Looking Behind the Curtain: Questions to Ask Before Hiring a Financial Advisor

The financial advisory business is a confusing marketplace for the individual investor. Many firms seem to offer similar services, wear similar clothes and have similar job titles. Underneath this façade, the differences between one company and another could be stark, based on answers to the below questions.

If you are currently interviewing financial advisors to entrust your financial assets to, I highly recommend using the below questions as a guide to your interview. If the representative you are interacting with seems uncomfortable or is unable to answer your questions clearly and concisely. This a major red flag and you should reconsider working with them or their firm.

Our intent with putting this information out to public is to create transparency in the industry and ultimately protect people who have been good savers over time. Preventing investors from engaging with someone who is masquerading as a financial professional.

Does a Suit Qualify Someone To Sell Financial Services? Why licensure matters.

What is a FINRA registered Investment Advisor Representative (IAR) and why is it important?

Let’s start with who FINRA is. FINRA is an acronym for Financial Industry Regulatory Authority and just like their name says, they are the federal regulator for individuals who hold themselves out to the public as investment professionals.

An advisor who is registered as an IAR with FINRA will at a minimum have passed both the Series 7 and Series 66 examinations. They will also need to register in each state that they conduct business. Generally, the combination of the Series 7 and Series 66 is the highest standard of licensure for an IAR as certain states may require less stringent licensure requirements.

Does it matter if my advisor is an IAR or not?

You could be receiving recommendations from an individual who is not legally equipped to provide you the advice you think you are receiving. You may think you are meeting with a "Financial Advisor," when in fact you are meeting with a "Retirement Coach," which is a job title that does not require the individual to hold any licensure or have any oversight from a regulatory body.

Imagine meeting at a what appears to be a law firm with an individual who dresses well and is well spoken, but the individual has only passed 2 of the 3 years required to graduate from law school. They are not an attorney and are not registered with the state bar association. You think you are receiving legal advice from attorney, but you are not.

Another example would be visiting a medical clinic and meeting with someone who is wearing a lab coat and looks like a doctor but is not certified to practice medicine from the governing medical board. It isn’t that their advice is inaccurate, but as the patient it is not clear that the person providing medical advice is not technically a doctor.

How to identify an advisor who is/is not an IAR?

The best way is to look on FINRA's own website https://brokercheck.finra.org/ and see if the individual is listed as a registered representative.

What licenses do you currently hold and what do they mean?

I have passed both the Series 66 and 7 exams, and my record can be found on FINRA’s Brokercheck website (https://brokercheck.finra.org/).

I also hold my life and health insurance licensure with the state of Minnesota, which allows me to broker the sale of life insurance, disability insurance and annuities for clients.

Finally, I became a CERTIFIED FINANCIAL PLANNER™ practitioner seven years ago. This is a certification that helps me serve clients in a more comprehensive manner across multiple disciplines of wealth management. CFP Board owns the marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S.

License Summary

There are numerous other FINRA sanctioned exams, but in the context of providing financial advice the Series 7 and 66 are the two preeminent licenses required to provide full financial advice across numerous financial product offerings.

Fiduciary vs Suitability: What Do These Buzzwords Mean to Me?

What is the difference between the suitability standard and the fiduciary standard?

The suitability standard requires a recommendation be appropriate at the exact moment the recommendation is given. The fiduciary standard requires recommendations be appropriate for the duration of the professional engagement. Additionally, fiduciary advice is implied to be free from direct conflicts of interest (i.e., compensation linked to a certain recommendation over another).

If an advisor claims to be a fiduciary, are they a fiduciary 100% of the time I work with them?

An example where the fiduciary grey area may come into effect is one of placing a long-term care insurance policy in force for a client. While the analysis and price shopping may indeed fulfill the fiduciary standard, the act of selling the policy to a client and collecting the commission on the sale would violate the fiduciary standard.

It is common to work with an advisor in which the asset management recommendations are made while operating as a fiduciary, but other areas involving insurance would fall under the purview of the suitability standard.

How are you paid when we work together?

Fee-based advisory services

This form of compensation is based on a percentage of the assets under management, in our case is paid on a quarterly basis. This is our preferred form of relationship as it removes most, if not all, direct conflicts of interest from the advisory/client relationship.

Commission

Common examples of this would include the placement of insurance solutions for clients, buying/selling of individual securities, sale of a certificate of deposit, and buying/selling precious metals. Generally, the commission is paid to the advisor by the company whose product is being sold, thus appearing to be "free" to the client.

Fee only

This engagement is the narrowest option of the fiduciary standard as it looks at a set of recommendations for a single moment in time and is paid in the form of a hard dollar amount by the client. Implementation of the plan is generally left to the client or additional compensation is paid to the advisor carry out the implementation of the recommendation(s).

Conflicts of Interest: Advisor Interest vs Client Interest

What is the difference between an independent advisor and captive advisors at other firms (bank owned, insurance owned, etc.)?

In three words: Conflict of interest.

When an advisor is employed by a company that offers products and services which are adjacent to asset management, there generally are clear and distinct conflicts of interest.

An example would be asking a butcher (captive advisor) versus a team consisting of a dietitian and a private chef (independent advisor team) what you should have for dinner?

A butcher would show you the cuts of steak, pork chops, etc. that were the freshest and best cuts of the day and recommend one or several of the options they have available for purchase. While all of these options are no doubt delicious, the butcher is restricted to recommendations that they are able to sell from their store.

A dietitian would ask you if you were trying to lose fat, gain muscle, train for a certain event, etc. Based on your answer, the dietitian would recommend a certain mix of foods for that meal and different combinations of foods based on different answers. The ingredients of the meal would be shopped for across multiple vendors in search of the highest quality ingredients at the best price. The chef would then prepare the meal according to the meal plan that was built to achieve your goal.

Compliance – Who is making sure my Advisor is following the rules?

Does your firm have a compliance department to ensure that your activities comply with state and federal securities laws and regulations?

Yes, our compliance oversight meets every legal and regulatory requirement on a federal and state level.

As an independent advisor, do you have any role in the employment and/or compensation of the compliance department?

No, we do not have any direct involvement in the employment or compensation of compliance personnel. They are hired and compensated by the company we offer our securities and advisory services through, LPL Financial. The compliance team also makes decisions that are impartial to our firm and does not consider revenue derived from a client relationship in its oversight.