This is a guest post by Jeff Rose, an Certified Financial Planner from Illinois. Rose is also the author of Good Financial Cents, a financial planning and investment blog. Before reading his article, you may want to begin with two previous guest posts from Dylan Ross: What is a financial plan and why have one? and When and how to hire a financial planner.
When meeting with a financial planner for the first time, many people are hesitant to ask questions because they don’t want to sound “dumb”. But dumb is not asking any questions at all.
Ultimately, you have the opportunity (and responsibility) to interview the planner to see if he is the right person to manage your investments. Before you decide if a particular financial planner is right for you, you should ask him some basic questions.
What will I find on your U4?
Remember when you were younger and you could always hide your grades from your parents? That was until the report card was sent home. The U4 is the “report card” of your financial planner’s background. That means if he’s done anything wrong and a complaint has been filed against him, it will be shown here.
By asking the financial planner if there’s anything on his U4, you’re finding out if he’s committed any wrong-doing. The best part is that if you don’t believe the financial planner’s answer, you can always log on to finra.org to find out if the financial planner is telling you the truth.
How much do you charge?
You would think that this would be a common question. But many folks feel that it’s impolite to ask how much a financial planner charges. If you were getting your car worked on, wouldn’t you ask the mechanic how much it was going to cost? Don’t be shy in asking this question.
There are many different ways that financial planners make money. They may be commission-based, fee-only, fee-based — or a combination of the three. Asking what the planner charges will help you know exactly what you are paying throughout the working relationship. If she explains but it still doesn’t quite make sense, have her put it on paper so that it’s crystal clear.
Those are the two basic questions. Here are some more in-depth questions you could ask:
How many clients do you have?
Here’s a quick story to help drive this point home.
At my old firm, an elderly gentleman walked into the office to drop off a check. As the elderly man waited, he struck up a conversation with one of the advisors in the office. They were from the same hometown.
After the man left, the branch manager — also from the same hometown — approached the advisor and asked, “How do I know that guy?”
“Well”, the advisor said, “that guy is from our hometown, and he’s actually your client”.
The branch manager had more clients then he knew what to do with. So many, in fact, that he didn’t even recognize one who had walked into the office. This is a prime example of how many advisors take on more than they can handle. Asking your planner how many clients they have will help you understand how much you will be serviced going forward. Do you want to be treated as a person or just a number?
What do you drive?
This is a good question to ask for many reasons.
For one, if you have an issue with working with somebody that drives an exotic foreign car, then maybe this planner doesn’t have the same values that you have. Also, if you’re “green” conscious and want to do green investing and your financial planner drives a large SUV, then maybe you both won’t see eye-to-eye.
Asking what she drives will help understand whether you and the advisor share core values that will enable you to work together successfully over the years to come.
Have you ever been fired?
Ask your planner if he’s ever been fired by a client. In our industry, it’s actually very common to start a relationship with a client but then have things things not work out. Sometimes it could be the planner’s lack of service. Other times it could just be a clash of personalities. Nonetheless, the planner should be very open if he has been fired before.
If the advisor is able to share a few stories, it will help you to understand why a client would have gone elsewhere. It’s an uncomfortable question, and seeing how an advisor responds should give you an indication of the character of the planner.
What’s in your portfolio?
If the planner is describing her investment strategy as implementing proper asset allocation and diversification, yet when you look at her portfolio it contains only technology stocks, will you really want to follow her advice? Shouldn’t she practice what she preaches?
If the financial planner is willing to show you some of the holdings in her portfolio, it might help you to believe in her investment strategy. Would you trust somebody selling Goodyear tires if she had Bridgestone on her car? Exactly.
Are you married?
You need to really know your financial planner. Face it: When you meet with a planner, they get insight into your entire life history. Isn’t it fair to get insight into his life, too? If your planner has (or had) a rocky home life, then maybe he has too many things going on in his personal life to truly service you and your needs going forward.
