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North Bay Business Journal

Monday, September 17, 2012, 5:30 am

Wealth Matters: Seven critical questions to ask a financial adviser

How is the professional compensated? What credentials do they have?

By Jason Gittins, CFP

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    Wealth Matters by Jason GittinsWhen working with a specialist — a doctor, lawyer, auto mechanic or anyone else — asking the right questions is critical in getting your needs met and the best service possible. However, we often don’t know what we don’t know, thus formulating smart questions can be difficult.

    Here are some of the most important questions to ask your existing or prospective investment adviser and why.

    “How are you compensated?” The answer to this question will be important and enlightening. There are generally two types of advisers, fee only and commission-based. They are not mutually exclusive. Many commission-based advisers also have a fee-based component of compensation. Always ask who is paying the adviser – whether it is you personally, or a product provider via a commission.

    Always ask for a written list of all the fees or commissions paid to the adviser. Fees you pay directly to an adviser might even be tax-deductible.

    “How did you advise your clients during the 2008–2009 global financial crisis?” Advisers won’t say they panicked, but many made ill-timed moves to reduce equity exposure at or near the bottom of the market. During the crisis, disciplined advisory firms held true to their investment philosophies. Conveying this conviction in the face of trying circumstances isn’t easy, and taking the time to listen, understand and address client fears was crucial.

    Advisers who could demonstrate to their clients via solid planning and modeling that their financial conditions were going to be OK, even if the market continued to drop by 20 percent to 30 percent, were able to keep their clients invested and ultimately benefit from the market rebound.

    “Are you a ‘fiduciary adviser,’ which must put the client’s interests first?” Many advisers will say they put your interests first, but often they are not legally required to do so. Look for advisers who are fee-only registered investment advisers and provide financial-planning advice.

    As fiduciaries, those advisers are required to put the investor’s interests first and disclose any conflicts of interest. Investors who have only worked with stock brokers in the past are commonly surprised by the different approach taken by a fiduciary in discussing financial planning and investments.

    “What are your qualifications and experience, and who will I be working with?” Grey hair and wrinkles do not necessarily correlate to a high level of expertise. Look for highly respected credentials such as the CFP (certified financial planner) and/or CFA (chartered financial analyst).

    If your adviser does not have upwards of 10 years’ experience as a professional, that firm should include seasoned advisers who collaborate on client relationships. This way, clients will benefit from the ideas and experience of the collective firm and not just one individual.

    “What specifically are your services?” Look for a firm that does more than just manage money. Find an adviser who can provide input and advice on insurance, estate planning, retirement planning, taxes and charitable giving.

    Your adviser doesn’t need to be an “all knowing” expert in these areas, but he or she should know the questions to ask to understand how each affects your ability to accomplish your objectives. A firm that not only knows how to “manage money” on your behalf but also knows other areas of financial management offers a much higher value proposition to the client.

    “How are you regulated, and how can I be confident my money is safe?” Your adviser should be regulated by either the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority (FINRA). Ask to see disclosure documents that outline the adviser’s work history, practices and fees charged.

    As Bernie Madoff proved, you can be “regulated” and still find a way to commit fraud. What he did not do was employ a third-party custodian such as TD Ameritrade, Charles Schwab or Fidelity to take custody of his client’s assets and investments.

    Custodial firms act as an independent third party to help protect the account owner. Advisers who recommend investments that cannot be held by a custodial firm — such as private placements, real estate or limited partnerships — require significant additional supervision and scrutiny.

    “How will we communicate with one another, and how often should we meet?” Once confidence and trust has been established in an adviser–client relationship, the number of meetings may drop to once or twice a year. Initially, however, you may have several meetings as you get to know the adviser and the adviser gets to know you. Ongoing communication should be, at the very least, when something has changed on either end of the relationship.

    Don’t settle for an adviser who does not get back to you in a timely manner when you have a question. Make sure your expectations regarding communication response times are clear.

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    Jason Gittins is a certified financial planner with Willow Creek Financial Services (wcfsinc.com, 707-829-1146), Sebastopol, one of the leading wealth management firms in California. Wealth Matters is a monthly column from the firm’s partners.

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