Most people have a certain image of what the selection process for a financial advisor can be like. It goes something like this: They’re standing on a beach, overlooking a sea of investment companies, with wave upon wave of advisors washing ashore, wanting their business. To a prospective investor, this can seem daunting, but it’s really not.
Of the hundreds of advisors that may come ashore, how do you pick the one that is best for you? Start by doing your homework. First, go to FINRA.org, where you can find out if the advisor has a criminal and/or poor regulatory record. Next, ask the advisor to send you their ADV Part 2. This document provides information on their background, experience, and the services they offer.
Once you have completed your review of the advisor and are satisfied with the results, sit down with them for a formal interview. Here is a list of initial questions to help guide you through the process:
Does the advisor utilize a third-party custodian (a specialized financial institution responsible for safeguarding a firm’s or individual’s financial assets)? Utilizing a third-party custodian is important because you do not want to provide any advisor the opportunity to “run away” with your hard-earned money.
How does the advisor get paid? Are you paying the extra penny? Are they a fee-only advisor? The fee-only model of compensation reduces the potential for conflicts of interest between the advisor and client because the advisor does not benefit from particular investments. Is the advisor paid through commissions? Does the advisor or the firm they are working for get paid kickbacks or receive incentives for recommending a certain fund or investment? You want to make sure the advisor has your best interests in mind, not their own. Ask for a complete fee schedule. If the advisor cannot produce one in writing, you should walk out the door.
Finally, find out what the advisor’s approach is to investing and financial planning. Does the approach fit with your goals and objectives? Has the advisor explained the process in a manner you can understand.
In the end, you want a financial advisor that has your best interests at heart, is transparent in his or her processes, and is willing to put everything they are telling you in writing. If they fail any of these tests, my advice is to save that penny and throw them back in the water.