Question 1. How Old Are You?
If you are older, you may want a younger adviser who will outlive you. If you are young, you may want an older adviser who has been through difficult economic times.
Question 2. What Is Your Educational Background?
Look for a Certified Financial Planner (CFP), likely with Registered Investor Advisor (RIA) credentials. Some Certified Public Accountants (CPA) with Personal Financial Assistant (PFS) degrees have suitable qualifications as well. Avoid brokers, insurance agents, real-estate promoters, business associates, relatives, golfing partners and hairdressers.
Question 3. How Long Have You Been An Adviser?
Experience counts a lot in the financial field, especially the experience gained in periods with plunging markets.
Question 4. Do You Accept Fiduciary Responsibility?
This is a legal term meaning they have a fundamental obligation to provide suitable investment advice and always act in your best interests, not theirs. They should also be willing to give you a written statement that they accept this responsibility.
Question 5. Have You Been Sued Or Have Any Reported Legal Actions?
This useful page on the Financial Planning Standards Council site reports recent disciplinary actions.
Question 6. What Is The Smallest, Average And Largest Portfolio You Manage?
Some advisers only take high-net-worth clients. That may not be suitable for you.
Question 7. Could You Give Me Three Clients’ Names, Phone Numbers And Email Addresses As References?
It’s important to call these references. Ask them how they found the adviser, the length of time they have been served, what kind of help they get, what they believe are the adviser’s strong and weak points and whether they would recommend that adviser to someone in your situation.
Question 8. Describe Your Firm?
You will want to know the number and skills of associates, whether this is a stand-alone firm or part of a large company, the amount of money they have under their control, the kind of clients they serve, and who will help when the person you are interviewing isn’t available.
Question 9. Exactly What Services Do You Perform?
Services could include retirement planning, manage securities, estate planning, tax planning, insurance, long-term-care advice, newsletters, and so forth.
Question 10. What Are The Total Costs And Fees For Typical Stock And Bond Funds You Would Recommend?
Costs are likely to be the lowest from fee-only advisers who don’t take commissions, don’t get rewards for selling particular funds, don’t receive 12b-1 kickbacks, don’t sell funds with front-end or back-end loads. They also advocate low cost providers like Vanguard, Fidelity TIAA-CREF, or T. Rowe Price, recommend broad market index funds or exchange-traded funds (ETFs), and have low turnover to minimize trading and brokerage costs.
The average mutual fund cost is 1.25%. Low cost funds have costs less than 0.5% of the investment balance each year. Broad index funds, based on major market indexes like the Standard & Poor’s 500 Index SPX, +0.46% which has stock in 500 of the largest U.S. companies, and the Russell 2000 Index RUT, +0.55% which has stock in 2000 of smaller companies, bought from low-cost financial firms can be significantly lower. Costs are in addition to an adviser’s fee.
Question 11. Do You Have Different Models Or Investment Pools Dependent On Client’s Risk Tolerance?
Risk usually relates to the decisions you would make in a volatile security market and the amount of money you might be willing to lose in a market downturn. It’s usually measured with a series of standard questions, but it’s important to know the degree to which the adviser tailors your investments.
Question 12. What Allocation Guidelines Do You Use? For A Person Of My Age And What You Observe About The Things I Have Told You, What Rough Percent Of Equities (stocks And Real Estate) Would You Allocate In A Portfolio?
The more equities, the higher the risk. Younger people can employ a higher percentage of equities because they usually have higher long-term returns but comes with more volatility.
Question 13. Do You Count Home Equity As Part Of An Allocation?
I personally don’t think they should because I believe a home is an investment of last resort, perhaps convertible to a reverse mortgage when elderly at which point it is a debt, not an investment.
Question 14. Do You Count Capitalized Future Payments From Social Security, Pensions, Or Annuity Payments As Part Of An Allocation?
Again, I don’t think they should because the discounted value of all future payments is huge in comparison to the size of most people’s savings. Since financial advisers are prone to classify such “investments” as fixed-income, that means your savings would have to be 100% equities, a decidedly risky position.
