Commentary by Adam Cmejla
In my previous column, I provided a list of some questions that would be important to understand and know if you’re contemplating enlisting the services of a qualified financial professional.
I’ll take this week to round out the list of important questions that you might want to consider when evaluating a potential advisor.
How are you paid?
This is usually the 800-pound elephant in clients’ minds when they think about working with an advisor. Make sure you clearly understand how and how often your advisor is compensated.
Is there an initial planning fee or is there “no charge for financial planning?” My sales radar always goes up when I hear the words “free” or “no charge.”
What that typically means is that the advisor must sell you something in order to get paid. Whether it’s insurance or investment-related, if they’re not charging a fee for their service, the pressure is on even more to sell you a product in order for revenue to be generated for that advisor.
That doesn’t make this business model wrong — it just means you need to be aware that there is no such thing as free and that, depending on their business model, certain products may be positioned to you that aren’t necessarily in your best interest but are done so anyways to generate fees and commissions for the advisor.
What do I get for your services?
If you’re working with a true financial planner who is providing comprehensive financial planning services, ask to see a copy of a sample financial plan that fits a similar client profile to your circumstances.
Having a working financial plan allows both the advisor and client to clearly see the long-term effects of the solutions that are proposed by the advisor rather than just looking at a single investment proposal or illustration.
Are you a fiduciary?
A fiduciary is someone who has a legal obligation to place their clients’ best interest ahead of their own. They must also fully disclose what their fees are, how they’re compensated and whether they have any conflicts of interest.
Here’s how you can tell: if you are paying them a flat fee or they are assessing management fees on investments, they are most likely acting as an “investment advisor” or “investment advisor representative,”, thus qualifying them as a fiduciary.
If they are taking commissions on the sales of securities/products, they are acting as a registered representative of a broker/dealer and thus do not have a fiduciary obligation to you but rather a suitability obligation.
This is a slight but very distinct difference, and here’s why: even if there was a lower cost investment solution for you, they could sell you the higher commissioned product as long as they can demonstrate that the investment was “suitable” for you.
A fiduciary would have the legal obligation to offer you the lower cost alternative.
For instance, the insurance industry does not operate as a fiduciary.
The complicated part of this business is that advisors can “wear both hats.” That is to say we can be “dual registered” advisors and be both registered reps and investment advisor representatives. In full disclosure, I operate a dually-registered firm offering both commissioned and fee-based solutions for our clients.
The important quality to have in any advisory relationship is transparency and the best way to obtain that is to ask questions. The more questions you ask, the better off you’re going to be.
There is no such thing as asking too many questions in the beginning of a relationship, and any advisor that tells you differently is quite possibly hiding an answer or information that they don’t want to disclose. In that situation, your best bet is to sever ties and look elsewhere.
Adam Cmejla, CMFC® is President of Integrated Planning & Wealth Management, a comprehensive financial services firm located in Carmel providing comprehensive retirement planning strategies to individuals near or in retirement. He can be reached at 853-6777 or HYPERLINK “mailto:email@example.com”firstname.lastname@example.org.