Interviewing An Advisor: What to Ask

Times Staff Writer

Once you have narrowed down the list of financial advisors who may suit your needs--and who have agreed to consider accepting you as a client--there are many questions you will want to ask each in a one-on-one interview.

Don't feel intimidated asking tough questions--or simple ones--counsels Nancy Smith, head of the federal Securities and Exchange Commission's investor protection unit. "You can never ask a dumb question about your money," she says.

Here are some areas you will want to explore with an advisor:


An advisor should:

* Disclose in writing his or her professional background, including education, employment history, philosophy of service and areas of specialization.

* Explain succinctly his or her philosophy of financial planning and/or money management and the general categories of investments used (e.g., individual stocks and bonds, load or no-load mutual funds, futures contracts, etc.).

* Be willing to share public regulatory documents related to the practice. In particular, investment advisors who register with the SEC should be willing to show you copies of their form ADV, Parts I and II. The ADV is the uniform application for investment advisor registration. Part I includes any disciplinary history.

The ADV forms are also available via the SEC.


* An advisor should be willing to provide names and phone numbers of at least three current clients.

* Other referrals that may be useful would include the advisor's banker and/or lawyer, although obviously you would not want to rely too much on these or any other advisor-picked referrals.


* An advisor should be able to show you how accounts the firm has managed have performed over time and compare them to well-known stock or bond market indexes that represent similar classes of assets.

* If the advisor shows a "model" or "composite" portfolio's performance as a benchmark, ask how that performance has translated into real profits for individual accounts.

* How have total assets managed by the advisor, and total number of accounts, changed over the last five years? That is, has the advisor been gaining or losing business?

* What was the advisor's worst-ever month in terms of performance? Worst-ever year? (This data will give some idea of how much risk the advisor has taken in the past with money.)

* What services won't the advisor perform? For example, is tax preparation included?


An advisor should:

* Disclose all fees, commissions and other compensation that may be received based on services provided and investments purchased for you. Will you pay brokerage costs? Will you pay an account maintenance fee of any kind, beyond the advisor's standard annual asset-based charges?

* Disclose any potential conflicts of interest that might affect the professional relationship or compromise the advisor's responsibility for putting your interests first at all times.


* What does the advisor believe to be a realistic annual return that can be achieved on your portfolio, given your risk tolerance and long-term goals?

* How often can you expect to hear from the advisor in terms of performance reports and updates on financial issues important to you?

* Are you comfortable with the type of account statements and other forms the advisor uses in communicating with clients?


* Where will your assets actually be held? A reputable investment advisor will have your assets held by a third-party custodian or brokerage firm, to limit the possibility of theft by someone at the advisory firm.

* How much power of attorney will the advisor want beyond the right to issue buy and sell orders on your account's behalf?

* Who will handle your account--the advisor you are interviewing or someone he or she designates?

Sources: Government agencies and self-regulatory groups, Charles Schwab Corp., AdvisorLink

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