I Hire People to Do That! -- things you should know if you plan to use a financial advisor

Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.
Groucho Marx (1890 - 1977)

As hard as it is to believe, I do understand that some people just don’t like to think about money. Sure they want it but they want someone else to manage it. Nothing wrong with that. My only advice is to be careful who you hire. Anyone can call themselves a financial advisor, consultant, planner or whatever. Remember the simple rule that "you get what you pay for."

Perhaps the most direct question you should ask when engaging an advisor is “Why are they doing it? If they were really that good at managing money, wouldn’t they be too busy managing their own? I am always amused when I listen to analysts recommend stocks on CNBC and then proudly state that they don’t own any. Why would you want to take someone’s recommendation that has no financial interest in seeing how it turns out? Sure there are conflict of interest issues that need to be sorted out but I definitely subscribe to the “put your money where you mouth is” school of thought.

So, once you get past that hurdle, there are other questions that you should ask. These questions fall into four general categories:

• Compensation – how much do they charge, what way do they charge (hourly, flat fee, commission or combination) and who else pays them (beware of advisors that collect commissions or product placement fees)


• Qualifications – what makes them a good financial advisor? What licenses and professional designations do they have? What is their education and work history? Have they ever had complaints of disciplinary action taken against them?


• Products and Services – What exactly are they going to do for you? What services do they offer? What information will you need to provide? Do they offer a full range of investment vehicles or only those from particular companies?


• Performance – Many questionnaires leave this off but I think it is important. After all, that is the bottom line of why you are hiring them. I never bought into the logic that advisors could explain away bad results by bad markets. I want to see a proven history with accounts similar to mine. Further, the performance results should be in compliance with the CFA Institute’s Global Investment Performance Standards (GIPs). These standards are best practices for institutional investors. I see no reason why investment managers for the little guys can’t comply as well. The CFA Institute has a good 2 page article on evaluating investment portfolio performance that I would encourage you to read. http://www.cfainstitute.org/aboutus/investors/pdf/How_to_Evaluate.pdf

There are several questionnaires on the internet but I am not including links to any because, frankly, I didn’t find them to be that good. Perhaps in my free time I will put one together ;-). In the meantime I would use the list above. In addition, I would also ask to see the advisor’s ADV Form (or the state securities agency equivalent). This is an annual filing that is required by every registered advisor and provides useful information regarding their operations. You can read more about this form at this link. http://financial-dictionary.thefreedictionary.com/Form+ADV

Another simple rule to follow. Watch for hidden clues and body language. If the advisor is uncomfortable answering these questions or providing you with backup documentation, run don’t walk to the nearest exit!!!