KUSA - Whom do you trust? It always come down to that simple question when you pick a financial adviser.
Small wonder that many investors are still reluctant to put their faith in experts after all the ups and downs of the last few years.
The trouble is, many investors don't have the time or expertise to make all of their own investment decisions. So, having a professional on your side is crucial. But how can you guarantee that your expert is reliable?
The first step is to realize that you're ultimately responsible for your family's money -- you're the chief executive of your own investment company. Your financial adviser, mutual-fund manager, wealth manager and anyone else who handles your investments should report directly to you. Even if you don't understand the ins and outs of investing as well as they do, you're responsible for ensuring that they handle your money properly.
Here are some big questions to keep in mind as you review your candidates:
1. What's in the adviser's background?
"Think like an employer," looking at a potential adviser's criminal and regulatory record, as well as references from past employers, says Wayne Cooper, founder of Wealth Management Exchange, a social-networking site for high-net-worth investors.
You can find regulatory records for stockbrokers, investment advisers, insurance agents and their firms online, starting at Finra.org, the Financial Industry Regulatory Agency's Web site. Finra's BrokerCheck will tell you which states and regulatory organizations that brokers and their firms are registered with, along with the licenses they hold, the exams they've passed, and their employment history.
The site also lists any formal investigations and disciplinary actions initiated by regulators, along with customer disputes, certain criminal charges and financial disclosures, including bankruptcies.
Investors can find more information about advisers, including education and work history, at the Web sites of organizations such as the Certified Financial Planner Board of Standards Inc. (www.cfp.net ) and the Financial Planning Association (www.fpanet.org).
2. What do the adviser's clients say?
Don't wholly depend on the reputation of a big firm or recommendations from friends, family or co-workers.
People who refer you to an adviser may also have different goals than you. For instance, your golf buddy may want to retire before age 40 and doesn't have any kids to think about. But you may be planning to retire at age 75 with money left over for your three kids. Thus, your financial plans and needs will vary drastically.
So, it can be helpful to ask for references from past and current clients in life situations similar to yours. When talking to the clients, get specific about their experiences. How often did the adviser communicate with them? Has the adviser ever admitted to making a mistake? How often do they evaluate their goals with the adviser? Has anything about their relationship surprised or disappointed them? Has the adviser performed well in bull and bear markets? Is the adviser ethical?
Then ask them for additional references from people the adviser hasn't solicited, says Greg Rogers, founder and president of RayLign Advisory LLC in Greenwich, Conn. "Try to find six degrees of separation from the adviser," he says. "You'll get better information if you get indirect references."
3. How does the adviser get paid?
Knowing how advisers get paid will help you tell if they're working in your best interest.
Advisers use a bunch of compensation structures. They may get a commission on the securities they sell; charge fees, either flat or a percentage of the assets they manage for you; work at an hourly rate; or a combination of all of them. Ask advisers to detail exactly how they work and the total compensation picture from managing your portfolio. Be wary of anyone who shies away from answering these questions in a transparent way.
Also ask about conflicts of interest. For example, if advisers work on commission, ask for their firm's commission schedule and find out if there are a limited number of products or services they can recommend and why.
If they can't justify the limited choice, that's a red flag. Meanwhile, if advisers take a percentage of assets as a fee, remember that they may be inclined to advise you to avoid moves that may reduce those assets, including charitable giving or buying a new house. Also be wary of an adviser who charges more than 1 percent or 2 percent of assets.
(Copyright © 2012 USA TODAY)
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