Basic Questions for Choosing and Working with a Financial Professional

by Claude E. Salomon, Seiden Wayne LLC

The preservation of one’s money and planning for events in the future is on everyone’s mind.  But, not everyone has the time, inclination or interest in managing money for herself or her family.  As professional attorneys, we are used to giving advice to clients or colleagues about what we know.

Managing your assets and planning for your financial future may mean seeking advice from another professional:  a professional financial services provider.

Before getting into specifics, ask yourself the following questions: Do you have a pension plan?  A 401(k) or 403(b) plan?  An estate plan or trust?  Do you have a plan for your children’s college education?  Have you planned for your retirement?  you have a pension plan?  A 401(k) plan?  An estate plan? 

Do you currently have a stock broker, an investment advisor or financial planner?  Do you know the difference among them?

Basic Terms

Stock Broker: A stock broker is someone who is licensed to buy and sell securities, that is stocks, bonds, options and other investments, for the public.  The person is affiliated with a securities broker or broker dealer. A whole web of regulations and rules govern the stock broker’s conduct with the public.   You can have several types of accounts with a broker, e.g. an individual account for yourself, a joint account with a spouse or significant other, a custodial account for minor children.  You can have a separate account for an Individual Retirement Account or Roth IRA.  

You can have a discretionary account or a non-discretionary account.  The non-discretionary account is where you are consulted on each investment decision and determine whether to buy or sell a particular security at a particular time.  Many people are comfortable handling their own investments.  If you are interested in, or knowledgeable about, stocks and bonds, or other types of investments, then open a non-discretionary account and forge ahead.  However, be aware that typically with a non-discretionary account a stock broker is not assumed to be a fiduciary, and his or her duty is generally said to extend only to ensuring a proper execution of the trade.   Also, stock brokers don’t have to recommend a product that is best for an investor – only one which is suitable given your investment goals and risk tolerance.  For example, three mutual funds might be suitable for you, given a certain stated investment goal and risk tolerance.  A broker could legally recommend one that pays a larger commission to him or her, even if its returns are not as good as the others.  

A discretionary account is what it says:  you give the stock broker the discretion to decide to buy or sell in your account without prior consultation as to each trade.  You must give your stock broker this authorization in writing.  You cannot give a broker oral  permission to act without your express agreement, even if you are on vacation or traveling.  There are also strict rules on communications with the public by letter, e-mail and the like.   A broker handling a discretionary account is your fiduciary and is required to act prudently and in your best interest. 

Investment advisor:   Investment advisors are financial professionals who are registered, either with the SEC or the State (depending on how much money they have under management and how many clients they serve). Investment advisors charge a fee for giving advice on what securities to buy and sell, with certain limited exceptions.  Investment advisors are deemed to be fiduciaries, and can only recommend those investments he or she believes are in your best interest – even if the investment advisor  will make more money by recommending you something else.   

 To confuse things even further, a person can be both a stock broker and an investment advisor.  That means that the person can apply different standards at different times in your relationship.    Stock brokers are usually paid by taking a commission on the purchase and sale of securities.  Investment advisors are either paid a flat fee for services or a percentage of assets you let the advisor handle but may also get commissions from sellers of products that they offer or recommend, such as insurance or a mutual fund, or are affiliated with a brokerage firm.  Brokerage firms offer “managed accounts” or “wrap accounts” offering additional advice or management by internal or external investment advisors that are paid a percentage of the value of the assets held in the brokerage account or managed by the advisor.   Some investment advisors will only recommend a plan and categories or specific securities for your plan; others are associated

Financial Planner:  Financial planners are usually also investment advisors, who will prepare a “financial plan” for you based on financial and other information you discuss with the planner.  The plan may not only involve securities – it can include insurance, tax and estate advice (often in conjunction with an accountant and attorney).  Financial planners may be compensated by a flat fee or some other method. 

 Last year the Securities and Exchange Commission issued a rule permitting stock brokers to offer limited investment advice for a fee without having to be registered as investment advisors.  Recently an appellate federal court struck down the rule as being contrary to federal law.  Whether the Commission will seek further review and how this dispute will end is still undetermined.

Professional Credentials
 
Often the financial professional will display or point to other credential awarded as a result of additional study.  These credentials may, but do not necessarily ensure, that the person is more qualified.   Some typical credentials are:

CFA:  Chartered Financial Analyst.  Awarded by the CFA Institute to securities analysts, money managers and investment advisors who have completed a graduate level program of study and passed an exam.  CFA Institute is a global nonprofit professional association that self-regulates its members.  

CFP: Certified Financial Planner.  Awarded by the CFP Board of Standards, a private credentialing group.  Graduates must have taken approved courses, passed an exam and have three years of experience.  The CFP Board has a standard of ethics for its graduates.

ChFC:  Chartered Financial Consultant.  Awarded by the American College.  A graduate must have had three years of experience, must take courses on taxes, insurance, investment and estate planning and pass an exam before receiving this designation.

CPA:  Certified Public Accountant.  Awarded by American Institute of Certified Public Accountants to accountants who pass the CPA exam.  CPAs are licensed by the state in which they practice and are subject to the licensing board.

PFS:  Personal Financial Specialist.  A financial planning designation awarded by American Institute of Certified Public Accountants. 

