Financial Planning Blog

Finding a trustworthy, competent financial advisor can be a daunting task for consumers. Without a strong recommendation from someone you trust and who values the same attributes you do, where do you start? Knowing this question is top-of-mind with the recent highly publicized scandals The Wall Street Journal recently ran a significant piece entitled “Seven Questions to Ask When Picking a Financial Advisor”. Although the author made some good points, I have to admit I was somewhat underwhelmed by the advice.

In Part 1 of this post I’ll give you the first four questions listed in the article, and provide some of my comments:

1. What’s the advisors background? State and federal regulators, along with industry organizations, go to great effort to provide regulatory and disciplinary records for those in the business of providing financial advice. The article provides useful links for your due diligence (click here for a list of those sites and more)—but, I have to admit, the process is less than user-friendly.
2. What do the advisor’s clients say? Obviously, a strong recommendation from someone you know and trust would be nice. However, asking the advisor for references from past and current clients as the article suggests is somewhat problematic. Investment advisors are prohibited by law from providing client “testimonials”, plus they cannot disclose the identities of clients without their consent.
3. How does the advisor get paid? The author correctly points out that “knowing how advisors are paid will help you tell if they’re working in your best interest.” Except for the admonition to “be wary of anyone who shies away from answering these questions in a transparent way”, the author didn’t provide much clear guidance. Although she outlined some of the different ways advisors are compensated, she gave only limited insight on why this matters. It would have been better to help confused consumers “connect-the-dots”, and show how a fee-only business model eliminates the potential conflict-of-interest created by sales commissions.
4. Where are the advisors checks and balances? The Madoff scandal has certainly illustrated the importance of not giving investment managers custody of your funds.  It is critical that a third party custodian (e.g. Schwab or Fidelity) holds your investments, that you make your deposits directly to and that you receive statements directly from that custodian.  This is obviously less of an issue with planners who are providing financial advice, but not directly managing your investments.

In Part 2, I’ll cover the last three questions from the WSJ article. In the meantime, if you are interested in how to vet a potential financial advisor, here are a couple of other links that may interest you. First, the National Association of Personal Financial Advisors (NAPFA) provides a more comprehensive set of questions and diagnostics on their website. Also, the Garrett Planning Network provides a questionnaire and a free download of “Finding and Hiring the Right Advisor” from the Personal Finance Workbook for Dummies.