I wrote an article in 2004 titled “Eight Questions to Ask Your Financial Advisor.” Five years later, the landscape has changed in many ways, while the fundamentals, being fundamental, I do not have. First, the changes:
- Thirteenth bear market, by my count, since the Great Depression
- The housing bubble accelerates, stalls and then bursts
- Mortgage derivatives fail, resulting in a banking crisis that continues at the time of this writing.
- Bernie Madoff uncovered for the largest ‘Ponzi scheme’ and financial fraud case in history, setting up a domino effect exposing a dozen (or so) other major fraud cases nationally and internationally.
- The financial services industry is coming under increased scrutiny, and those within the industry are working faster than ever to define their roles and responsibilities.
This is the last point I want to focus on in this newly revised 2009 ‘edition’ of the article of the same name. And in doing so, I will also highlight the fundamentals that remain at the heart of the process of choosing an advisor.
So how has the financial services industry changed and why? Don’t get bogged down in precise distribution, but I would say that a third of the change has been forced, as a result of increased rules, regulations and internal controls; another third in response to public demand for greater transparency and clearer processes; and the final third as a result of the industry’s natural progression towards refining their roles.
I’m not going to talk about the rules, you can easily find them. The public response also seems clear: most people just want to know “how it works”, “what it is supposed to do” and “how much it costs”. As for the natural progression of the industry, allow me three points of clarification:
(1) There has been a clear transition from “commission-based” services to various forms of “fee-based” services, or “advisory services” rather than “brokerage services.” By charging for ongoing service rather than for a particular transaction, the belief is that the adviser’s interests are more aligned over time with the client’s interests.
(2) There has been a change in care, from financial instruments to financier planningfocusing more often on the client’s medium- and long-term goals and less often on company- or product-specific strategies and systems.
(3) Finally, there has been a trend toward specialization over generalization. In this regard, the industry has recognized that the complexities of a family or business are just as real as the complexities of the marketplace, so multiple specialists will be needed, along the way, to help demonstrate a full and comprehensive level of service. .
It should be noted that in each of the three areas there is a lot of variety and movement; some of them due to positive flexibility and others due to disagreements about which methodologies work best. Among the fees, there are plan fees, retention fees, and asset fees. Planning includes life planning, retirement planning, income planning, and legacy planning. And among the specializations, there are internal teams, informal to formal networks, and freelancers. The rest of this article does not seek to answer these details, but rather to provide you with some fundamental questions that will hopefully point you in the right direction towards a solution that works for you.
Without further ado, here are the NEW “Eight Questions to Ask Your Financial Advisor”:
(1) Do you use a comprehensive approach to financial planning by directing our efforts around a written plan based on my specific goals?
(2) How will you communicate, both initially and over time, what I’m paying you, how I’m paying you, and what I’m getting for it?
(3) Do you have any conflicts, limitations or encumbrances that I should be aware of, and will you let me know in the future if any arise?
(4) What is your core philosophy regarding your work? What results would lead YOU to conclude that our joint work is successful?
(5) Do you act as a specialist or as a generalist? In either case, who will coordinate the specialists that will be needed over time to address my changing needs?
(6) How often do you meet with clients? What are those meetings like and what methods of communication do you use between meetings?
(7) Will I be working directly with you, or through qualified assistants, and what procedures should I expect regarding phone calls made and received, mail sent and received, etc.?
(8) What problems, issues or challenges should I NOT worry about, despite what I may hear through the media; what problems, issues or challenges SHOULD concern me, despite not hearing much about it; and how will you help me do that?
Clear communication should be a visible theme within these questions, and in this regard, some things never change. Therefore, I conclude with precisely the same final statement from 2004:
The best advice is to never be afraid to ask!
© 2009 Emerald RPG, All Rights Reserved.
Contact the author by phone or email if you would like a copy of his “12 Fundamentals of Retirement Planning.”