Question 15. What Kind Of Investments Do You Recommend?
Good responses include index funds, real-estate investment trusts (REITs), highly rated bonds, certificate of deposits (CDs) and a portion of money markets. Be cautious when the replies seem to promote managed funds, individual stocks, a directly owned real-estate property, reverse mortgages, commodities, long short funds, partnerships of any kind including master limited partnerships (MLP), options, hedge funds, investments with limited withdrawal privileges, collectibles, thinly held securities, and annuities with high costs and lots of fine print that provide flexibility for the insurer but not you.
Also be VERY cautious about replies that imply the adviser can do much better than the S&P 500 index with the adviser’s selection of equities. Very few professional beat the index, and it’s rare when they beat it for several years in succession.
If you believe you wouldn’t understand the responses, take someone with you or try to remember the responses and talk to a knowledgeable person later.
Question 16. On A Scale Of One To 10 Where One Represents A Pure Buy-and-hold Investor And 10 Represents A Market-timer, Where Do You Put Your Clients?
1 through 4 would be a satisfactory answer while a number 5 through 10 implies that the adviser thinks he can foretell the future and even its timing.
Question 17. Does Your Retirement Forecasting Include Discrete Financial Events Like A Real-estate Purchase Or Sale, Death Of A Spouse And Subsequent Survivor Benefits Or Other Large Financial Events?
If it doesn’t, it isn’t a very complete analysis
Question 18. Is Your Planning Model Based On A Constant Return And Inflation Assumptions Or Does It Include The Effects Of Variable Returns And Inflation?
Neither will give you a perfect answer. Constant returns and inflation in forecasts don’t include the effects of a retiree having to make a withdrawal in a down market year. In contrast, Monte Carlo computer models vary returns every year using statistics of the past in numerous iterations. Some vary inflation too. Monte Carlo analysis gives a “success probability” assuming that the statistics of the future will be the same as the past, something that many forecasters believe doubtful.
William Bernstein, a highly respected analyst and author, suggests using no more than a 6.5% return for equities and 3% for bonds. With results from my own programs, I lean toward using the actual returns and inflation for each year starting with 1965 because I feel we will face similar conditions with periods of high inflation and serious volatility.
Since none of us can really forecast the future, what’s important is to do a new forecast each year using the most recent balances and future events as you see them at the time to adjust your savings or spending accordingly. Future events should include the need for some long-term-care and death of a spouse with consideration to survivor benefits.
Question 19. Does Your Retirement Forecasting Account For Federal And State Income Tax And Taxes On Interest, Dividends And Capital Gains?
Again, if tax rates aren’t considered, it isn’t a very compete analysis.
Question 20. Do You Think You Would Be A Good Adviser To Me? Why?
- You ought to think about what kind of answers you would want before the interview. Then, as you get responses from the advisers, you’ll have a better idea whether this adviser is suitable for you and may be a better fit than the others you are considering.
- Your first visit should be free. You may want to make a phone call or two afterward to clarify a point or cover something you forgot. If you are corresponding by email, make sure that you set up a personal, face-to-face meeting at the adviser’s place of business as well. If you feel quite uncertain about making an adviser decision, perhaps you can bring a trusted friend, relation or associate with you.
- It really pays to do due diligence to find an adviser. It’s much like a marriage in which separation or divorce may be difficult. That’s particularly true when the adviser has control of your account (instead of requiring your approval before any buy or sell action), provides multiple services in addition to financial planning such as estate planning or income taxes, invests in funds available only to his firm or gives you scanty periodic information. The easiest relationship to sever is one where the adviser gets together with you periodically to look at your investments and tax return, recommend changes and answer questions. So instead of being like a spouse, the adviser is more like a marriage counselor.
- Finding a good financial adviser is more difficult than finding a good doctor but will be truly rewarding. I can attest to that from my own experience from just several hours of financial conferences about forty years ago.
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