SEC Q&A: What questions should I ask when choosing an investment adviser or financial planner?

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Questions to Ask Your Financial Advisor

The Securities and Exchange Commission (SEC) has on their website a page entitled, “Investment Advisers: What You Need to Know Before Choosing One” which begins:

The Securities and Exchange Commission (SEC) receives many questions about investment advisers—what they are and how to go about choosing one. This document answers some of the typical questions we receive from investors about investment advisers.

Here is one of the questions and answer from that site:

Q: What questions should I ask when choosing an investment adviser or financial planner?

A: Here are some of the questions you should always ask when hiring any financial professional:

  • What experience do you have, especially with people in my circumstances?
  • Where did you go to school? What is your recent employment history?
  • What licenses do you hold? Are you registered with the SEC, a state, or the Financial Industry Regulatory Authority (FINRA )?
  • What products and services do you offer?
  • Can you only recommend a limited number of products or services to me? If so, why?
  • How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
  • Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
  • For registered investment advisers, will you send me a copy of both parts of your Form ADV?

Be sure to meet potential advisers “face to face” to make sure you get along. And remember: there are many types of individuals who can help you develop a personal financial plan and manage your hard–earned money. The most important thing is that you know your financial goals, have a plan in place, and check out the professional you chose with your securities regulator.

These are good questions, but they are not the ten questions we believe you should ask any prospective financial advisor in order to safeguard your hard-earned money.

Nevertheless, here are our answers and comments to the SEC’s eight suggested questions:

1. What experience do you have, especially with people in my circumstances?

Because of family relationships, we have clients of all ages and stages of life. Many clients seek our services around age 60 as they are approaching retirement and a gap in their income. Other clients who benefit the most from our wealth management services are small business owners, university professors, or other super-savers who are busy productively earning and saving and want to delegate oversight to a team of professionals.

Most of our clients are the millionaire-next-door who has saved and invested diligently and now has sufficient wealth to warrant professional management. For those of you who think $1.5 million is a lot of money, at age 65 the safe withdrawal rate on that portfolio is $65,400 a year, hardly a lavish lifestyle.

We try to make sure there is a good fit between our firm and prospective clients. We have a written client profile to help make those expectations clear.

2. Where did you go to school? What is your recent employment history?

We believe that an ensemble approach to serving our clients is better than a silo approach. In a silo approach an advisor has his book of clients whom he is responsible for serving. This is a common approach among commission-based (often confusingly called “fee-based“) agents and brokers because that advisor receives the fees and commissions directly from his book of business.

In an ensemble approach every member of the firm’s team may work for any client. Although there is usually a single point of contact (for the sake of better serving the client) the advisor will work with the member of the team with the best expertise to address the specific client concern. We believe this approach uses every team member’s expertise to its fullest.

Comprehensive wealth management is a bottomless endeavor. We can always use someone to specialize another one of the areas of financial expertise. Even the youngest, greenest, newest hire in the firm could be given one of the specialties to master and handle for our clients and within six months be doing a better job than anyone else in the firm. This process of specialization is how we handle the plethora of financial services we offer.

You can view the education and background of our entire team here.

As for me, I earned a Master’s degree in Computer Science from the University of Oregon and a B.A. in Philosophy and Electrical Engineering from Stanford University. I taught computer science and then worked in Medical Computing before moving to the world of finance. My parents were fee-only financial planners and you can read about the blend of my father’s investment artistry with my technological analysis an article entitled “Family Affair“.

3. What licenses do you hold? Are you registered with the SEC, a state, or the Financial Industry Regulatory Authority (FINRA)?

We are not under the oversight of the Financial Industry Regulatory Authority (FINRA). That is for broker-dealers and dually registered investments advisors. You can read our article entitled “FINRA Supports Regulation to Quell Competition” to learn why this should reassure you. We are registered directly with the SEC.

You can view the major licenses that staff holds on the page that lists our team members, which includes a plethora of degrees and licenses in the financial services industry. Some of the training is quite helpful just for the training’s sake. We purposefully don’t list them all. As an example, I also have the Accredited Asset Management Specialist (AAMS) designation which I choose not to include on the webpage or business cards.

4. What products and services do you offer?

We offer comprehensive wealth management. It is impossible to actually provide comprehensive wealth management because there is no bottom or end to it. Many firms say they offer financial planning when what they really mean is that they will do a retirement projection. We really do strive to determine the services and benefits that might help our clients best manage their wealth.

We do not, however, have any products to offer. As fee-only financial planners our services are free from the conflicts of interest which come from selling specific products.

5. Can you only recommend a limited number of products or services to me? If so, why?

No, we can recommend any set of products or services that we believe would be in your best interests. In fact, we are (by law) not allowed to recommend anything other than what we believe would be in your best interests. This is what it means to be a fiduciary, and you deserve a fiduciary standard of care.

6. How are you paid for your services? What is your usual hourly rate, flat fee, or commission?

As fee-only financial planners, we are only compensated by our clients, and never by commissions.

For managed accounts, we charge as a percentage of assets under our management. You can view our fee schedule here.

We purposefully do not have any additional charges for our comprehensive wealth management services even though I believe that they deliver the greater portion of benefit to our clients. In the industry people think we are crazy to do this, but I don’t want to be continually selling our clients additional services when I would rather give them no disincentive to take advantage of them.

Clients, especially our typical frugal super-saving clients, will not seek comprehensive wealth management services if there is a fee for each service. Yes, this can be penny-wise and pound foolish. Many times the service is worth multiples of what we might charge for it. But the charge is still an impediment to clients who we want to encourage to take advantage of all the services we offer. So we have chosen not to charge our managed account clients anything other than their management fee.

Occasionally we do hourly work for a new client who has never engaged our services before or we charge them a flat fee. But this type of work is much more difficult than doing the same equivalent work for our managed clients. With our managed clients we have completed writing an Investment Policy Statement and collected so much electronic information on their financial situation that we have all the answers and latest data in a machine readable format so we can quickly and easily utilize our other analysis tools.

As a result, we prefer not to do piecemeal work for non-managed account clients as it is more work for less client benefit.

7. Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?

No. You can always check the latest status on your advisor on the SEC’s website (see the answer to the next question).

8. For registered investment advisers, will you send me a copy of both parts of your Form ADV?

Form ADV Part 1 is available online at the SEC website. You can use that site to determine if your advisor is truly fee-only, as well as if they have any regulatory complaints.

Form ADV Part 2 is also available on the SEC site. We put our ADV Part 2 brochure online so that is it easy for prospective clients to view and use as a comparison against other firm’s answers to the same questions.

I wrote an article on the new ADV Part 2 requirement back in 2011 explaining how you should read and review the ADV form filings.

A few month later I also wrote the “Ten Questions To Ask A Financial Advisor” which we think the SEC should have asked.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)