A financial professional not only may be a stock broker, investment advisor or financial planner.  He or she may also include an insurance broker, attorney or accountant. There may be a team provided or the financial professional will work with your selected accountant, attorney and insurance broker.

Since different kinds of financial professionals can offer overlapping and equivalent services, it can be confusing to decide what to do and how to choose.  Don’t necessarily focus on the title, but on the type of service you want and need, and how that person will best help you reach your goals.

Useful Tips

Understand what level of assistance you want, need and can afford.  Approach the selection process in the same way you would any other professional such as a doctor or dentist, and also consider how you would recommend a private attorney to a friend or family member.  Be prepared to interview several people to find the one with the personality, resources and style you are comfortable with.

Put together your financial information in a folder to review.  This is a big job but having all the information will help you prepare for your financial plan.

Make copies of your most recent bank, investment and credit card statements; your pay stubs; a list of your employment benefits such as pension and 401(k) plans, your mortgage or loan payment information, any wills, trusts, or powers of attorney, any insurance policies, business agreements, real estate titles, cars titles, etc.  Don’t forget to include any retirement account and Social Security information, pension benefit statement, tax returns for the last several years and your tax estimate for the current year.  Prepare a list of your assets and liabilities, an draw up a budget or expense worksheet.  The worksheet lists your monthly or annual estimated expenses is a good way to gauge what you need to live on now and may need in the future.

Make sure that you have information on any special needs and goals.  Do you have elderly or infirm parents, or a child with special needs, who will need additional care or funds in the future? 

Do you have any specific goals for the next 5, 10, 20 years?  How will you pay for your children’s education?  Do you want to sail the seven seas when you reach 55?

How to Interview a Financial Professional

Write down a list of questions to ask before you go.  It is also a good idea to go with your spouse or another relative who will take notes.  Having a written summary of the interview will help you compare this professional to others before making a choice. 

Basic questions to ask:
 
Ask the person you are interviewing about his or her background, qualifications and experience.   What kind of services does the professional offer?   Does this person have a specific approach to financial planning or investments?  Does the person have any special experience or knowledge in the areas that you are interested in – like college savings, retirement planning, starting a new business, children with special needs. 

Will this person be the only one working with you?  If there is a team approach, ask who is on the team and what are the resources involved.  What kind of clients are currently serviced?  If the financial professional manages the assets and investments directly, ask what is the range of monies/assets under management?   You may find that you will be a small fish in a big pond. 

Ask about compensation – how much is the typical fee?  What is the basis for the compensation -- commission, hourly fee, flat fee, percentage of assets.  How will the financial professional disclose any potential conflicts of interest, including any incentives or cash payments when or if you purchase certain financial products?   Be aware that some brokers get paid by mutual fund companies and insurance companies for selling their products.  Some get non-cash bonuses such as expense-paid trips.  Ask to make sure that the advice you get is unbiased and in your best interest.

Do a background check:    Stock brokers are licensed by the NASD, Inc (formerly the National Association of Securities Dealers).  You can look up information about a stockbroker on NASD’s website www.nasd.com, by clicking on “Broker check.”  Each State also maintains records on stockbrokers doing business in that state.  You can request the information on the broker’s employment and disciplinary history from the NASD or the State Bureau of Securities.  Also ask the broker.   Investment advisors are not  regulated by NASD but may be registered with the State securities or investment agency.   Investment advisors with small numbers of clients may be exempt from registration.  Ask the advisor whether s/he is registered with any state agency and whether s/he has been involved in any disciplinary proceedings or litigation.

Additionally most brokerage agreements and some investment advisory agreements require arbitration of customer disputes.  Ask about any arbitration awards against the professional.  And, see a copy of any contract that you may have to sign before you choose to place you money with any specific financial professional.  about any arbitration awards against him or her.
 
Always get the information in writing: If the financial professional is unwilling to give you the information in writing, ask why.  His or her answer may be telling.

Working with the Professional

The homework does not stop when you hire a financial professional.  You are the client, and treat yourself like one.  The relationship requires work on both sides to make it work well.

You should get regular statements, either from a brokerage house or from your advisor.  Ask questions to make sure you know how to read the statement.  If you have a question, ask it as soon as possible. If you do not understand the answer, or are brushed off, go higher, to the supervisor or the compliance officer of the brokerage house or investment advisory firm.  Put serious questions or any complaint in writing.  Make sure you get a response in writing.  If you can’t get a satisfactory answer, you may want to reevaluate your decision to work with this person.

Recommendations and financial plans should be reevaluated regularly to make sure that they still meet your needs and take account of your investment and financial goals, which change over time. Take time for at least an annual “checkup” of your financial plan.   A new child, an inheritance, a job change or health issues may change your life drastically.  Make sure that you keep your financial professional up to date and in writing. 

Most of all, rely on your training as an attorney and your good common sense.  If you don’t like the way you are treated, or cannot get understandable answers to your questions, or think you are getting “boilerplate” recommendations that are not working for you, then it may be time for a change.  Although it means taking additional time, you may need to start the process again or revisit one of the professionals who were initially on your “short list.” 

Conclusion

More and more we must rely on ourselves in making the decisions for a secure and comfortable financial future.  A choice of one or more financial professionals to help you on that way is crucial to achieving your goals.  So be prepared!

And remember, you spend many long hours working for your firm and tending to your family’s needs.  So make sure that you take the time to treat yourself as an important person – because you are.