Many people are intimidated when they meet with a financial advisor for the first time because they're embarrassed about their lack of financial knowledge.
This is ironic because a lack of knowledge is the main reason they're seeking an advisor. Instead of feeling intimidated, you should adopt the same critical posture as when interviewing a contractor or a mechanic, even though you're not an expert in those fields either.
You're the consumer and you should act like one by asking probing questions to see whether an advisor is truly interested in and capable of working in your best interests. When shopping around for an advisor, put candidates to the test by asking five key questions:
1. How are you paid, and what are all the costs that would be involved in working with you? The answer to the first part of this question will shed light on the advisor's potential for conflicts of interest. Consumers need advisors who succeed by making money for their clients, not primarily for themselves. This is the rationale for the fee-for-service compensation arrangement that most advisors use.
If advisors recommend that you buy certain financial products that they then offer to provide, you need to determine whether the recommendations stem from an objective assessment of your needs or from a possible conflict of interest rooted in the sales commissions they'll receive. Not all advisors who sell products do so with a conflict of interest; their clients may actually need the recommended products for their portfolios.
Yet, if an advisor wants to sell you products, you should evaluate his or her motivation by asking additional questions, beginning with, "What are you getting out of this?"
Beyond the advisor's own compensation, find out all the other costs that might be involved from other parties — fees and transaction costs charged by mutual fund companies, brokerages and any other entity that may be involved. Costs are one of the few investing factors you can control by saying no if they're too high. To boost your net investment returns, advisors should be just as interested in helping you contain these costs. Ask advisors to write down all direct and indirect costs that would be involved in a relationship, from all entities involved. This list should include the advisor's own fees and commissions (if any).
Also ask for disclosure of any compensation received in any form – cash, services, training or office equipment – in return for arranging your investments with these companies. While you're at it, find out whether the advisor has an outside custodian for assets or handles this internally. Outside custodians can introduce checks and balances. If Bernie Madoff had had an outside custodian, his massive, chronic Ponzi scheme might have been discovered sooner.
If an advisor won't supply all of this information in writing, move on.
2. What are your qualifications?
Look for credentials that reflect knowledge of the field and, more importantly, that indicate continuous learning. These include any of various designations or certifications, such as certified financial planner.