Does that mean a planner has to be married to be able to take care of you? Of course not. I used to work with a planner who was having marital problems and it strongly affected his business. He wasn’t able to focus on his clients, and because of that he eventually got out of the business. You just want to make sure that a planner can focus on your needs.
How long do you plan to be in the business?
If you search for a financial planner and find one that fits your needs, what happens when she retires? Does she have a sufficient exit strategy plan in place? Maybe a younger advisor that is going to fill her shoes. If so, does that younger financial advisor fit the criteria that you used to hire the first advisor?
Getting a sense of how long your new-found planner will be in the business, and what her plans are after she leaves, may help put you at ease knowing that you made the right decision for years to come.
Have you met with a financial planner? If so, what did you ask before hiring her? Are there other questions you wish you would have asked? Share your thoughts. (And once you’ve found an advisor that works for you, check out my article about questions to ask your financial planner about your situation.)
Jeff Rose is an Illinois Certified Financial Planner and co-founder of Alliance Investment Planning Group. He is also the author of Good Financial Cents, a financial planning and investment blog. You can also learn more about Jeff at his website Jeff Rose Financial.
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Hey, don’t get me wrong now. The secret to my “brilliant” asset management is simple and one that most on this post will agree with: low expenses (etfs, stocks, ind. bonds etc.), manage taxes, and keep in mind what your time horizon is. I do this all day though. Yes, I get an asset management fee, but that way you’re paying the guy that manages your money to be vested in your portfolio’s performance. What you’re not paying for is bloated fund expenses (although some funds are worth it) and loads. I don’t like deferred sales charges either – included in that mix is fixed annuities. No thanks, I’m not an insurance salesman. I have a securities license (and a fiduciary license as well). And those dinners are a waste of money, in my opinion.
Lastly, with regard to “private placements”, I do have access to limited partnerships, investment trusts etc. that you’re not going to find on e-trade. There are net worth requirements, but they are great products that can add significant value to your overall portfolio. There’s more to life than stocks and bonds – just research what Yale and Harvard have in their endowment funds (avg. 16% annualized).
I’m not here soliciting business and I’m not saying that I’m right for everyone. My point to all this is that there are a lot of crooked “advisors” that get people (like many who have posted here) pissed off because they just sell crap and don’t actually provide value. Anyone can write a financial plan that tells you that you need more insurance and that you should try to max out 401(K)/Roths etc. Most won’t take the time to actually teach you how to become wealthy. That’s worth paying a “consultation” fee for.
This articles a great start. Find out that their U-4′s clean (I imagine most are). More importantly though, find out what their philosophy is, why they will add value to your situation net of their cost, what types of investments do they prefer and why, how would they handle (hypothetical situations), what are they most proud of/success stories, what was a failure and did they learn…
You get the point. Get past the salesman because there are good planners out there that are worth the cost. It’s disappointing to hear from people that have been burned by bad relationships. It is a good industry.
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@ Jay, What exactly is a “fiduciary license,” and who issues this license? And how do you act as a fiduciary and registered rep when one client wants to sell a bond, another wants to buy the same bond, a the broker you represent wants a cut? Whose interests come first then?
You may not be soliciting business here, but you are muddying waters with some of your claims.
The bottom line is that sales and planning are not related activities. DIY investors can still purchase “private placement” investments from the appropriate broker if it made sense, but the person selling it cannot objectively make that determination.
You don’t have to put the “consultation” in “‘consultation’ fee” in quotes when talking about commissions because there is actually such a thing as fee-for-advice that does not require people to buy something.
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Jay,
It’s obvious you are part of everything that’s wrong with the industry. The sad thing is you probably tell people you have a “fiduciary license” and they believe you, when of course there is NO SUCH THING.
Keep posting so real investors can learn all of the shuck and jive most “advisors” use to make their living.
