Cheat sheet for interviewing new financial advisers

In last week’s column, we talked about the beginning steps for a retiree looking for a new financial adviser, based on a letter from “Barbara.” She and her husband were looking for portfolio management and retirement expertise. The need for management leads to a search for a “registered investment adviser.” (If you missed the column and would like a copy, write to me at readers@juliejason.com.)

We left last week’s column with a promise of questions to ask when you start interviewing firms.

It turns out that regulators have provided investors with a cheat sheet, the U.S. Securities and Exchange Commission’s Form CRS (Customer Relationship Summary). The CRS is a short, two-to-four-page document that follows a recipe. The idea is that it’s an easy tool to help you compare and contrast firms and the individuals whom you would like to interview.

Among other things, in the CRS you’ll see a list of questions the SEC would like you to ask (called “conversation starters”). To me, considering my law experience on Wall Street, one of the most revealing questions is about conflicts of interest and how the firm handles them.

What are some possible conflicts of interest? Advisers might receive higher compensation for recommending one investment over another. An adviser who changes firms could receive incentive compensation that he can lose if he doesn’t meet production requirements.

Another question the CRS addresses is whether the firm or adviser has “legal or disciplinary history.” If the answer is “yes,” the CRS will point you to the SEC’s public disclosure site (tinyurl.com/44vfe8hc) that provides additional information. Legal and disciplinary details will give you a sense of a firm’s culture. The Financial Industry Regulatory Authority’s BrokerCheck site (tinyurl.com/y5vjjzku) will also be helpful in researching this type of information.

The CRS also covers fees. A section of Form CRS asks, “What fees will I pay?” Another asks: “If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?”

As an example, say that a firm charges a yearly fee of 1.25% for managing portfolios of $1 million or less. At that rate, a $500,000 portfolio could pay $6,250. You would want to know if there are other costs or fees that are visible (and potentially invisible).

Before plunging into an interview, make sure you compare a few Forms CRSs to get an understanding of different firms.

This whole exercise is about comparing and contrasting, but you have to start with the big picture, which is the firm. The adviser works for the firm and will adapt to the culture of the firm, not the other way around. Again, I would not start with the adviser. I would start with the firm.

Then, interview the adviser who works for the firm whose culture you identify with. Firm policy and protocols trickle down to the adviser who would represent you. Choosing a firm over a person may have been less important when advisers acted as “customer’s men” — they represented you to the firm. That changed over time after firms started manufacturing and selling their own products to their customers. The good thing is that this information can be gleaned from Form CRS.

In the end, keep in mind that there are a lot of investment advisers to choose from. There are 14,806 investment adviser firms registered with the SEC, according to the 2022 Investment Adviser Industry Snapshot (tinyurl.com/4e4be7ks). Another 17,371 are regulated by the states instead of the

SEC; these are smaller firms.

In addition, many of the larger brokerage firms, whose names you would recognize, are “dual registrants,” meaning they act as both investment advisers and brokers. In those cases, the broker working for the firm is “dually hatted.” However, different rules apply when the broker is acting as such.

If you want to learn more about this subject, I can send you a copy of a sample chapter from my latest book, “The Discerning Investor,” which was recently published by, and only available through, the American Bar Association. (Email me at readers@juliejason.com.) Also, you may want to listen to my continuing legal education presentation at Lawline (tinyurl.com/3pm8zbkr), an online learning platform for attorneys.

Seasoned Investment Counsel and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients),” published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.