1. How Do You Make Money?
Although some financial planners and advisers charge flat or hourly rates, most charge an annual fee based on a client’s assets under management. The fee averages about 1 percent; if your portfolio is $500,000, the adviser gets $5,000. (The percentage can go down as assets increase.) A “fee only” financial planner makes money only off the client. “Fee-based” advisers also may charge a fee to oversee your portfolio and may earn commissions on products they sell, such as variable annuities.
Fee-only advisers will tell you they’re free of conflict because they don’t earn commissions. But advisers who earn commissions say they, too, act to find the best solutions for clients—or they wouldn’t be able to keep clients for long. What’s important is simply that an adviser be transparent about how he or she makes money off you—so ask.
2. Are You a Fiduciary?
A fiduciary must put a client first, revealing any potential conflicts of interest. Even fee-only planners aren’t completely free of bias. “If the client says, ‘Should I take half a million out of my portfolio to pay off my mortgage?,’ then I make less money” because there are fewer assets under management, says Jon Yankee, a fee-only planner at FJY Financial in Reston. “But it’s my duty to explain that to the client.”
Attorneys, registered investment advisers (RIAs), and members of the National Association of Personal Financial Advisors (NAPFA) are all fiduciaries. Many CPAs and financial planners are as well, though stockbrokers and insurance agents typically aren’t.
3. What Do I Get for My Money?
Will an adviser check in with you periodically? Will he or she be available when you have a question? And what level of advice are you getting? Some advisers provide big-picture financial planning—going beyond cash and investments to insurance, trusts, and wills. Others don’t. Some advisers recommend specific investments, but not all do.
4. How Many Clients Do You Have?
The answer is another indication of how much personal attention you can expect. While this may not be a consideration for, say, an accountant who does your taxes once a year, it’s worth knowing about someone who would handle your money.
Barry Glassman, a fee-only financial planner at Glassman Wealth Services in Vienna, says that some advisers have as few as 20 clients, while others have several hundred. “An adviser can invest for hundreds, but planning requires much more attention.” In that case, he says, “fewer than 75 is likely the right answer. After all, how many people can you know really well?”
To further ensure that an adviser gets to know you and your needs, says Morgan Stanley adviser Marvin McIntyre, look for one who asks the right questions in your initial meeting: “So many questions drive me crazy, like ‘What’s your risk profile?’ People don’t understand that. Instead, an adviser should ask: ‘What’s important to you? What keeps you up at night?’”
Looking for a financial planner, investment manager, or accountant? Head to our financial advisers guide to find the best financial planners and advisers in the DC area.
This article appears in our April 2016 issue of Washingtonian.