Try answering Dylan’s question about the so called fiduciary license. Maybe I’ll get me one of those too. LOL
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Series 66 is a federal fiduciary license. You must recommend BEYOND suitability (i.e. beyond income/age/risk tolerance). It’s not a selling point for me it’s just a fact. I don’t tell people what licenses I carry unless they ask. The routine auditing of my work speaks for itself. But, attack my character if you want.
The truth is there is someone out there who can help you build your wealth faster than you can on your own, net of their cost. It doesn’t sound like you’re willing to look though.
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Jay, I hope you don’t think I’m attacking your character, but your statement is just not correct.
The series 66 is not a “Fiduciary license”, it is a FINRA exam that some states require if you want to affiliate with a broker/dealer related Registered Investment Advisor. Many states don’t require this, in fact most advisors who accept fiduciary responsibility aren’t registered with FINRA at all, they are strictly registered with the SEC.
I think there’s only one question Jay. Do you accept fiduciary responsibility with all of your clients? My issue with dually-registered advisors is that they try to take on and put off the RIA or Registered Rep hats while working with clients, where both actions require a different standard of care.
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Jay #104 says: “Series 66 is a federal fiduciary license. You must recommend BEYOND suitability (i.e. beyond income/age/risk tolerance). It’s not a selling point for me it’s just a fact.”
Here is a classic industry spin that on it’s face is false.
–”Federal fiduciary license” —
1. There is no federal anything. The exams and licensing are administered by FINRA a self-regulating organization for the securities industry. But by all means using “federal” sounds much more impressive.
2. The series 66 exam is actual a combination of the state securities exam (series 63) and the investment adviser rep exam (series 65). As Jude points out, this exam is generally taken by brokers who wish to be registered both as general securities reps AND investment adviser reps. It is not in itself a “license”.
Notice that Jude asked Jeff Rose if he accepted fiduciary responsibility for all clients or just some. Jeff did not respond because by virtue of acting as a Gen Securities Rep, the fiduciary standard is null and void for those clients. Suitability (and binding arbitration) is the standard. In plain English, the broker-dealer is a retailer of securities, just like your local grocer sells milk and eggs. Like Jay, they pretend to sell “advice” but that’s just to get you to buy stuff.
I stand by my original post #78.
Jay– I’m not attacking your character. You seem to just lack requisite knowledge of how the biz really works. You’ll figure it out sooner or later. Try to get a letter or article with that “federal fiduciary license” stuff approved by your compliance folks. They’ll flip!
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There is a big difference between a commission-based sales rep and a fee-only financial adviser/planner.
While I understand many peoples’ issues with the former, I don’t understand why so many of you have issues with the latter.
I’m sure every one of you who says there is no need to hire a professional planner pays other people to do things for them. Sure you could paint your own house, but I bet most of you don’t. If that is a fair use of your money, why is a financial planner a waste of money?
Financial management isn’t that hard, but some people don’t have the time, interest or knowledge to understand it all. I’d much rather someone hire a fee-only financial planner to set them on a good path than just “wing it” or make decision based on what they hear on TV.
I actually have an appointment with a fee-only adviser next week. We decided to do this because we have some specific questions we need addressed and also because the penalty for getting long-term financial planning wrong is pretty steep. You really only get one change to get this right. You don’t want to read a few websites, think you know enough and then turn 60 and suddenly find out your calculations were off and you need to work 15 more years.
I don’t see how it can hurt to have a second set of eyes look at something that important.
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@Jay,
I’m not attacking your character, just the accuracy of your comments. I hope you see the difference.
As others have correctly pointed out, the Series 66 is an exam, not a license, and there is nothing federal about it.
I do agree that some people can and do receive positive net value from paying for objective and appropriate financial advice. But paying for advice and purchasing financial products are mutually exclusive and regulated as such.
If you are in fact a registered representative of a FINRA member firm, then you should be aware that you are prohibited from posting anything that is untrue or misleading on the Internet according to advertising rules. Your broker is supposed to be supervising your activities to ensure this. I don’t believe you are supposed to be posting anonymously either. So, I can only conclude that either you are not really a registered rep or you are breaking the rules. I hope its not knowingly, so if you are unaware of the rules, you may want to discuss this with your firm’s compliance officer and even review FINRA’s Guide to the Internet for Registered Representatives: http://www.finra.org/Industry/Issues/Advertising/p006118
@ Lucas,
As for Jeff Rose not answering Jude’s question (#58) “do you accept fiduciary responsibility with your clients? For all of them? Or is it a hat that you put on and take off?” I suspect (educated guess) that Jeff won’t answer it because of a recent industry anomaly created by the CFP Board’s revised (and improved) Standards of Professional Conduct. As a registered rep of LPL securities, they likely won’t allow him to say that he has a full-time fiduciary duty to his clients. At the same time, the CFP Board of Standards does not permit planners to put-on and take-off the fiduciary hat. So, memorializing an answer to that question could land him in hot water with either LPL or the CFP Board.
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The series 66 provides a FINRA regulated license that is subject to federal jurisdiction. Just like the series 7 provides a federally regulated securities license.
Let me explain to you what fiduciary obligation means. A fiduciary should, at all times, hold your interests above his/her own. Just like your 401(K) sponsor (your boss) has a responsibility to provide appropriate funds and reasonable expenses or how a corporate board should act in the best interests of its firm. Advisors (not brokers) should be held to the same standard. Sounds like common sense, right? I’ll use an example from real life.
Let’s suppose that a 58 year old woman (single) is terminated from her job and has $450K to rollover. At the advice of a friend, she consults a broker to handle the funds. That broker recommends that she put ALL of her money into a variable annuity. She does so because she trusts the recommendation of her friend.
Once she familiarized herself with the product in more detail after the fact (yes that’s her fault for not doing due dilligence), she realizes that there are tremendous surrender penalties associated with the product and what’s more, at the broker’s advice she incurred a huge tax liability and penalties with regard to how the rollover/withdrawal was handled.
Now she wants out but has hired an attorney and the process may drag on for some time. Another course that she could’ve taken, incidentally, is to file a complaint with FINRA. Usually broker-dealers will release products from surrender etc. for fear of tarnishing their reputations (the U-4).
So, is that broker liable? Maybe not. S/he doesn’t have a fiduciary responsibility so the only requirement is to recommend based on suitability. Based on age, income, net worth, time horizon etc. that product may actually qualify as “suitable” for her. As a fiduciary though, that broker would be in hot water because s/he put their own interests first above the client’s (annuities pay well – but can be right for some clients nonetheless). If this broker were a fiduciary, s/he could be tried/penalized federally and not just at the state level.
So from that aspect, working with a financial planner who also can sell products is not necessarily a bad idea. They can be held accountable for their recommendations. It is the client’s job to demand transparency and choice so that all are satisfied with the outcome. It’s simple, an advisor recommending a GOOD solution won’t be afraid to be fully transparent with you. Or, if you work with a fee-only planner and a broker, you’d better be comfortable with both
This goes back to the original point which ties in with the article above, do your due dilligence during the interview process because that person can be your best friend or your worst enemy.
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@Dylan:
Seriously? Advertising? I’m not disclosing my name or my firm or discussing any specific product recommendations. This is not business related and you are not my prospects. I’m just a stranger on a blog, just like you.
Just because you researched something on another website, referenced it, and then cited your work doesn’t mean that it’s relevant.
Guess what. Christina Applegate topped People’s most beautiful people list for 2009. Check out this link: http://omg.yahoo.com/news/christina-applegate-tops-peoples-most-beautiful-2009/21914?nc.
Stick to the main thesis of the argument. We’re trying to discuss the pros and cons of working with a financial professional. You’re right about advertising and FINRA rules. But it doesn’t apply here.
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Jay, just because you are not disclosng anything about your or your firm, it doesn’t change the fact of the regulations. They were written in a different time, but they have been applied to conversations in online forums, specifically chat rooms and comments on blogs. Whether you like it or not, your communication is always under review. As a RR, you and your communication should be held to a higher standard. Everybody involved in the business of money should be.
Since you seem to enjoy links, here’s one for you. It’s the FINRA guide to the internet for Registered Reps.
http://www.finra.org/Industry/Issues/Advertising/p006118
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@Jay,
It’s quite apparent that you are confusing concepts, licensees, registrations, rules and regulations.
Also, your claim, “so from that aspect, working with a financial planner who also can sell products is not necessarily a bad idea. They can be held accountable for their recommendations,” is misleading. Financial planners that don’t sell will also be held accountable for their recommendations. Sales and financial planning are separately regulated activities.
As a registered rep, you are not permitted to skirt the rules by being “just a stranger on a blog.” But you don’t have to take my word or anyone else’s for it. There is a very easy way to resolve this. Go ask a principal at your firm. Tell them what you’ve been doing and ask if it’s okay. They are responsible for your actions and it’s their call, not yours, as to whether your actions are permissible. Don’t want to? Afraid of what they’ll tell you? Than maybe you should rethink posting the claims you’ve been making. You won’t be bothering them; this is how a self-regulated industry is designed to work.
Again, don’t take my word for it; ask your firm’s compliance officer. If you’re so sure you are right, you have nothing to lose. If that though gives you pause, that’s all the more reason to confirm you are not breaking the rules. If you want to do what’s right and be ethical, confirm it with those that are responsible for supervising your activities as a registered rep.
Your snarky responses don’t help the credibility of you claims either.
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Following most of these, and nothing else could be very faulty, and may lead you to a poor relationship with someone who has these credentials satisfied but also despenses poor ideas and has a poor track record.
Other clients satisfaction and an audited track record with a fee based advisor is very sound….you’ll know what your getting. If my advisor makes me money over many years above the market (and all their clients) will be a success himself, I’ll be the first one to jump in his ferrari for a lunch meeting.
My first advisor was a heavy handed insurance man that had over 6000 clients, was a nice old guy who thought he was doing it right…..but net of fee’s to all involved served up weak and tangled up performance….was perfect for wall street, not me.
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Jason,
Your post makes sense but completely plays into the industry ideology. What you describe, an audited track record, (and you may be satirical with your comment)just does not exist for retail investors. How can even accredited investors really ever know the truth? Bernie Madoff had audited financial records for years and it was a complete sham. Fee-based means an “advisor” who charges fees and sell stuff. These folks are of little value. Maybe you meant fee-only?
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Some comments: if you really think you can “do it yourself”, then please explain why the average rate of return for mutual funds is something around 9%, but the experienced rate of return by most individual investors is half that. Much to Peter at 107, there is value … whether it comes from someone that pays a fee, or pays commission. Whether the investor has $600 or $600K, their emotion gets in the way of doing what is right long term.
@Lucas/Jason, 114. You are so full of horseshit invective it’s ridiculous. Did some FA drop you on your head when you were a baby? “Little value”? To whom? You? Because they are and can be of great value to many people. What is a a “complete sham” and obfuscation of the truth is your failure to discuss the difference between the fiduciary responsibility of an FA and Registered Representative; and the efforts of Congress right now to extend and further regulatory agencies.
What is a “sham” are investors that walk into an office, sit down and turn their money over to someone with knowing what that man is charging and what he is earning of that money – and what alternative investments might be available and what those fees are. That – for sure – I’ll agree with. There is a price for doing business, and a value that is returned. IF you know what you are doing and IF you have the time to do it, good for you. But …
@Jay 99, for whatever firm he works,he cannot “regularly” beat ANYTHING. I’m sorry, no one can and he’s in gross violation of any standard to say such a thing. Forward making claims simply are not allowed in the financial industry, and everything he writes smacks of someone that has been in this business for a short time. And he knows that.
