Eight Questions to Ask Your Financial Advisor

I wrote an article in 2004 titled “Eight Questions to Ask Your Financial Advisor.” Five years later, the landscape has changed in many ways, while the fundamentals, being fundamental, do not have. First, the changes:

• Thirteenth bear market, by my count, since the Great Depression

• The housing bubble accelerates, stagnates, and then bursts

• Mortgage derivatives fail, resulting in a banking crisis that continues as of this writing.

• Bernie Madoff uncovered for the largest ‘Ponzi scheme’ and largest financial fraud case in history, setting up a domino effect that exposes a dozen (more or less) other major fraud cases nationally and internationally.

• The financial services industry comes under increased scrutiny, and those within the industry are working faster than ever to define their roles and responsibilities.

It’s the last bullet I want to focus on in this recently revised 2009 “edition” of the article of the same name. And in doing so, I will also highlight the fundamentals that remain at the center of the advisor selection process.

So how has the financial services industry changed and why? Don’t get bogged down in precise distribution, but I’d say a third of the change has been forced, as a result of increased rules, regulations, and internal controls; another third in response to public demand for greater transparency and clearer processes; and the final third as a result of the industry’s natural progression toward refining its functions.

I will not discuss the regulations, you can find them easily. The public answer also seems clear: most people simply want to know “how it works”, “what it is supposed to do” and “how much it costs”. As for the natural progression of the industry, allow me three points of clarification:

(1) There has been a clear transition from “commission-based” services to various forms of “fee-based” services, or “advisory services” on “brokerage services”. By charging for ongoing service rather than for any particular transaction, the belief is that the interests of the advisor are more aligned over time with the interests of the client.

(2) There has been a shift in care, from finances instruments to financial planning, with the focus more often on the customer’s medium and long-term goals and less often on company- or product-specific strategies and systems.

(3) Finally, a trend towards specialization over generalization has been observed. In this regard, the industry has recognized that the complexities of a family or a business are as real as the complexities of the market, so several specialists will be needed, along the way, to help demonstrate a complete and comprehensive level of service. .

It should be noted that in each of the three areas there is still a lot of variety and movement; partly because of positive flexibility and partly because of disagreement on which methodologies work best. Among the fees are plan fees, retention fees, and asset fees. Planning includes life planning, retirement planning, income planning, and inheritance planning. And among the specializations, there are internal teams, informal networks to formal and independent professionals. The rest of this article does not seek to answer these details, but rather to provide you with some fundamental questions that will hopefully lead you in the right direction towards a solution that works for you.

Without further ado, here are the NEW “Eight Questions to Ask Your Financial Advisor”:

(1) Do you use a comprehensive approach to financial planning by directing our efforts around a written plan based on my specific goals?

(2) How will you communicate, both initially and over time, what I am paying you, how I am paying you and what I am getting for it?

(3) Do you have any conflict, limitation or lien that I should be aware of and will you tell me in the future if one arises?

(4) What is your central philosophy regarding your work? What results would lead YOU to conclude that our joint work is successful?

(5) Do you act as a specialist or as a generalist? In either case, who will coordinate the specialists that will be needed over time to address my changing needs?

(6) How often do you meet with clients? What are those meetings like and what communication methods do you use between meetings?

(7) Will I work directly with you or through trained assistants, and what procedures should I expect regarding phone calls made and received, mail sent and received, etc.?

(8) What problems, issues or challenges should NOT concern me, despite what I may hear through the media? what problems, issues or challenges I SHOULD be concerned about, despite not having heard much about it; And how will you help me do that?

Clear communication should be a visible theme within these questions, and in this sense, some things never change. Therefore, I conclude with the exact same final statement from 2004:

The best advice is not to be afraid to ask!

© 2009 Emerald RPG, All rights reserved.

Contact the author by phone or email for a copy of his “12 Fundamentals of Retirement Planning.”