How to Pick a Financial Adviser
A roadmap to making the right choices
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You can thank Bernie Madoff for one thing:
His widely publicized crimes demonstrated how important it is to choose your financial adviser carefully.
Picking the right person takes research, and lots of questions and legwork, but consider the potential payoffs of making the best choice: Your children attend the college of their choice and graduate debt-free, and you get to retire at age 65 or younger with enough money to finally see Paris in the spring.
Make the wrong choice and your kids are stuck at the LowCost U, yet still end up with a pile of loans to repay, while you keep working till your heart gives out.
To help you find the right adviser, Hawaii Business spoke to a dozen financial experts and created this roadmap. Follow it and we just might see you in Paris.
Before You Talk to Advisers
Set goals: Figure out what you need and want. If you’re in your 20s or 30s, ask yourself: Do I want to buy a home, send my children to private schools, save for college, save for retirement? If you are older, decide when you want to retire and where. An adviser will need to know your goals, debts, income, assets and likely salary increases.
Educate yourself: Learn about your investing options so you’ll be ready to ask educated questions of potential advisers. Here are some learning approaches:
• Start with reputable and independent online sites like Morningstar, Lipper and 401khelpcenter.com. They offer tutorials on investments, research and other tools.
• Attend a course or workshop; The University of Hawaii offers online courses at www.hawaii.edu/dl/courses/ such as “Take Charge of Your Money” and “Personal Finance.”
• Read a tried and true guidebook, like updated versions of “The Intelligent Investor,” “A Random Walk Down Wall Street,” “Common Stocks and Uncommon Profits” or “Bogle on Mutual Funds.” Avoid trendy titles that promise quick riches or “secrets” to investing success.
Collect names: Ask your parents, other relatives and trusted friends about the pros and cons of their advisers. As you collect names, study the initials that follow those names and find out what they mean (See “Advising’s Alphabet Soup,” page 41).
Check ’em out: The Financial Industry Regulatory Authority is the largest independent securities regulator. Go to finra.org and click on BrokerCheck to learn about an adviser’s training and education, employment data and whether or not they’ve been involved in customer disputes or disciplinary action. Advisers must file clearances and are obligated to update this site. (A complaint may be filed here, but may be unfounded. Check on the filing’s results.)
What to bring: For the first interview, consider bringing your tax returns, W-2s from the previous year, salary slips – a snapshot of your assets and liabilities. This information helps you get the right person if you’re seeking a referral from the head of an office, like Merrill Lynch and Co., says Diane Kimura, vice president and wealth management adviser with Merrill Lynch in Honolulu.
If you’re not certain you will be picking this person, you may not be ready to divulge your personal finances at a first meeting. In that case, bring more general information but not the forms.
How to Interview Potential Advisers
Prepare in advance: Generic financial advisers with little training can hang out a shingle, so ask each one about their education, background and work experience.
As you make appointments to meet advisers, ask if the first interview is free (it should be).
Your questions: Ask a lot of questions, but also expect the adviser to ask you lots of questions; if they don’t, they may be more interested in your money than in helping you, so cross them off your list. Ask about:
• clients you can speak with as references;
• their experience working with people like you;
• their fiduciary responsibility and loyalty to you;
• the value of the assets they manage.
You want someone with over five years of experience managing a lot of assets; credentials showing rigorous training; a solid background in finance; and a high level of fiduciary responsibility, meaning they are putting you first, not some funds that pay them high commissions.
Fees and commissions: Make sure to cover this important topic in the first meeting. Advisers are compensated in several ways: a flat fee paid by you; a small percentage of the assets they are investing for you, which could also be the fee; commissions, which are essentially kickbacks from the funds in which they invest your money. Get full disclosure from the adviser about how he or she is paid. Generally, as a portfolio increases beyond $1 million, the fees become proportionally smaller, generally less than 1 percent of the total.
“If they’re (flat or percentage) fee only, you’re on the best track,” says James Haskins, an independent certified financial planner who has been in the business for more than 40 years and whose fee is a minimal percentage of his client’s portfolio. “They only make money if their advice is working for you. In my world I’d rather see someone on a fee-only basis (rather than paying commissions on what they sell you). It puts them on the same basis as your lawyer or accountant. They’re paid for only one thing – to do the job for you. That way they would not be attracted to steering business to the higher-paying products that the firm makes money from, too.”
Photo: David Croxford
Ask where your money is kept: “People need to make sure that their money is held and safely kept at a very large U.S. custodian,” says Cris Borden, a registered investment adviser with his own firm, Kobo Wealth Conservancy, and Hawaii municipal bond portfolio manager at First Hawaiian Bank from 2000 to 2007. “That’s the problem investors had with Madoff. He custodied the money at his own firm and created statements. Those duties have to be separate. It’s a matter of risk control.”
Kobo, for instance, works with several large custodians such as Fidelity Investments. Clients receive a statement of assets and their value from Fidelity, while Kobo produces quarterly performance statements on the account.
How will they communicate: Do you want to get regular e-mails from your adviser? Or are you content to meet once a year or talk on the phone from time to time? Ensure that you’re comfortable with their methods.
Ongoing training: The investing industry is not static, so advisers need to keep learning all the time. “All the firms nowadays have great in-house training. Plus we have continuing training as well,” said Colleen Blacktin, vice president and branch manager of Charles Schwab’s Honolulu office. “For instance, we just finished doing a training on ETFs – Exchange Traded Funds that trade like stocks but have low operating expenses.
“Schwab encourages all our employees to pursue additional educational opportunities, with several of our Hawaii professionals holding masters degrees in finance, accredited asset management specialist (AAMS) designations and certified financial planner (CPF) certifications. … Every few years, we have to be tested. FINRA and the SEC (Securities and Exchange Commission) require that.”
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