements

EDUCATION

While the school a financial advisor attended may matter to you, the most important factors when looking at his or her education are the degrees and designations the financial advisor has earned. Craffen says the following are absolutely necessary:

• College degree: An area of study that requires critical thinking skills, such as business, economics, engineering, mathematics, etc. is ideal.
• Designations: At a minimum, a financial advisor should have a Certified Financial Planner® or Chartered Financial Consultant® (ChFC).

Beyond the above degrees and designations, Craffen says that ideally, a financial advisor will also have an advanced degree or certification. Any of the following are useful:

• A master’s degree in financial planning
• A master’s degree in Financial Engineering or Chartered Financial Analyst ®(CFA), which Craffen explains is useful if the advisor also manages investments.
• A Master’s of Business Administration (MBA)
• A Certified Public Accountant degree and law degree (CPA/JD)

COMPENSATION MODEL

You should understand how the financial advisor is compensated. Craffen explains each of the three types:

• Fee Only: “Advisors do not receive any commission and may be members of the National Association of Financial Advisors (NAPFA) or Garrett,” Craffen explains. “If they are, you can be assured they will not sell product and will only be compensated through what you pay them. They will not have a broker/dealer but may custody client’s assets (if they manage portfolios) at Schwab, TD Ameritrade, Fidelity, or Pershing among other firms that cater to fee advisors.”
• Fee Based: These Advisors charge fees in addition to receiving commissions for product sales. “Unfortunately, the term ‘fee based’ is a misnomer, as they should be called fee/commission based,” says Craffen. Fee based advisors can sell investment products, allowing them to earn commission or insurance. Craffen notes that if you look at their business card, it may indicate “broker/dealer,” a FINRA requirement, that says something along the lines of “Securities sold or offered through…”
• Commission Based: Advisors don’t charge fees and generally earn commission only. “It may seem as if the advice is ‘free,’” Craffen says, “but they are paid through the commissions they earn from product sales.”

To figure out how the financial advisor you’re interested in is compensated, look at his or her ADV-Part II and “Brochure.”

REFERENCES & CLIENT RELATIONSHIPS

While it never hurts to ask for and call references, Craffen notes that a financial advisor is very unlikely to provide you with references that will offer anything other than a positive review.

However, if you decide you’d like to speak to clients, ask the financial advisor for two to three references. “Make sure they are not family members,” says Craffen, and also ask for one long-term client and one newer client. This will allow you to assess the financial advisor’s approach to new clients.

The following is a list of questions Craffen suggests you should ask the references:

• Length of relationship: “How long have you been with the advisor?”
• Type of services provided: “What did the advisor do for you: Financial Planning, investment management or both?”
• Conflict resolution: “Have you ever had a problem with the advisor? If so, how was it solved?”
• Responsiveness: “Is the financial advisor responsive to your phone calls and e-mail?”
• Concerns: “Is there anything about the advisor that makes you unhappy?”
• Financial projections: “Does the financial advisor recreate your financial projections regularly?”
• Returns: “Are you happy with your portfolio return?”

Craffen points out, “most advisors cannot report investment return, as they do not adhere to the Global Investment Performance Standards (GIPS)… That reporting costs tens of thousands per year and therefore only mutual funds and other larger advisors can afford that.”

FIDUCIARY & POTENTIAL CONFLICTS

• Fiduciary: Ask the financial advisor whether he or she will act as a fiduciary — someone who will act in the client’s best interest versus their own.
• Potential conflicts: Does the financial advisor have any potential conflicts that stand in the way of him or her acting in your interest only? Craffen explains that even fee-only advisors may have conflicts, for example “advising you on the tradeoffs of using your portfolio to pay off a home mortgage may mean that they have less of your portfolio to manage reducing their fee.” A commission only advisor has a product conflict: they may not earn any money unless they sell you something. “Fee based advisors can have both conflicts,” Craffen notes.

SAMPLE WORK

• Sample work: Craffen recommends asking the financial advisor you’d like to work with for a sample financial plan. “If you are hiring them to prepare a detailed analysis, you will want to get a sense for how thorough they are and if they will look at all aspects of your financial circumstance,” he explains. Basically, you want to find out how comprehensive the financial advisor is.

YOUR INSTINCT

It certainly shouldn’t be your guiding factor, but how do you feel about the financial advisor you’ve selected? “Any relationship you have with an advisor is better if it is long term and based on trust and mutual respect,” Craffen says. While your personalities don’t need to be entirely compatible, you do want to like your financial advisor.

“Look for someone that is sensitive to your needs and acts less as your ‘adult parent’ and more as the consultant you are hiring to provide their expertise,” he suggests. “The advisor should not tell you what to do. Instead, they should provide you with the tradeoffs (based on solid analysis) of different decisions you may be considering.” Are you trying to decide on the best age for retirement? Purchasing a second home? Determining when you should take Social Security?

Your financial advisor should be able to offer a well-rounded picture in any of these scenarios, and then they should allow you to make the decision. “They should never pressure you one way or the other,” Craffen says. “We have parents and spouses for that!”

This might seem like a long checklist to make your way through after you’ve decided on a financial advisor, but doing your homework now is well worth your time. After all, your financial future is at stake.

Investment advisory services are offered through Avantax Planning Partners℠. Commission-based securities products are offered through Avantax Investment Services℠, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to CP Financial Services, LLP. Although Avantax does not provide or supervise tax or accounting services, our Financial Professionals may offer these services through their independent outside business. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses.