You may feel good about hiring a financial adviser, especially if a friend gives a rave review. But the fact that you’re going to lean on this adviser to manage your life savings may still leave you a little queasy.
Yes, the adviser has impressive credentials. Yes, the firm seems credible. No, there are no disciplinary blemishes on the adviser’s record.
There’s just one more question: Can you trust this person?
While there’s no foolproof way to assess an adviser’s honesty, you can look for clues that inform your judgment. Some indicators are subtle and easy to miss, so vet the adviser with the help of this checklist:
1. Get a clear explanation of fees: Advisers are paid in a variety of ways. Their business model might include one or more of the following: earning a percentage of assets under management; generating commission on product sales and retainer, or flat-fee payments from clients.
They may also work closely with certain financial services companies and pitch those products at the expense of a competing company’s offerings. Or they may favor a particular type of product (such as annuities) for valid reasons but not disclose incentives that affect their advice.
“You want advisers’ fees to be made clear early in the relationship, as opposed to them dancing around fees or answering your questions incorrectly,” said Jamie Hopkins, managing partner of wealth solutions at Carson Group in Omaha, Neb. He suggests asking an adviser, “Do you earn commissions?” and “Do you have proprietary products that you sell?”
2. Look for longtime, knowledgeable staffers: High-integrity advisers tend to hire high-integrity employees. So before you choose an adviser, get to know the support staff. Find out how long employees have worked for the adviser. Dig to determine their background, experience and skills.
“If everyone seems new, you may wonder why are there so many new hires,” Hopkins said. “Longevity [at the firm] and low turnover are good signs. There’s a lot of delegation involved [in financial planning] so you have to trust” the inside team of employees as well as key outsiders such as accountants and attorneys who work closely with that adviser.
3. Seek written confirmation: Honest advisers are meticulous communicators. When they make a commitment or promise, they treat it seriously and expect to be held accountable.
“You want somebody who’s willing to put things in writing,” Hopkins said. “I know great advisers who aren’t the best presenters — maybe they’re introverts who don’t connect with people right away. But they give you real information and document what they tell you in writing.”
As a test, call and ask a technical or detail-oriented question. If the adviser sends a response with a crisp summary of facts, figures and to-do items as covered in the phone conversation, that’s a good sign.
Another positive indicator: an adviser not only tells you “I’m a fiduciary” but also provides a signed “fiduciary oath” form that describes in plain English what fiduciary duty entails.
4. Check the firm’s other advisers: As much as you like an adviser and you’re ready to become a client, consider that person’s work environment. Beware of seemingly trustworthy planners who surround themselves with less trustworthy peers.
“If you like your adviser but you’ve heard bad things about the other four advisers at the firm, that can be a red flag,” said Timi Joy Jorgensen, director of financial education and wellbeing at the American College of Financial Services in King of Prussia, Pa.
Research shows that firms with one or two advisers with spotty disciplinary histories are more likely to hire other advisers with marks on their record. “They tend to flock together with sympathetic managers and coworkers,” Jorgensen said.
5. Straight shooter or blowhard? A dose of humility can instill trust. Advisers with big egos, by contrast, can come across as lecturers or motor-mouths who love the sound of their own voice.
Seek out advisers who respond to your questions directly and readily admit what they don’t know. If they evade the core issue and talk in circles, they might be trying to hide something (such as their lack of knowledge).
Beware of advisers who reply, “Just trust me” instead of trying to educate you, says Sonya Lutter, a financial therapist and director of institutional research and education at Herbers & Co. Academy.
“And watch out if they start by saying ‘honestly’ or ‘to tell you the truth,’” she added. Prefacing their remarks by calling attention to their truthfulness can actually raise doubts about their truthfulness.
Also read: How to be better with money