Dollars & Sense
Consider these questions when choosing an investment advisor
Glad You Asked
There comes a time in life when a little help comes in quite handy. This can very well be the case when it comes to investing, particularly as your investment portfolio increases and you near retirement. The good news is that there is a multitude of investment professionals very willing to offer you that help. The bad news is that not every adviser is a good fit. With that in mind, we present questions you should ask of any adviser who solicits your confidence and the management of your financial assets:
What is the adviser’s experience, and how will your assets be managed?
Don’t just accept the adviser’s word. Verify. Information on a Registered Investment Adviser can be found at adviserinfo.sec .gov. Information on brokerage firms and individual brokers can be found at finra .org/brokercheck. Take your time and read these disclosures. If the individual is not registered, it is a red flag.
If the investment professional uses a particular investment approach, find out how long it has been in use and what the results have been. Don’t accept back-tested results or vague statements as proof of performance. If you don’t sufficiently understand the investment approach, consider it another red flag. Remember, results that sound too good to be true usually are.
How will your assets be held?
Ideally, your assets should be invested in a separate account in your name at a national custodian or brokerage firm. You should be able to independently verify the status of your account, either through online access or third-party statements. Your adviser should have no ability to withdraw funds from the account other than preauthorized payment of periodic fees. Deposits should never be made out to an individual.
How is the adviser compensated?
Does that compensation present a possible conflict of interest? Is the individual paid to solicit your investment in a specific money manager or investment vehicle? Is the advice unbiased and in your best interest?
Has the adviser asked the right questions?
Your adviser should understand what you want to accomplish and how a recommended investment fits with your financial situation. You don’t want an adviser who is selling a solution without finding out what you need.
Is the recommended investment appropriate for you?
You know best what you need in terms of capital preservation, how much and when you will need income from your investments, liquidity, ability to pass on to heirs, and the like. If the financial adviser is not asking you about those requirements, you must ask how your needs will be met. Make certain you understand the answers and preferably have them in writing. Verbal promises and assurances are not enforceable in court.
If the investment does not work out as anticipated, what is the financial adviser’s exit plan?
Will he or she strive to protect your investment, or are you on your own once you invest?
How much will it cost to implement the new adviser’s solution?
If you are required to liquidate assets, what costs will be incurred to convert those assets to cash? This is particularly important when liquidating insurance products such as annuities. Has the new adviser given any consideration to the tax consequences of repositioning the portfolio? What will it cost to purchase recommended investments? Will those investments be liquid, or will you have to commit to a holding period?
And then, ask yourself why you are considering the adviser.
If you are dissatisfied with your current adviser, you may want to talk about the issue with your adviser before you make any changes. Remember, changing an adviser is going to incur costs to move your assets and reinvest. If your answer is because you like the new individual, you want to help them out, or you feel pressured to make the change by the individual or another adviser, step back and give yourself time to reconsider your decision. Working with a financial adviser only makes sense if your interests will be best served by the relationship. James H. Applegate is a Certified Financial Planner™ and regional director with Financial Services Advisory, Inc., a fee-only investment advisory firm with offices in Fort Myers, Florida, and Rockville, Maryland. He can be reached at 239-489-3346 or via e-mail at japple[email protected]vest.com.