How to vet an advisor?

Pam Krueger July 22, 2015
vet advisor

It is a very important question and it’s amazing how casually many people take advisor referrals from friends and co-workers without a background check. Doing a bit of homework before you meet with a potential advisor will allow you to focus on evaluating whether the advisor will be the right match for your needs and goals. Fortunately, the process is very simple, with two parts to the vetting process: the research you conduct on your own and the advisor interview.


Research the Advisor

Some background research on your potential advisor is key to ensuring you wind up working with someone with no fraud or judgments on their record. The best place to start is with the FINRA Broker Check tool, found at:

All you have to do is enter the advisor’s name and you will be directed to a report, either with FINRA, or with the SEC (if an advisor is an independent), which will tell you all about the advisor’s history, including any complaints made against them, the results of such complaints, and if any action was taken against the advisor. This report will give a sense of what licenses the advisor has, how long they have been in the industry, and which firms have employed them. If you don’t find the advisor’s name and history in the regulators’ database, ask why her or she isn’t included. This is a big red flag.

The Advisor Interview

Now that you have done some research, it’s time to meet with the advisor in person to get a handle on the services they offer, their investment philosophy, and other details to evaluate if they will be the right match for you.

Here are six questions to ask:

1. “What is your area of expertise?” Beyond retirement planning and a financial strategy, do you want your advisor to provide advanced estate planning, tax planning, succession planning, or portfolio management? What kind of “team” can the advisor put together to address these needs? No one can be a specialist in everything. Advisors specialize in everything from college planning to estate planning. You really want to make sure what you need is what you get in terms of expertise.

2.“How can I expect to interact with you and what is your philosophy?” It’s best to set expectations early on in the relationship. If you want to be part of every decision or thought process, or you prefer to simply opt out and let your advisor make all the decisions, you need to make that clear right away. Also, get a feel for their investment style. How do they approach the process of investing? How do they manage risks in the market? In turbulent times, how do they protect clients against losses?

3.“Can you show me your real-time track record?” Ask to see a multi-year track record taking in bull and bear markets. You want to see how the accounts of their clients performed across “X” number of years – either a random sampling of clients or the whole lot, in a report independently produced and audited. The track record should also tell you if the performance numbers represent gross returns or net of fees returns (i.e., the return once management fees are subtracted out of the account, which constitutes a more accurate picture).

4. “Can you provide three client references and describe your typical client?” Ask for three references of clients with your similar financial goals and profile. You want them to describe you (or someone similar to you) in response to this question.

5. “How am I paying you?” There are fee-only, fee-based, fee-plus-commission, and commission-only advisors. Some advisors make most of their incomes from commissions linked to product sales or investment trades. Others make the bulk (or even all) of their incomes from advisory fees. You're the client-- and you are paying for professional advice and guidance whether it's a commission every time you buy or sell an investment or a straightforward fee. You need to clearly understand how and how much you're paying. My suggestion is to ask your advisor to show you on an actual statement where you see every fee and any charges.

6. “What clearing firm do you use?” What is the custodial firm for client accounts – that is, where will your investment money be held? Are investor-owned assets held in an account insured by the Securities Investor Protection Corporation (SIPC)? We care because we’re also talking confidentiality, auditing and regulatory compliance, and errors and omissions insurance. A proper clearing firm should be used to prevent any temptation an advisor might have to tap into client assets.

The answers to these questions and the information gleaned from the FINRA check will not only give you peace of mind but also help the decision-making process run smoothly as you select an advisor.

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