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What to Ask When Looking for a Financial Professional

Jason Stipp
Christine Benz

Jason Stipp: I'm Jason Stipp for Morningstar.

On Morningstar.com, we've long helped investors take the reins of their own portfolios, but we also recognize that for many investors and many situations, an advisor can add tremendous value.

So, if you are looking for an advisor, what kinds of questions might you want to ask? Here to offer some insights is Morningstar's Christine Benz, our director of personal finance.

Christine, thanks for being here.

Christine Benz: Jason, great to be here.

Stipp: Christine, before you actually go out and seek a financial professional, the first questions that you ask are of yourself. What do you need to figure out about your own financial plan before you can even begin the search for an advisor or a planner?

Benz: First step back and think about what type of financial guidance you need. Do you need soup-to-nuts guidance on everything from budgeting to investment planning to estate planning? If so, you need a generalist to help you quarterback all the different relationships that you might have. Or maybe you need someone who can help you specifically with investment selection and portfolio construction. If that's the case, then you want to focus on finding an investment specialist--someone who really knows that area inside and out and doesn't spend as much time on areas that aren't central to creating an investment plan.

Stipp: So these sorts of folks will probably help you with long-term planning like retirement or maybe saving for education or something like that.

Are there other sorts of needs where you might not go for a traditional planner, and you might need another kind of financial professional?

Benz: Well, I think there absolutely are. So there are certain instances where you might want to focus on someone with a different skill set who knows a little bit about financial planning. So, an example I would give is for someone with a lot of stock option issues, where there can often be knotty tax issues related. For someone like that, I would say an accountant is probably their best first step, an accountant who is well-versed in the issues of stock options. And that person can maybe coach you a little bit on the financial planning aspects on the side. But really, centrally, that's a tax-planning issue, and what you need is someone who knows that area inside and out.

Stipp: Can you walk through at a high level, what are some of the first questions you should be asking as you're vetting a potential planner or advisor?

Benz: One of the key things to know, Jason, is that the various titles that advisors might use are next to meaningless. So "financial advisor" is a standalone title; it really doesn't mean a whole heck of a lot, nor does "financial planner."

What you want to look for are specific areas of expertise, and usually you want to look for specific credentials that will signal whether or not that advisor or planner has obtained additional study and credentialing in those areas. So "certified financial planner" stands out as the gold standard for someone who is offering broad financial planning advice for that whole household set of issues.

A "registered investment advisor" would be a person that you would want to seek if you are looking for someone who can provide you with focused portfolio guidance on investment selection and portfolio construction. So those are a couple of the key credentials that I would look for.

Stipp: Is there anything in the financial planning or financial advisor space like a Better Business Bureau, where you can vet to see if there have been complaints or any infractions or anything like that?

Benz: Yes, there are a couple of different places you can go. The CFP Planner Board of Standards can help you see if someone who is saying they have a CFP has actually earned the right to use that designation.

FINRA also has the tool called BrokerCheck, so if you are working with someone who is a broker, you can check up on whether they have any regulatory infractions that have been lodged against them. And you can also see whether or not those issues were cleared up. So the BrokerCheck will show you, have there been complaints lodged against this person and also what was the result of those complaints--because it may have been something that was sort of unfounded. It's on the broker's records, so you want to see what happened. It's not necessarily a black mark simply because there was some sort of a complaint lodged.

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Stipp: So look past titles; look for specific credentials. You can check up on any infractions and whether those had been resolved, and get an update on that.

Another thing that's important to pay attention to, and can get a little complicated, is how the advisor is compensated. What should you look for there? What are the different types and how can you begin to parse through those?

Benz: It's important to step back and understand that there are really three main ways that a financial advisor could charge you for services.

So the most simple is called the fee-only type of planner, and that's someone who charges usually on one of three bases. So it could be someone who charges on an hourly basis. They may charge you on a per-project basis, so maybe it would be $1,200, and I will craft this investment plan for you. Or they may charge you on a percentage-of-assets basis. So, on an ongoing basis, they are going to take a cut of your investment portfolio. Those are the three main ways that fee-only advisors work.

The important thing to know about this model is that it doesn't involve commissions in any way. So anytime you are working with someone who is fee-only, you can take confidence from the notion that they don't have any vested interest for putting you in any one given type of product or another.

Stipp: Then there is also something called "fee-based," and this is actually different than fee-only. How is it different and what do you need to know about that kind of model?

Benz: It's been a point of major confusion with investors. "Fee-based" means that person charges some fees, often on a percentage-of-assets basis on an ongoing basis--maybe 1% or less per year--and then they might also work with commission products. So this has been an area of confusion. I think some investors say, oh my advisor is fee-based, so there are no conflicts of interest. Well, not so fast. That fee-based advisor may in fact be using commission-based products--not that there's anything inherently wrong with that--but it's something you should defiantly understand about how he or she works.

Stipp: So if that's kind of a hybrid between a fee-only and a commission-based, I assume that a totally commission-based advisor would be the third type?

Benz: Right, and that is the case with a lot of brokers, or certainly folks within the insurance industry, where they are paid strictly on what types of products they put you in.

Stipp: On the fee-only, is there any rule of thumb about a kind of portfolio that would be better for an hourly fee versus a percentage of assets fee? It seems like fee-only could be a good place to start if you are definitely looking for completely objective advice. Is there a rule of thumb about that?

Benz: Well, I would say the smaller, focused problem you have, the better off you'll be with the hourly model. So if you have a specific issue, or maybe you just need a one-time checkup--I have spent some time on this, but does this look like a reasonable plan to you?--if you are looking for that second set of eyes on your plan, the hourly model is definitely going to be more cost-effective, even though those hourly rates can easily be over $200 an hour. It will still be cheaper for you than having someone pay it on a percentage of assets basis.

If you need more ongoing handholding, if you want someone you can call at any time, night or day, and ask questions or say that you're worried about the market, that percentage-of-assets model will make more sense for you, but just know that you probably over the course of your engagement with the advisor, will certainly pay more than if you are working on a more focused, hourly basis.

Stipp: So lastly, Christine, is an issue that could be related to fees ultimately, but it's an important one for investors to consider, and that's to ask whether, is this advisor a fiduciary? And that word carries some very special meaning in this space. What should you think about fiduciary and why is it so important?

Benz: Definitely ask an advisor if he or she is a fiduciary, and the reason that it's so important is that a fiduciary is required to put your interests ahead of his or her own; they are legally required. So, by law, that means that if they recommend a product to you, it must be in their judgment, the best product for you at any given point in time. So a simple example would be, if there is an index fund that is tracking a given index, and it's charging, say, 50 basis points more than another, you better be in the cheaper one, if you are working with a fiduciary.

Someone who is not a fiduciary, say, a broker, is still required to put you in products that are suitable for you--so they are required to ask you some questions about what you are trying to achieve, and the products that person puts you in must be suitable. So there is a standard there, it's just not quite as high as the fiduciary standard. That's been why there has been so much back and forth about this issue, because in most cases, in nearly all cases, it seems that fiduciary standard does help better align the deck in favor of the smaller investor.

Stipp: Christine, it looks like an advisor can add a lot of value for investors, and you can add some value on top of that by asking the right questions to find the right fit. Thanks for joining me.

Benz: Thank you Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.