how to choose a financial adviser and what questions to ask

In short

A friend of mine once hired an adviser because the man had a firm handshake and a nice office. He never asked how the man got paid. If you are thinking about hiring help with your money, you can do better than that, and it takes about an hour. Ask the adviser to state in writing whether he or she acts as a fiduciary, which means putting your interests first. Ask how every dollar of pay reaches the adviser. Look the person up on the free government databases before you sign anything. Get the fee in writing as a dollar figure for a year. Walk away from anyone who rushes you.

The whole of it

What it is

I once watched a neighbor spend a month picking a used truck and ten minutes picking the person who would manage his retirement savings. Most of us do that, and it is no shame. Choosing an adviser feels like a job for experts, so we hand it to a feeling. But a financial adviser is simply a person you pay to help with money decisions, and the word covers a wide field. Some advisers manage investments for a yearly fee. Some sell insurance or funds and earn a commission on each sale. Some give a plan for a flat price and never touch your money. The title on the business card tells you little about which kind you are meeting.

Two legal terms matter here. A fiduciary is a person who must put your interests ahead of their own when giving advice. A registered investment adviser, often shortened to RIA, is a firm or person registered with the SEC or with a state, and these advisers owe a fiduciary duty to clients. A broker is a salesperson for investments, and brokers follow a different standard, which the SEC calls Regulation Best Interest. The two standards are not the same, and the SEC explains the difference on its investor website, Investor.gov. Reading that page first is time well spent.

How it works

You have probably noticed that nobody offers to work for free. So the first question is always who pays the adviser and how. There are three common ways. Fee only advisers are paid by you and by no one else. Commission advisers are paid by the company whose product they sell. Fee based advisers, a confusing name, may do both. Each can be honest. Each has a built in pull, though. The commission adviser earns more when you buy certain products. The percent of assets adviser earns more as your account grows, and gets paid even in a year when the account falls.

The money side is simple arithmetic, and you can check it yourself. Suppose an adviser charges 1 percent of the money managed. On a $200,000 account, that is $200,000 times 0.01, which is $2,000 a year. Over ten years, that fee alone could cost $20,000, and that is before any growth or loss is counted. Some people find the price fair for the help. Others do not. Either answer is yours to give, but you should know the figure before you say yes.

The vetting step is free. Two public tools exist for it. The SEC runs the Investment Adviser Public Disclosure site, and FINRA runs BrokerCheck. Both show a person's licenses, work history, and any complaints or discipline on record. Every adviser registered with the SEC must also file a document called Form ADV, and Part 2 of it is written in plain English. It lists fees, conflicts of interest, and disciplinary events.

The numbers, and where to find yours

Folks often ask me what is a fair price. I cannot hand you one, because it depends on your situation and on the services offered. What I can do is tell you where your numbers live. Your adviser's fee schedule is in Form ADV Part 2, which the adviser must give you or point you to. Your own total cost is that schedule applied to your account balance, as in the $2,000 example above.

Some limits and thresholds are set by law and change by year. These include the amount you can put into retirement accounts and the size of firms that register with the SEC rather than a state. The yearly contribution limit for a 401(k) is the current figure, which the official source publishes each year, and the limit for an IRA is the current figure, which the official source publishes each year. The IRS publishes both on its website. Ask the adviser which of these limits applies to you, and then check the number on the IRS page yourself. That small habit tells you a lot about whether the adviser is careful.

A worked example

Let me tell you about a woman named Denise. She is 45, earns $90,000 a year, and has $150,000 saved across a 401(k) and an old IRA. A salesman at a bank offered her a managed portfolio for a fee of 1.25 percent. She asked him what that came to in dollars. He said, a bit slowly, that it was about $1,875 a year. She checked his math herself. $150,000 times 0.0125 is $1,875. Good. So far, so honest.

Then she asked the second question. Was he a fiduciary? He said his firm was "committed to client service." That was no answer. She asked again, and he admitted he was a broker, not an RIA. Denise did not storm out. She thanked him, which is how you keep a door open, and went home to look him up on BrokerCheck.

Next she met a fee only adviser who charged a flat $2,400 for a written plan. Denise compared. Over five years, the percent fee would cost $1,875 times 5, or $9,375, and that is if her balance never grew. The flat plan cost $2,400 once. The comparison was not quite fair, since the first offered ongoing management and the second did not. So Denise asked what she actually wanted. She wanted a plan and a second opinion, not a manager. The flat fee fit. Your answer may differ, and that is fine. The point is that Denise knew her numbers before she signed.

Where it goes wrong

I have made my share of mistakes with money, so I speak as a fellow traveler here. The first trap is the warm personality. A kind adviser is a pleasure to sit with, and kindness is no proof of skill. Check the record anyway. The second trap is the word "adviser" itself. Many titles sound official and mean little, and the person must disclose how they are paid if you ask directly. Ask directly.

The third trap is hurry. An adviser who says the offer ends Friday is selling, not advising. Good advice survives a weekend. The fourth is the product with a surcharge buried inside it. Some insurance and annuity products carry a surrender charge, which is a fee the buyer pays for pulling money out early. The seller must disclose it, and the buyer has to ask where to find it in the contract. The fifth is handing over control without limits. A custodian, which is the bank or brokerage that actually holds your money, should be separate from the adviser. Ask who the custodian is. Your statements should come from that firm, not from the adviser alone.

Finally, remember that no adviser can promise a return. Anyone who does is breaking a basic rule of the business. Trust gets built slowly, and a promise like that is a reason to leave.

Questions to answer before you leave this page

Do you know what you want help with, whether that is a plan, an investment manager, or a second opinion? Have you read the SEC's explanation of fiduciary duty on Investor.gov so you can tell a straight answer from a slippery one? Will the adviser state in writing that he or she acts as a fiduciary at all times for you? Do you know exactly how this person gets paid, including commissions, flat fees, and a percent of your account? Have you turned that percent into a yearly dollar figure and a ten year figure, as Denise did? Have you looked the person up on the SEC's Investment Adviser Public Disclosure site and on BrokerCheck? Have you read Part 2 of Form ADV and noted any conflicts of interest or disciplinary events? Do you know who holds your money, and will your statements come straight from that firm? Can you wait a week before deciding, and does the adviser respect that? And when you picture sitting down with this person in five years, do you feel you could ask a hard question and get an honest answer?