The following is an excerpt from the book The Five Years Before You Retire by Emily Guy Birken.
There are many different types of financial planners and advisers—and only some of the titles that various financial advisers can use are regulated. Meeting someone who calls himself a financial planner could mean you’ve shaken hands with an insurance agent, a stockbroker, an investment adviser, or a Certified Financial Planner (CFP).
If that’s not confusing enough, different types of advisers are paid in different ways, which can seriously affect your bottom line. Even those with a good understanding of the financial can be excused for feeling a little overwhelmed.
With all of this in mind, finding a trustworthy financial adviser can seem like an impossible task. But going it alone is not a good strategy for handling your retirement. Partnering with a financial adviser who is well versed in all of the rules, regulations, options, and opportunities facing you makes much more sense than trying to educate yourself from the ground up.
So how do you determine exactly whom to trust with your financial decisions? While the process of interviewing potential advisers might take some time and effort on your part, it is much less overwhelming than either finding you’ve placed your trust in someone you shouldn’t have or trying to make all of your complex retirement decisions without any help.
The following checklist of interview questions can help you find the adviser who will be your ally in creating a retirement you’ll love:
1. What is your background and experience?
In general, you will want to see that your prospective adviser already has several years of experience under her belt and has worked through various market ups and downs. Finding out just what your adviser was doing over the past several years can help you to know if her strategies and risk tolerances fit well with yours.
2. Please explain what licenses and certifications you hold.
This question will help you to understand exactly what type of adviser you are meeting with. As I mentioned above, it’s entirely possible that your adviser has multiple licenses and certifications, which means that they may be governed by several regulatory agencies.
3. How are you compensated?
If you only ask one question during your interview of potential advisers, make it this one. Understanding precisely how any one adviser will be paid will allow you to compare her with others that you interview. In addition, asking this question can really head off potential scammers, since someone who sees you as a mark will not want you to know how she is paid.
4. What is your investment philosophy? What strategies do you use?
These are good questions to ask even if you are not sure of your own investment philosophy and strategies. Your potential adviser should be able to explain what he considers to be important in investing, and based upon his answer, you might find yourself nodding your head or thinking it’s time to move on to another candidate. If any aspect of the adviser’s answer to this question is unclear, ask for clarification. Better to feel foolish asking questions than feel foolish by losing your shirt.
5. Describe your ideal client.
If you’ve found the right adviser, you’ll hear a description that sounds remarkably like you. If you are unlike every other client among your adviser’s customers, it’s unlikely he’ll be able to serve your needs well.
6. What is your area of expertise?
Some advisers focus on investments to help new workers start to build their nest egg, others help their clients with college planning, and still others earn their bread-and-butter on planning for the transition to retirement. While a soon-to-be retiree working with an adviser who is more geared toward helping young professionals start saving for retirement is not as big a mismatch as going to your dentist for a broken arm, there is no need to settle for an adviser who doesn’t specialize in your needs.
7. Can you show me some sample portfolios?
Your adviser should be able to give you some very specific ideas of what to expect from his work. Sample portfolios will help you to understand exactly how your adviser will recommend that you allocate assets and handle volatility.
If your adviser balks at giving you some samples and instead tries to reassure you that he makes X% for his clients each year, thank him for his time and lose his business card. Reassurances may sound good, but you want to see the specific dollars and cents of what he has been doing. Past performance does not guarantee future results (a phrase that I feel all investors should have embroidered on a pillow), but seeing how an adviser has specifically handled various portfolios can help you determine if you will work well together.
8. Please tell me what you see as my financial goals and objectives.
This one is kind of a trick question, since your adviser will already have asked you what you hope to accomplish and should theoretically be able to repeat back what you’ve already said. However, it’s an important question to ask because your adviser can take many cues about your financial goals from other aspects of your conversation, and should be able to help clarify your objectives. Many new clients are not able to state their objectives in clear terms, as their goals can often be somewhat amorphous as they think through their hopes for retirement. Having your prospective adviser tell you what he has heard regarding those goals and objectives can not only tell you how well he was listening, but it can also help you to better understand exactly what it is you want if you have not been able to articulate it yourself.
Putting It All Together
Getting the advice of a professional is an important part of feeling confident about your choices. Since many of us feel intimidated by finances in general, however, it can be very easy to either try to go it alone for fear of looking stupid in front of an adviser, or take the advice of the first competent-sounding person who offers it. Neither of those options will put you on the path to a secure and enjoyable retirement—and neither one is necessary, no matter how timid you may feel about your understanding of finances. Taking the time to understand who your prospective advisers are, what they can do, and how they receive compensation is just as vital as interviewing a potential nanny would be.
Using these interview questions, you should be able to find an adviser who will help you make the most of your finances.