How to Pick a Financial Adviser

Most security buyers obtain advice without paying for it specifically. It stands to reason, therefore, that in the majority of cases they are not entitled to and should not expect better than average results. They should be wary of all persons, whether customers’ brokers or security salesmen, who promise spectacular income or profits. – Benjamin Graham

Many investors take comfort from the experience and second opinion that a good financial adviser can provide. The right advice can give just the psychological boost you need to keep investing steadily at a time when other investors’ hearts may fail them. In screening an adviser, these should be your goals:

To determine whether he or she cares about helping clients or just goes through the motions;
To establish whether he or she understands the fundamental principles of investing and is sufficiently educated, trained and experienced to help you.

Here are some of the questions that prominent financial planners say any prospective client should ask:

Why are you in business? What is the mission statement of your firm? What is your investing philosophy? Do you use stocks or mutual funds? Do you use technical analysis? Do you use market timing? (A “yes” response to either of the last two questions is a “no” signal to you.) Do you focus solely on asset management, or do you also advise on taxes, estate and retirement planning, budgeting and debt management, and insurance? How do your education, experience and credentials qualify you to give advice in those areas? How do you choose investments? What investing approach do you believe is most successful? What evidence can you offer that you have achieved success for your clients? What do you do when an investment performs poorly for an entire year? (Any adviser who answers “sell” is not worth hiring.) Do you, when recommending investments, accept any compensation from any third party? Why or why not? Under which circumstances? How much do you estimate I would pay for your services the first year? What would make that number go up or go down over time? (If fees will consume more than 1% of your assets annually, you should probably shop for another adviser.)

May I see a sample account statement? (If you don’t understand it, ask the adviser to explain it. If you can’t understand his explanation, he’s not right for you.) Do you consider yourself financially successful? Why? How do you define financial success? How high an average annual return do you think is feasible on my investments? (Anything more than 8% to 10% is unrealistic.) Will you provide me with your resume, your Form ADV and at least three references? (If the adviser or his firm is required by the Securities and Exchange Commission [SEC] to file an ADV and he will not provide you with a copy, get up and leave – and keep a hand on your wallet as you go.)

Have you ever had a formal complaint filed against you? Why did the last client who fired you do so?

Finally, bear in mind that great financial advisers often have as many clients as they can handle – and may be willing to take you on only if you seem like a good match. So they will ask you some tough questions as well, which might include: Why do you feel you need a financial adviser? What are your long-term goals? What has been your greatest frustration in dealing with other advisers? Do you have a budget? Do you live within your means? What percentage of your income or assets do you spend each year? When we look back a year from now, what will I need to have accomplished in order for you to be happy with you progress? How do you handle conflicts or disagreements? How did you respond emotionally to the bear market that began in 2000? What are your financial fears? Your financial hopes? What rate of return on your investments do you consider reasonable? (An adviser who doesn’t ask questions like these is not a good fit?)

Above all, you should trust your adviser enough to permit him or her to protect you from your worst enemy – yourself. “If the adviser is a line of defense between you and your worst impulsive tendencies,” says financial – planning analyst Robert Veres, “then he or she should have systems in place that will help the two of you control them.” Among those systems:

A comprehensive financial plan that outlines how you will earn, save, spend, borrow and invest your money;
A statement that spells out your approach to investing;
An asset-allocation plan that details how much money you will keep in different investment categories.

These are the building blocks on which good financial decisions must be founded, and they should be created mutually rather than imposed unilaterally. You should not invest a dollar or make a decision until you are satisfied that these foundations are in place and in accordance with your wishes.