And to me, that’s the crux. Jay and his ilk misrepresent even in their best intentions what they are and what they can do. In their worst, they can be self-serving and to that extent I’d agree with the invective in their way.
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ALEX says: ” then please explain why the average rate of return for mutual funds is something around 9%, but the experienced rate of return by most individual investors is half that…”
Alex,
You start with the BIG LIE that the industry perpetuates. The average return is UNKNOWN, because the returns of all the lousy funds that close simply vanish. Gone forever. Remember those “Tech” funds that lost billions in the tech bubble? The remaining cash was distributed (rarely) or most often rolled into another fund with a good (surviving) record. Those negative returns are gone.
Nice try though. And my point on Madoff (Stanford) stands. Audited returns and financial statements? Please.
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Lucas@116: Puhleeze. The experienced rate of return of investors in mutual funds stands at 4.5%. This is not a myth, not a big lie. It is the fact, and one of the facts you prefer to ignore because it doesn’t fit into your series of obfuscations.
What does Madoff explain in this conversation … at all? That some one person can corrupt the process? Or do you honestly believe that companies like American Funds, Fidelity and Vanguard are all cooking the books? if so … well, discussion, such as it is, is over.
To others that might be reading this thread, you should know these things before you walk in to speak with him:
* How long he’s been at his current firm? Why did he go there? How long has been selling? 80% of the FAs fail in their first two years. Don’t, under any circumstances, give a large part of your money to a newbie. They can learn with someone else’s money.
* Have him describe his “book”. Have him explain why he uses the proportions he does. What are the expenses of these investments, as opposed to other investment selections of similar sorts (individual bonds? unit trusts? mutual funds? load v no-load?)
*This last question is a trap. Ask him if he will make recommendations on your self-directed IRA. A commission based financial advisor should know he cannot make recommendations on such investments; that is why they are “self-directed”. He should be presenting you with options, pointing out how the differ and allowing you to make a well-informed decision.
At the end, FAs have a role and offer value. You, as the consumer have a role and you cannot abdicate that role. If you do abdicate, you suffer ills at your own hands.
Oh … and to would be CFP: what they do, and what the ordinary FA does is so inconsequentially different as to be inconsequential. If that is indeed your goal, take the 7 and 66, get into a fee-based business and get at it.
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Alex said: “average rate of return for mutual funds is something around 9%”
AND: “you honestly believe that companies like American Funds, Fidelity and Vanguard are all cooking the books? ”
Alex,
Just because you repeat the industry line doesn’t make it true. Of course it’s a compelling story, but it’s false. I could give you many many examples but you already know them. This industry gets to bury it’s losers, LEGALLY hiding billions in losses by rolling these dead funds into new ones. It’s a no brainer. All an investor has to do is look at a huge jump in the assets of a fund. Watch a fund grow from $500 million to $2.0 Billion in less than a year. That growth could be new investors pouring cash into a hot fund, but it’s often the dead assets of a sister product, a fund with terrible performance. Those negative returns disappear the moment the fund is closed, and thus the “average” rises. Your 9% average is an INDUSTRY LIE sir. No question.
Also your comment that FAs have a role? Indeed their role is to make money for the firm, themselves, and (rarely) the client. 80% of new FAs fail not because the can’t manage money, they fail because they cannot (or will not) sell enough crap to consumers. The industry is essentially one big multi-level marketing scheme, with every person in the food chain getting a little slice of whatever their subordinates bring in.
It’s a lousy, lousy business.
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I think you all are giving him a bit of a hard time!
I get his question about “what kind of car do you drive” if you put in in the context that he explained it. It makes sense. Same for some of his other comments.
I didnt gree with everyting, but generally I got his position. I think i was actually a nice attempt to give the same dry info in a slightly more less boring way.
Take it at face value, dont anlyse it too much
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