In the last few decades with the advent of self-directed defined contribution plans (versus defined benefit), it has become more necessary to engage a financial professional to assist in future spending needs.  In the 2013 Risks and Process of Retirement Survey report, it states that “in 1974, defined benefit plans covered 44% of private sector workers, but today the number is less than 20%.”  And like anything that you do that employs the need of a professional there should be some rules for engagement. The best physicians, attorneys and CPAs I’ve found have been through a personal referral or word of of mouth.  However, the commonality that exists among all these groups of professionals is the need to have a rubric or list by which to choose the right guy or gal.  This works the same way for your financial professional.  Being an industry insider, I’ll share with you what you should be looking for and why.   Pretty much regardless of objective, when seeking the advice of a financial professional you are looking to maximize the value you receive for what you pay.  Agreed?  Here goes…

1) Look for credibility.  I rank this first because reputation is key with me.  And this is easily done the same way I found my last physician–by talking to existing clients and/or other professionals.  You probably have 3-5 people in your network that at least know someone that has heard of the person you are talking about.  The point is you are trying to corroborate their credibility.  What are other clients experiencing as far as service and advice?  Are expectations being met or exceeded?  The probability is low that an unsavory character in the financial services industry is getting a ton of glowing endorsements.  There is always the Madoff exception, but it is definitely an exception.

2) Look for competency.  You want someone that knows what they are doing.  And probably equally as important, quickly admits to an area of little or no expertise.  Someone acting like they know something that they don’t isn’t doing you any favors and can be very dangerous.  The level of competency should exceed what you are comfortable searching for alone via Google or Wikipedia also.  This part of the engagement process should be like an interview of sorts.  Primarily, you are looking for the professional to provide you with examples of how they have handled situations involving investment and financial planning before so you can gauge their experience level.  You can also begin to tell where their “niche” lies.  You may be talking to a guy or gal that is great at securities selection and building a portfolio of stocks and bonds, but you actually would just prefer a really simple financial plan to organize your annual spending for some upcoming purchases or life events.  This would be a terrible mis-match that you want to identify upfront.

3) Look for credentials.  To stay with the physician analogy, I don’t typically walk into a doctor’s office looking for where they went to school, but then again I do want to know they went!  So alma mater aside, the fact that they engaged in some type of post-secondary rigor counts for something.  There is a fine line here though, because the more education and designations behind the last name could translate into higher fees (for service).  At the heart of the matter though is that the professional you choose is just as good at being a teacher and explaining the topics for which you need more understanding.  The financial industry has a plethora of designations that it awards and deems worthy of distinction.  Hopefully though, by the time you use the techniques listed above you will be comfortable enough with an individual that this is of lesser importance.
As with any service you pay for, know what you are trying to achieve and if you don’t understand what is being offered–ASK QUESTIONS.  If your questions cannot be answered clearly and concisely, it is usually a red flag.

And here is a bonus…so if you really want to look like a pro when you are interviewing, try asking these questions:

  • Question:  What clearing firm will custody my assets?
  • Reason to ask:  This is what clients of Madoff should have asked because this is where your brokerage statements are produced.  Try and stick with the bigger, more established custodians.  Examples are Charles Schwab, Fidelity, Pershing, TD Ameritrade and those that can afford a SuperBowl commercial!
  • Question: Do you have an internal system to track and monitor my portfolio performance?  If so, what is it?
  • Reason to ask:  Just because you receive a monthly brokerage statement doesn’t necessarily tell you how you performed against a given benchmark.  This report should do that at a minimum.  (You can compare this to the stated objective in your investment policy statement). It also offers a good “check and balance” so you can reconcile this report with the brokerage statement.
  • Question: How would you describe your investment philosophy?
  • Reason to Ask:  There are really two types–active or passive investing.  Both have their pros and cons (read more here), and you want to make sure your manager–active or passive–can achieve your investment goals.  The philosophy won’t necessarily dictate how your accounts are invested (you can still request certain things), but can give you an indication about what your manager is comfortable with executing.
  • Question:  How are you compensated–commissions or fees?
  • Reason to Ask:  This has become more of a “hot topic” as of late as regulation is pending (just google Department of Labor fiduciary proposal) to change the laws around fiduciary requirements.  This will open the discussion on how your guy or gal charges for services provided and what those service should entail.